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No Change for Jones Act Conversions

Jonathan K. Waldron, partner at Blank Rome, was quoted in "No Change for Jones Act Conversions," by Rajesh Joshi in the March 23, 2012 edition of Lloyd's List


The regime that governs the rebuilding or conversion of Jones Act ships at foreign shipyards will not change, the U.S. Coast Guard has said, writes Rajesh Joshi.

The decision is the latest development in a six-year-old controversy, in which Jones Act shipowning and shipbuilding interests have challenged some domestic owners’ attempts to convert tonnage overseas, particularly in China, to save money.

The Jones Act dates back to 1920.In a notice published in the Federal Register this week, the USCG recognized that efforts to tighten the restrictions on foreign rebuilding could jeopardize the Act’s exemption from World Trade Organization rules.

This is based on a provision that the WTO’s predecessor, the General Agreement on Tariffs and Trade, exempts statutes in force before its own creation in 1947.

However, this is subject to periodic WTO review to ensure that the exempted law has not been tightened or adversely modified.

Foreign governments, no fans of the Jones Act, can pounce on any tightening to invoke this provision.

“Any changes to the Jones Act statutes or measures implementing those statutes must not make them less consistent with GATT 1994,” the Federal Register notice concludes.

However, regulatory experts said the WTO angle was peripheral to the USCG’s decision, which simply reaffirmed a rule that has worked well over the years and does not need to change.

Under the Jones Act, foreign repairs that do not involve more than 7.5% of the ship’s steel weight can proceed with no formality. But replacements that exceed 7.5% need USCG approval, subject to a cap of 10%.

In one notable case in 2006, the Shipbuilders Council of America sued the U.S. government for allowing foreign conversion of Seacor tankers.

A district court ruled in the SCA’s favor, but an appeal court later overturned the decision, recognizing the USCG’s existing regime as “holistic” and based on predictability.

Other controversies have centered on foreign rebuild projects undertaken by Matson Navigation and Horizon Lines.

Blank Rome partner Jonathan Waldron said that the appellate decision gives the USCG a strong platform for “bringing certainty and predictability to future rebuild decisions and its interpretation of the rebuild law”, and that the Federal Register notice underlined this stance.

In early 2011, the USCG reopened the foreign rebuilding issue for public comment, following a petition by a coalition that included the SCA and Jones Act shipowners Crowley Maritime, Horizon Lines, Matson Navigation, Overseas Shipholding Group, Pasha Hawaii Transport Lines and Totem Ocean Trailer Express.

The Federal Register notice states that the petitioners’ proposed tightening of the existing regime would establish “new and onerous procedural impediments” to an applicant seeking to contract work to a foreign shipyard.

“Their proposal would make the process slower, more cumbersome, inflexible, conducive to adversarial disputes and appeals by third parties, whether or not directly affected, and more resource-intensive for the coast guard,” the document states.

Maritime regulatory consultant Dennis Bryant interpreted the Federal Register notice as a refusal by the USCG to give the petitioners an administrative victory after they had lost in court.