A recent opinion piece argues that the repeal of a century-old maritime law, the Jones Act, could be the single biggest threat to the modern US freight rail industry's pricing power.
Back
A 106-year-old law could be key to rail competition
(P1) A recent Wall Street Journal opinion piece highlights the 106-year-old Jones Act as a critical factor limiting competition for the U.S. railroad industry, suggesting its repeal could significantly alter the domestic freight market.
(P2) "Adding new maritime competitors to the domestic freight market would inhibit the railroads’ ability to pass through price increases to customers," Lloyd W. Talbert of Manhattan Beach, Calif., said in a letter to the editor.
(P3) The argument is rooted in the history of U.S. rail deregulation. The industry faced a major crisis in the early 1970s, culminating in the bankruptcy of Penn Central, then the largest railroad in the country. This government-induced fiasco led to the creation of the passenger-focused Amtrak and the freight-oriented Conrail.
(P4) The core issue at stake is whether the freight rail industry, which has consolidated into a few major players, could withstand a wave of new competition from maritime shipping if the Jones Act were repealed. This could potentially mirror the pressures that led to the 1970s bankruptcies, threatening the current profitability structure that has benefited companies like Norfolk Southern and the privatized Conrail.
The Specter of Penn Central
The letter draws a direct parallel to the conditions that precipitated the fall of Penn Central. The railroad's collapse in 1970 remains the largest corporate bankruptcy in U.S. history at the time. It was a result of a combination of burdensome regulations, intense competition from the then-new interstate highway system, and significant union pressure on costs. The subsequent deregulation, particularly the Staggers Rail Act of 1980, is widely credited with allowing the industry to recover, consolidate, and thrive.
Conrail, formed by the government from the ashes of Penn Central and other bankrupt northeastern railroads, became profitable after deregulation and was eventually returned to the private sector in a successful 1987 IPO. The author's concern is that new regulations, or a failure to remove existing ones like the Jones Act, could reverse these gains.
Union Pressure and Modern Costs
The letter's mention of "union pressure" is particularly timely. While not the focus of Talbert's argument, the railroad industry continues to face significant labor-related costs. U.S. employers across all sectors spend an estimated $1.7 billion annually on union avoidance consultants, according to a 2024 report from the Economic Policy Institute and LaborLab. This figure doesn't even include the internal costs companies bear to manage labor relations and negotiate contracts.
For an industry as capital-intensive and unionized as freight rail, these costs are a significant factor in overall profitability. The threat of increased competition from maritime shipping would come at a time when railroads are already navigating complex labor negotiations and high operating expenses.
The Jones Act Explained
The Jones Act, formally Section 27 of the Merchant Marine Act of 1920, mandates that all goods shipped between U.S. ports must be transported on ships that are built, owned, and operated by United States citizens. The law was intended to support the U.S. merchant marine, but critics have long argued that it stifles competition and increases shipping costs.
Repealing it would open domestic water routes to foreign-flagged vessels, which often have lower operating costs. This would create a new and formidable competitor for railroads, especially for bulk commodities and container traffic along the coasts and major river systems. The potential for lower prices from maritime shipping could force railroads to cut their own rates, eroding the pricing power that has been a hallmark of the industry since the Staggers Act. The question is whether this would lead to a more competitive market or a race to the bottom that could destabilize a critical part of the U.S. supply chain.
This article is for informational purposes only and does not constitute investment advice.
