The Third Proviso: Transportation Strategies & Jones Act Compliance

Purpose and Limits of the Third Proviso.

The Third Proviso to 46 U.S.C. § 55102 exempts from Jones Act restrictions the transportation of cargo between U.S. points when moved over “through routes” that include a Canadian rail segment connecting water facilities. The Third Proviso is meant to preserve pre-existing U.S.–Canada rail integrations, and evidence of historical usage and consistent trade patterns that support Jones Act compliance. The U.S. Customs & Border Protection (“CBP”) emphasize that the Third Proviso is not intended to facilitate artificial detours that are engineered solely to avoid the Jones Act, but to preserve bona fide commercial cross-border routes. Indeed, to satisfy the Third Proviso, the route must be recognized by the Surface Transportation Board (“STB”) and the Canadian leg must constitute a substantial rail movement and not a nominal or contrived segment, so operators should document its operational necessity, distance, and cargo volume. Operators should document the operational necessity of the Canadian leg and the distance or volume of cargo moved to demonstrate substantiality by maintaining contemporaneous operational records, including terminal handling, storage receipts, and cargo tracking logs. CBP rulings confirm that cargo may be handled, stored, consolidated, or transloaded in Canada without defeating the Third Proviso exception, provided the movement reflects the “usual course of trade” rather than a pretextual workaround.

In-Bond Rail Transit

Cargo may transit Canada in-bond without formal importation into Canadian commerce yet still qualify under the Third Proviso if the route satisfies the statutory requirements. In-bond status signifies that the merchandise remains under customs control and does not, by itself, satisfy the exception. Operators should closely document and track the chain-of-custody while maintaining evidence of continuous movement. To fall within the Third Proviso exemption, an in-bond movement must involve:

• A substantial and commercially legitimate Canadian rail segment, including measurable mileage or volume;

• Recognition of the route by the STB;

• Cargo handling or other legitimate commercial activities in Canada; and

• Separate bills of lading for each leg of the transportation;

Absent these elements, the CBP tends to consider such in-bond movements as prohibited coastwise transportation subject to the Jones Act, so documenting these elements will help mitigate enforcement risk while providing a defensible audit trail.

Motor Carriage Through Canada

Stakeholders often assume trucking cargo through Canadian offers a viable compliance solution to the Jones Act restrictions, but this, by itself is incorrect. The movement of cargo by motor carriage between two U.S. points that travels through Canada is considered coastwise transportation, unless the shipment enters into the stream of Canadian commerce. To break coastwise continuity, the cargo must be:

• Imported into Canada;

• Altered, processed, manufactured, finished, repackaged, or held out for sale; and

• Exported to the U.S.

Operators should document the commercial purpose and type of activities conducted to demonstrate meaningful Canadian commercial activities that add material value. Temporary storage or mere passage through Canada does not suffice and the use of non-Jones Act compliant vessels on any associated water leg is prohibited.

The Export–Import–Re-Export Model

If transport through in-bond rail is unavailable, then participants may structure movements under an Export–Import–Re-Export Model, which involves the following:

• Export from the U.S.;

• Import into Canada for warehousing, consolidation, or some other legitimate commercial purpose; and

• Re-export to the U.S.

Once imported into Canadian commerce for a bona fide commercial activity, goods cease to be “coastwise merchandise” subject to 46 U.S.C. § 55102, such that the leg back into the U.S. is deemed to be an international movement. Maintaining a paper trail of the export, import, and re-export filings is essential, as this structure requires issuing separate bills of lading and clearing the goods through both U.S. and Canadian customs, but it remains a viable option for movements that do not fit squarely within the Third Proviso.

Empty Containers

The term “merchandise” under the Jones Act at 46 U.S.C. § 55101(3) means “any goods, wares, and chattels…whether or not intended for sale.” The CBP recognizes empty shipper-owned containers that are moved between U.S. points are “merchandise” even if they are only repositioned for future commercial use. The limited regulatory exception for “vessel equipment” at 19 C.F.R. § 4.93 applies narrowly to items that are: (1) owned or leased by the vessel operator; and (2) used in foreign trade of the U.S. Shipper-owned containers do not fall under the meaning of “vessel equipment,” so repositioning empty-containers for transport between U.S. ports must be performed by a Jones Act-qualified vessel.

Conclusion

The Third Proviso offers a narrow but practical exemption to the Jones Act when applied correctly. Compliance depends on proving the Canadian rail segment is substantial and commercially legitimate, which should be well-documented. Key elements include STB recognition, separate bills of lading, accurate customs filings, and evidence of meaningful Canadian commercial activity as a corridor – not a loophole. Proper structuring and thorough records make the Third Proviso a lawful way to integrate Canadian rail into U.S. supply chains. Missteps, however, can trigger Jones Act violations and significant penalties, so pre-movement audits and legal considerations are recommended for the transportation of merchandise between U.S. points.