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 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. 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 divorce taxes from the provision of government services through an "equal" tax but unequal provision of services builds in a gain for those who can successfully circumvent the taxes. In the limit, such behavior leads to flags of convenience or more serious consequences. I would submit that if an inventory of government services provided ocean miners was compiled, one would find that the value of such services--especially the protection of assets--would be less than that supplied land miners. Peruvian and Ecuadorian seizure of U.S. tuna boats is a strong indicator that little, if any, military protection will be offered to ocean miners. Thus, a case can be made for charging a lower tax price to ocean miners. Please do not misunderstand. I am not requesting special tax treatment for ocean mining at this late date. However, I do think that the Treasury could be at least as prudent. As it is, they and the other administration spokesmen have simply added new dimensions of uncertainty which this fledgling industry must face. The executive branch has thus far resisted all attempts at making U.S. negotiators responsible for their actions, especially when they inflict monetary losses on some citizens. It follows that if you insulate negotiators from sustaining a personal loss when they offer concessions, then they are more likely to make concessions. In a way, conflict-ofinterest regulations aggravate this problem because they exclude negotiators from the arena who will personally bear at least part of the consequences of their actions. On the contrary, the selection procedure produces negotiators who are more likely to go on to practice law in the new field or to careers in teaching students about a treaty which is elaborately laced with their concessions. The more complex the treaty, the more demand there will be for the newly emerged "experts." The Treasury observes that the legislation rests on the presumptions that ocean mining interests will be given away in the attempt to obtain a new law of the sea and that protection for such an eventuality is not available from nongovernmental institutions. They go on, however, to assert that "these premises are incorrect.' I must respectfully disagree. If my past experience as the Treasury representative on the delegation is any guide, there is precious little that will restrain the U.S. negotiators. In fact, the Treasury will probably be among the last to know that the ultimate concession has been made. Anyway, if the chance of a bad treaty is as remote as the administration claims, then the insurance payments are similarly low probability events. Thus, opposition by the negotiators to the payment of damages is the strongest argument for including the insurance provision in the legislation. This administration attitude is precisely why no nongovernment institution will guarantee that the behavior of the U.S. negotiators will be responsible. To do so would be to increase the likelihood of concessions. The risk is not exposure to a random act of God. Rather it is the classic case of moral hazard where the beneficiary of the insurance--the government--can affect the probability of a payment. The reason I say that the government is the beneficiary is because ostensibly they receive a quid pro quo for giving up ocean mining interests, while whatever loss occurs is sustained by the ocean miners and whoever else agrees to insure the negotiators' behavior. I must add that I was impressed by the candor shown in recent weeks by Ambassador Elliott Richardson in criticizing the outrageous behavior he witnessed at the sixth session of the UNCLOS. I hope that this attitude presages a tougher negotiating spirit at the next session of the UNCLOS. Congressional movement toward adopting domestic ocean mining legislation will strengthen this more resolute attitude of defending U.S. interests. However, to remove the provision that makes the government at least partially responsible for making deep seabed concessions will signal the other delegations that the U.S. is actually bluffing. The inescapable result will be escalating demands and further delays in the beginning of ocean mining. The fate of ocean mining and even the promise of sharing the wealth of the oceans with the poor of the world, rests now with the Congress. Clearing the way with this domestic legislation will allow the natural development of the ocean mining industry. These actions will encourage other countries to adopt similar legislation and as experience with mineral recovery from the oceans improves this new regime, then another UNCLOS can be convened to codify the practices which prevail at that time. It may well be that such a treaty is the only viable way of producing a stable regime which will reduce conflict rather than aggravate it. In all honesty I cannot claim credit for originating this notion of producing effective international economic agreements. The credit should go instead to President George Washington, who outlined the strategy in his farewell address. I recommend it for your consideration and also for our delegation. They might even view it as additional "presidential instructions." Harmony, liberal intercourse with all nations are recommended by |