seabed would in all likelihood lead to a hardening of positions on other unresolved matters by the developing nations. Moreover, the bona fides of the United States posture as a leading force negotiating at the Law of the Sea Conference in good faith and in a spirit of compromise would be seriously questioned. (2) It has not been persuasively demonstrated that immediate access to deep seabed minerals is of strategic importance to the United States. (3) The resources of the deep seabed have been recognized by the United States and most other countries as "the common heritage of mankind."2 Whatever that principle means, it certainly means that the resources of the deep seabed should not be exploited without regard to the interests of the world community. Accordingly, measures encouraging the unilateral exploitation of the resources of the deep seabed by the technologically advanced, completely outside of an internationally agreed framework, should not be looked upon with favor. Yours sincerely, JAMES J. BROSNAHAN, Chairman, Special Committee on the Law of the Seas. Vice-Chairman, Special Committee on the Law of the Seas. Senator MATSUNAGA. Thank you very much, Mr. Lock. As requested of the previous panel, we would appreciate it if and when we do submit written questions to you, you will supply the answers to us as soon as possible, preferably by Thursday of next week. It is 12:30 now. I am already overdue. Unless you have one sentence to add, each of you—— Mr. STATHAM. Could I say, Mr. Chairman, briefly, one of the few occasions in my life I find myself more closely in agreement with someone on my right than on my left, I obviously disagree with many of the points Mr. Ary made, and for the record, would be pleased to respond to any questions or comments. Senator MATSUNAGA. Thank you very much. You were the only one who kept within the 10 minutes, you are deserving of extra treatment. We will insert for the record at this point the testimony of Mr. James L. Johnston, senior economist with the Standard Oil Co. (Indiana), and Mr. C. Richard Tinsley, Minerals Economist, Continental Illinois National Bank in Chicago. [The prepared statements of Mr. Johnston and Mr. Tinsley follow:] 2H. Res. 330 (93rd Cong. 1st Sess.), S. Res. 82 (93rd Cong., 1st Sess.) and U.N. General Assembly Resolutions 2467Ă (XXIV), 2574 (XXIV),. 2749 (XXV), and 2750A (XXV). TESTIMONY OF JAMES L. JOHNSTON BEFORE OF THE U.S. SENATE ON OCTOBER 4, 1977 My name is James L. Johnston and I am currently senior economist with Standard Oil Company (Indiana). Until two years ago, I was the Treasury representative on the U.S. delegation to the U.N. Conference on the Law of the Sea (UNCLOS). As you know, a subsidiary of Standard Oil, Amoco Minerals has announced its intention to join Lockheed's ocean mining consortium. However, with your permission, I would like to present my analysis of the tax and insurance provisions of the ocean mining legislation in my personal capacity as an economist with experience in the negotiations rather than as a representative of the industry. My Continental Bank colleague Richard Tinsley has sketched out for you the potential contribution of ocean mining to the future supplies of nickel, copper, cobalt, and manganese. He has also provided estimates of the liability exposure for both the industry and the government, should the U.S. negotiators choose to make ocean mining a concession to obtain a treaty at the UNCLOS. There are three important points in his analysis. 1. 2. 3. The mineral production from ocean mining has the potential of improving the raw material independence of the United States, but will nowhere near flood the market. The liability of the government is significantly less than 100 per cent of the loss imposed on the industry by the U.S. negotiators if the treaty is made effective in the peak year. The fund of industry payments will be nearly $150 million by 1988, thereby providing a potential incentive for other countries to endorse our legislation in order to share in that fund. While acceptable with some minor improvements, the domestic legislation is less than what the industry has said they would like to see enacted. As it now stands the legislation actually imposes a more adverse regime on ocean mining than that which prevails for land-based mineral recovery. First, the land-based miners are not cursed with the UNCLOS. Make no mistake, the UNCLOS negotiations are very dangerous and that danger does not disappear if the UNCLOS collapses. Even now the negotiations are contributing to customary international law, with the whole process being aggravated largely because U.S. negotiators insist on making their concessions public. While this saves the U.S. negotiators the embarrassment of withdrawing concessions after they have proved ineffective, it erodes the existing rights we possess under international law. Indeed, one of the UNCLOS diplomats Alan Beasley of Canada, who is no friend of U.S. mineral interests, has argued that the negotiations have already put a legal cloud over the right to engage in ocean mining. He would have us reject domestic legislation and settle for whatever deal can be arranged in the UNCLOS. Clearly Ambassador Beasley represents his country's interest in continuing to be the principal mineral supplier to the United States. The second difference between land-based and ocean mining is the requirement that the latter make contributions to an insurance fund in addition to paying the regular corporate income tax. Generally speaking, hardmineral producers are not highly profitable as the accompanying chart shows. Net income in 1976 was less than five per cent of sales and less than seven per cent of stockholder equity. If anything, ocean mining is only now becoming marginally profitable. If it were a huge bonanza as some suggest, ocean mining would have begun long ago. After all, knowledge of the deposits has existed for a century. It should be clear from these modest returns on mineral recovery that extra insurance charges or a seemingly small royalty could eliminate whatever incentive remains in this politically destabilized environment to continue development. As if these problems were not enough, additional uncertainties have been introduced recently in testimony by U.S. government representatives. One problem raised by the Interior department is that detailed "supervision" of ocean mining is required even beyond that implied to protect the environment. The prospect of a government functionary who does not bear the financial consequences of his decisions, directing the rate of recovery and multiple use of the ocean space, will serve to increase the project uncertainty and encourage the incorporation of even more discretion for the proposed International Seabed Authority. Another unhelpful government claim is that some unnamed experts consider cartelization a remote possibility. The literature I am familiar with sees supply interruption--of which cartelization is a special case--to be a distinct possibility. Indeed one, the Charles River Associates study urges development of ocean mining to effectively reduce the threat of supply interruption. An article (in Kyklos, 1976) by two former Treasury economists, Ryan C. Amacher and Richard James Sweeney also argues the important role which ocean mining can play in thwarting cartel formulation attempts. It is true that a couple of analyses have tried to dismiss the threat. Regrettably these flawed analyses have tended to confuse the issue. I have attached an article of mine which identifies the errors of one such analysis. Without going into the details of my critique, let me just say that the danger of an international cartel is significantly enhanced if the cooperation of the major consuming country government can be obtained. I would submit that the executive branches' endorsement of the International Seabed Authority with extensive discretion (and not insignificantly with preferential tax treatment), is disturbingly indicative of the fact that a worldwide mineral cartel is very possible. The NOAA Administrator has contended that exclusive rights cannot be granted to ocean miners because it necessarily means granting jurisdiction to the underlying seabed. He further argues that government regulation should be the method protecting rights and resolving conflicting uses. Apparently what is not appreciated is that mineral rights to a deposit can be--and indeed often are--separated from the remaining bundle of rights. The granting of rights to the resource is generally superior to regulation in allowing resources to go to their highest valued use without creating external spill-over effects. Of course, regulation employs more regulators. Perhaps the most disturbing of the problems raised by the executive branch are the tax issues. The Treasury has suggested a host of onerous tax provisions for U.S. ocean miners which do not apply to land-based miners, despite the avowed intention to avoid "tax discrimination between U.S. deep seabed mining and U.S. domestic mining." The Treasury questions whether the tax treatment enjoyed by land-based miners would be available to those recovering minerals from the oceans, specifically the: 1. investment class life, 2. 3. 4. investment tax credit, domestic percentage depletion, and treatment of payments for treaty insurance as a credit. The The whole testimony reflects what I call the tax collector mentality. That is, if the Congress considers a new tax of x-y rather than the larger amount x, then the tax collector mentality would characterize y as a subsidy to the taxpayer. In this case the ocean mining bills are straight forward in calling minerals recovered from the deep ocean as equivalent for tax and custom purposes to those recovered on shore. Treasury, by contrast would insert an elaborate set of special tax provisions into the bills and then have them submitted to the House Ways and Means and the Senate Finance Committees. The very fact that they are suggesting such a course of action reveals their intent for what it is--the creation of a special tax regime for ocean mining. The whole tax collector mentality is an economic anachronism, if it ever existed as a principle in positive--as opposed to normative--public finance theory. The modern literature increasingly combines government revenues with expenditures in one theoretic structure. Government is viewed as an institution which provides services for a tax price. The principal services are the definition, assignment, protection, and enforcement of property rights including dispute settlement through the courts. Clearly, not all demand the same amounts of these services, thus not all pay the same tax price. Note that I did not say that all "should" not pay the same tax price. That would be a subjective preference, as would the tax collector mentality which insists on separating revenue considerations from expenditures and somehow on treating all taxpayers "equally." Attempts to 98-973 - 78-31 |