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GLOBAL ECONOMICS
Sheila Copps knows better than anyone of the painful nexus between culture and trade. As Minister of Canadian Heritage, she has been known to holler more than once at trade policy bureaucrats who have tried to curb her passionate zeal. While the serious guys in suits have won the most recent trade policy battles, the odds are that Sheila is just taking a temporary breather to lick her wounds. She's certain to be back and raring to go – just in time for the Millennium Round.
The interesting thing about disputes over trade and culture is that many of the problems are entirely preventable. They arise not from any fundamental issues inherent in the Agreements or with Canada's policy objectives but with an inability of those within the trade community to understand the world of culture – and vice versa. Two solitudes as self absorbed as those of culture and trade diplomacy are hard to find. It is little surprise that the debates have been conducted on such different planes and with such scant success.
It does not help that events in the trade and culture file unfold under a microscope. The very raison d'être of cultural industries is to inform and entertain the general public. They are the media, or they have excellent access to it. Consequently, when cultural industries come under attack through a trade challenge, they meet it in the best way they can, by defending their position on the airwaves and in magazines and newspaper columns. In one sense, this is good because Canadian culture is important and should be protected. However, it can leave us with the impression that fights over culture are the only ones that matter. It can also lead to the oversimplification of issues which makes for bad policy-making.
Cultural issues are complicated ones to solve. Sometimes it is even tough to express opinions about them. It is an area where one has had to establish one's bona fides before weighing in. The audience has to be assured that the commentator loves Canada more or at least as much as the next person and is willing to stop at nothing to protect our culture. Trade consultants wanting to mine the cultural field are well advised to have a Can-lit or artistic icon as an immediate family member. Otherwise, they need not even bother hanging up a shingle.
Of course, this is all rather silly. What we need for Canadian culture is less blather and more strategy.
Describing Canada's cultural sector is made difficult by the fact that few people even agree on a definition of culture. Some consider culture to be an ubiquitous, all encompassing thing like our shared values and beliefs. The nationalists among us think the only culture that counts is Canadians talking to other Canadians. Economists tend to view culture more narrowly as a product or service that is produced by an identifiable industry and can be paid for and consumed in the same way as any other. To technocrats, culture is defined by the medium that is used to deliver it – the airwaves, the sound waves, the printed page, the electronic message. Divergent as these perspectives are, the one common theme is that culture has important non-market dimensions.
While one should avoid making generalizations about Canada's cultural sector, a couple of observations are in order. The first is that Canada is very open to foreign cultural influences. The following statistics underline this point:
Hollywood has a strangle-hold on our imaginations, not to mention our pocketbooks. A high proportion of what we read, hear and watch, particularly in English-speaking Canada, is fed to us from a foreign producer.
It is impossible to generalize about Canadian culture. Our culture can be high-brow as in the Royal Winnipeg Ballet or the Vancouver Symphony. It can also be as low-brow as the Tom Green show. Canada boasts of some immense cultural successes like Shania Twain and Céline Dion who operate in the global big leagues. Indeed, our own "Lord-in-Waiting", Conrad Black, counts as one of the world's leading media moguls. At the other end of the commercial spectrum are cultural producers that could not survive without Canada Council funding. They are the present-day equivalent of the starving artist in the garret studio.
The fact that we deal with two rather distinct cultural communities makes it more complicated to devise good trade and cultural policy. One facet of our cultural sector is export-oriented, technologically up-to-date and quite comfortable in the global marketplace. The other is geared to the domestic market. It is the one most concerned about talking to Canadians about Canada and other Canadians. While this division is hardly unique to Canada, our proximity to the American cultural powerhouse has unnerved us more than most. We need to find ways to preserve that segment of our cultural sector that reminds us of who we are and what we share. At the same time, we must avoid clipping the wings of those who would fly wide and high to bring us acclaim, and export revenues, in world markets.
To borrow the refrain from a once-popular song, has video killed the radio star? When last we checked, radio is still around but it and other traditional cultural vehicles are under serious attack from new technologies.
Technology have always been an issue for the cultural sector. One only has to think of the introduction of "talkies", mechanized printing presses, recordable phonographs and VCRs to appreciate the constant adaption made by the industry over the years. Indeed, to shield the cultural sector from technological advancement would be both fruitless and misguided. Culture has to be exposed to the upheavals of technological change if it is to stay inspired, relevant and connected to its users.
But the current technological revolution is bringing change at a whirlwind pace. The Internet has made cultural products vastly more accessible but much harder to protect and control. Consumers in Canada can read magazines and newspapers from all over the world. We are not nearly as bound by time, location, nationality and financial resources in our enjoyment of cultural products as our parents and grandparents were.
As new technologies extend the range of cultural works well past their traditional boundaries, it becomes much harder for governments to promote their domestic cultural sectors with the same box of policy tools. Internet versions of newspapers and direct-to-home satellite transmissions are but two examples. In earlier days, when governments wanted to protect domestic broadcasters they would grant licenses to domestic players only and they would impose a series of conditions on what programs could be broadcast and when. With home satellite and Internet broadcasts, regulators have lost much of their control of the airwaves.
The split run magazine case that found its way to the WTO is another example of how technology has undermined governments' ability to restrict foreign cultural products. Canada used to impose a prohibitive tariff on imported magazines. In an effort to get around this tariff, American publishers started to beam versions of the magazine by satellite to publishers located in Canada to be printed here. The idea was that since the magazines were no longer physically crossing the border, there was no product to be taxed or denied entry. The Canadian government met this development with a special excise tax imposed on split-run magazines, a tax that was eventually shot down by the WTO. The next technological wave promises to be even more illusive, however. New electronic versions of reading material and other cultural products can be beamed directly to the home and customized with articles and advertizing that is geared to the individual reader's interests, income level and demographic profile.
This is not to say that new technologies will make it impossible for countries to protect and promote their cultural sectors. They do make it much harder though. In their quest for new policy tools to protect indigenous culture, a worldwide preoccupation, governments might be well advised to do some collective brainstorming.
If you believe the Reform Party's culture critic, Canada's cultural policy is preoccupied with grants to the creators of dumb-blonde joke books and art exhibits comprised of rabbit carcasses. In fact, this is only the tip of the iceberg.
Canada uses three basic instruments to protect its cultural industries: financial support in the form of subsidies and tax measures; Canadian content regulations; and foreign ownership restrictions.
Canada has a long, long list of government programs that provide financial support to the cultural sector. In addition to Canada Council grants to publishers and (dwindling) financial support to the CBC, there are a host of special programs aimed at the sound recording business, the video and television industry and the multimedia sector. New funds are being established on a regular basis to meet the needs of emerging technologies.
Over time, the structure of public support has gradually shifted away from pure cash subsidies to loan guarantees, equity investments and tax credits. An example is the Canadian Television Fund, a Can $200 million vehicle for equity investment in TV programming.
Financial assistance to cultural producers also comes in the form of tax relief. To support Canadian broadcasters, the Canadian Income Tax Act permits advertisers to deduct the cost of ads they place with Canadian stations but limits the deduction for ads placed with American broadcasters. Similar tax provisions apply to Canadian businesses taking out advertisements in newspapers and magazines. Canadian film and video producers are eligible for tax credits on their production costs.
The second basic instrument - Canadian content regulations administered by the CRTC - are considered to have been among the most effective vehicle for advancing our cultural sector. While best known is the requirement that radio programming reserve 30 per cent of its broadcast time for Canadian products, ‘Can-Con' regulations also apply to TV programming, and to distribution systems including cable and Direct-to-Home satellite. Essentially all broadcasting systems are expected to provide Canadian programming and make a financial contribution to Canadian content.
The final instrument available to government is foreign ownership restrictions. They are based on the premise that Canadian-owned distributors, broadcasters and publishers are more likely than their foreign-owned competitors to disseminate Canadian content. While an arguable proposition, it is not going to be true in all instances.
The Investment Canada Act allows the government to review any foreign investment in almost any cultural industry to determine its net benefit to Canada. Depending on the sector, additional restrictions can also exist, including performance requirements of various sorts. For example, a film distribution policy enacted in 1988 limits any new foreign film distributors operating in Canada to distributing only those films that it has produced or controls itself. The fact that this restriction was "grandfathered" and does not apply to American distributors who were already in the Canadian market angered Polygram, the huge Dutch distribution giant. However, the EU turned the other cheek and did not pursue a trade case against Canada, less because of the merits of the case and more because Polygram ended up being bought by the Canadian corporate powerhouse, Seagram.
Restrictions also apply in the book retailing business that limit foreign owned companies from selling books as their primary activity. In the broadcasting area, only companies with more than 46.7 per cent Canadian ownership and de facto control by Canadians are granted licenses by the CRTC.
Many of the policies used to promote the cultural sector in Canada offend, if not the letter, at least the spirit of our WTO obligations. Other programmes and policies are no longer effective because technological advances have rendered them powerless or redundant. Canada is far from the only country in this position. The next round of WTO negotiations could not be coming at a more interesting time for the cultural sector.
Despite the best efforts of the US negotiating team in the Uruguay Round, culture occupies a very small place in the WTO Agreements. In fact, its absence is rather conspicuous.
As Canada discovered first hand in the WTO case over magazines, how cultural measures are treated in the WTO Agreements depends very much on whether they fall under the General Agreement on Trade in Goods (GATT) or the General Agreement on Trade in Services (GATS). This creates much uncertainty since deciding whether a cultural creation like a sound recording or a film is a good or a service is a difficult proposition at the best of times. Sadly for Canada, the magazines dispute was not one of our best times.
With two minor exceptions, the cultural sector is subject to all of the standard disciplines encompassed in the GATT including the basic principles of most-favoured-nation and national treatment. The first of the exemptions falls in Article IV which permits countries to establish quotas for the exhibition of films. This is in recognition of the longstanding European practice of maintaining screen quotas. Second, Article XX allows exemptions from general GATT principles for measures aimed at protecting national treasures of artistic, historic and archeological value.
In the GATS, culture is almost nowhere to be seen, despite hectic efforts right up to the dying days of the Uruguay Round to hammer out an agreement on audio-visual services. Canada requested and was granted an MFN exemption for the film and television treaties we have with a number of countries. Moreover, we failed to make any commitments whatsoever on national treatment in the cultural sector. It is likely that our reticence will not go unnoticed in the next set of negotiations, particularly since the GATS Agreement is one that has been singled out for further liberalization. Canada will be under pressure to include in its GATS schedule commitments to provide national treatment to foreign investors and exporters of some cultural services.
If the Americans have much to say about it, the next round of negotiations will probably focus on resuscitating the failed audio-visual services negotiations and expanding the list of commitments under the GATS Agreement. Culture will also enter into other negotiating areas including intellectual property, e-commerce and investment. The existing TRIMs Agreement prohibits performance requirements as a condition of foreign investment. However, the current Agreement covers only certain sectors, and culture is not one of them. Culture would be hard-pressed to escape unscathed from any comprehensive agreement on investment.
For Canada, the most significant trade issue arises not from the WTO Agreements, per se, but from how they were interpreted in the recent trade challenge over magazines. The consequences of this has already had profound implications for how we conduct cultural policy in this country.
Before getting into the specifics of the WTO case over split-run magazines, it is useful to understand where the US is coming from on culture in general. American entertainment giants like Jack Valenti and Ted Turner believe that culture is really just a business like any other. In fact, entertainment is big business in the US, ranking second behind aerospace in terms of export activity. Not only do cultural exports generate lots of economic wealth in their own right but they are a vehicle for the promotion of a whole host of other US-produced goods and services, everything from Coca Cola to the Ford cars the X-Files stars drive around in. Some cynics even see cultural exports as part and parcel of the dissemination of American values and ideas throughout the world.
Of course, the US cultural sector has a soft underbelly just like ours. The National Endowment for the Arts is only one of a long list of well-heeled public benefactors. Chances are that US public sponsors might even have the odd meat dress, Voice of Fire and rabbit carcass skeletons in their own cultural closets.
The point is that the United States has taken an ambitious and aggressive attitude towards trade and culture. It has displayed little patience towards the efforts of countries like Canada, France and Belgium to restrict access to American cultural exports, viewing such attempts as simple protectionism.
The Canadian magazine industry has long been concerned with split-run products entering from the United States. A split-run is a magazine with predominantly US editorial content that is supplemented with Canadian advertisements. Canadian publishers fear them because split-runs siphon off lucrative advertising revenue which is the source of the majority of their revenue. Moreover, the fact that most of the costs of the US publications is covered in the larger American market means that they can offer cut-rate deals to Canadian advertisers and subscribers.
In December 1995, the United States launched a WTO challenge of three Canadian measures aimed at protecting our magazine industry from its split-run competitors. The first measure that the US challenged was a tariff code that prohibits imports of split-run magazines. The second measure attacked was an 80 per cent excise tax on advertising revenue earned by split-run publications Finally, the US challenged a postal subsidy programme, the effect of which was to allow Canadian publishers to put a cheaper stamp on magazines they mailed to subscribers than their split-run counterparts.
Canada lost conclusively on magazines. It was a bad sign when the WTO panel refused to accept our argument that magazines and their embodied advertising constitute a service as opposed to a good and should be governed by the more lenient GATS. With respect to the import prohibition on split-runs, the panel's decision was straightforward: such prohibitions violate a number of trade provisions and are not permitted. The panel went on to decree that Canada's excise tax discriminated against US imports, thereby violating the GATT's national treatment provision.
Concerning the postal subsidy, the WTO ruled that any subsidy that is not granted directly as a payment to domestic producers violates the GATT rules. This was easy to fix in this instance – Canada now gives postal subsidies directly to Canadian publishers – but the decision might have implications for other cultural industries that indirectly benefit from subsidies to others.
Of course, it could have been much worse for Canada. Luckily for us, the US chose not to challenge the provisions of our Income Tax Act that allow Canadian businesses to deduct the cost of advertising in Canadian, but not foreign, publications and television and radio stations. This was rather handy because by the time the WTO panel and Appellate Body had finished with us, the income tax provisions were the only policy we had left to support our magazine industry.
The panic that greeted the WTO decision caused a lot of flailing around in the Canadian culture and trade communities. Officials at Canadian Heritage proposed Bill C-55 which would have made it illegal for Canadian businesses to advertise in split runs. Their logic was that in focusing on advertising, a service, the policy would fall exclusively under the laxer GATS provisions and could avoid getting caught by the WTO. The US thought that we were trying to be too cute by a half. It saw the Bill as an outright attempt to avoid implementing the WTO's determination. To turn up the heat, the US threatened to retaliate against a handful of very well connected industries including steel and textiles. An all-out trade war seemed imminent.
Cooler heads prevailed in the end. Canada and the United States entered into negotiations over the amount of Canadian advertising a foreign publication should be allowed to have. The result was an agreement that up to 18 per cent of advertising revenue can be generated from Canadian sources without the magazine having to add any Canadian editorial content. The agreement allows American publishers to establish wholly-owned subsidiaries in Canada to publish Canadian editions as long as the editions contain a majority or substantial amount of Canadian content. Canada also instituted a new subsidy scheme for magazines worth an estimated $90 million per year. The subsidy provided to individual publishers will be based on a formula determined by lost advertising revenues and postal subsidies.
Many in the cultural community believed that Canada was unwise to capitulate to the US in the magazines dispute. They viewed it as part of a slippery slope towards total cultural domination by Washington. Canadian culture is something they consider worth standing up for notwithstanding the cost. At least we should not give up before the first shots are fired they say.
Important as our cultural sector is, Canada cannot afford to flout international trade rules. The cultural sector cannot reasonably expect another Canadian industry to pay the price for its refusal to meet our international trade obligations. There are other ways to support our cultural sector that do not violate trade principles. We need to explore these.
In the end, Canada had to accept the WTO decision. We must rely on our status in the international trading arena and use the system to change the system. That means better rules for culture that will help us avoid the kind of mess we got into with magazines.
Many in the cultural community steadfastly maintain that culture should be off the table in any trade negotiations. A blanket exemption for culture is the minimum deal they would find acceptable. Their belief is that had such an exemption been in the WTO Agreements, as it is in the NAFTA, we would never have lost the magazine dispute.
Is the exemption route the best strategy for promoting and protecting our cultural sector? Probably not.
The NAFTA's supposed exemption for culture is not as good at it seems at first glance. What it allows is for Canada to pursue policies towards the cultural sector that might not be consistent with other aspects of the Agreement. They might violate the principle of national treatment, for example. However, in such situations, the United States is entitled to take measures of equivalent commercial effect. This means that Canada must pay a price for cultural policies that violate the basic provisions of NAFTA. The price is usually paid in the form of trade retaliation against some other sector of the Canadian economy. And one can bet that a favourite target for retaliation is an industry like steel that is based in the hometown of the minister responsible for Canadian culture.
Of course, this must sound rather familiar to those acquainted with the WTO case on magazines. The WTO rules allow a Member who has successfully challenged another to take "appropriate countermeasures," to equivalent commercial effect, if the losing Member does not comply with the WTO panel and Appellate Body report. If Canada lost a challenge to one of our cultural policy measures and we refused to change the policy to comply with the WTO ruling, the challenger could retaliate against another of our industries.
Essentially then, the NAFTA exemption is worth little more than the WTO's non-exemption. In fact, it may be worth less. The WTO rules require the Dispute Settlement Body to formally authorize countermeasures and to determine what the appropriate level should be. The situation could get much messier under the NAFTA. The United States could decide on its own accord to retaliate against one of our cultural policies and could unilaterally decide on the retaliatory action it wanted to take. In such circumstances, Canada could end up fighting with the US for years over whether our cultural policies violated the NAFTA in the first place and whether the countermeasures implemented by the US were appropriate.
In truth, the NAFTA never really did exempt culture. The suggestion that it did was just slick marketing by those anxious to sell the deal and the FTA that preceded it. The NAFTA's cultural exemption is little more than permission to break the rules on the understanding that the US could retaliate in kind against some other industry. This is more or less the same deal we have in the WTO.
Okay then, the cultural pundits might argue, we should seek an unconditional exemption for culture in the WTO. Canada has negotiated such provisions in the bilateral foreign investment agreements that we have signed with various countries. They provide a carte blanche exemption for investment policies for the cultural sector and do not allow for retaliatory countermeasures.
We might, however, want to think this through. The first question to ask is whether our cultural sector could live with the kind of restrictions that a blanket and unconditional exemption would impose. Consider that culture is an ubiquitous and expansive phenomenon. Countries could decide that a whole host of things impact negatively on their culture – things like processed cheese, polyester neck ties, or country music – and attempt to block their importation. Alternatively, a country could determine that having a national aerospace industry or a world-class wine industry is essential to its national cultural identity and generously subsidize these ventures, distorting world trade in the process. While far-fetched, these examples underscore a critical point. Unless we put some limitations on what is and what is not considered culture, the very idea of an unconditional exemption should be out of the question.
It is also important to remember that if Canada were to get an unconditional exemption, so too would other WTO Members. That might not sit well with some elements of our cultural sector, particularly those which depend on export markets. Canadian television shows sell all over the world. It's a good thing too, since TV shows are dreadfully expensive to produce and foreign revenues make many of these productions possible. Our national pride swells at the thought that Margaret Atwood is enjoyed by readers in many foreign lands. Having her books restricted to our tiny market would take away much of our fun, not to mention our stature on the world cultural stage. But a cultural exemption is a cultural exemption. We would have no leg to stand on if our trading partners decided that our cultural products should be denied a place in their markets.
It does not take too long to see that a cultural exemption is an acceptable notion but only if we define culture precisely and provide some guidelines on the types of instruments that could be used to protect it. In fact, what we are talking about is rules for culture as opposed to exemptions for culture.
An obvious place to start in preparing for the negotiations is to take stock of what the cultural community suggests. The trouble is that many of the statements that the cultural experts make just do not get us very far. Consider the declaration that "culture is not a commodity like any other." While there is no disputing this, the same could be said of a lot of products, not to mention services, that are the subject of international negotiations. There is no doubt that culture is a highly distinctive area. But we are still better off in the end to engage our trading partners in rational discussions about culture instead of making conversation-stopping statements that mean almost nothing.
The trouble is that some of the basic myths are questionable. One dominant myth is that globalization is bad for culture and for cultural diversity. Quite apart from the fact that there is little evidence to support this claim – indeed, there is evidence to the contrary – it is a misleading notion. The very idea of protectionism should be anathema to culture. After all, culture depends on the spontaneous and unrestrained flow of creative ideas. That, not the desire to protect and shield, should be our basic point of departure.
Another challenge that the cultural experts set out for trade negotiators is to affirm the importance of cultural diversity. Affirmations, in themselves, mean very little and therefore are pretty harmless. It is probably better this way. For this affirmation to mean something would be to create a potentially damaging outcome. We must not give our trading partners the tools to deny us access to their markets, at least not unless we fully realize what we are doing and get something in return.
A final observation concerns the special cultural instrument recommended by the Cultural Sectoral Advisory Group on International Trade (SAGIT). While the specifics are lacking, the thought is a constructive one. It makes imminent sense for WTO countries to try to agree on the kinds of domestic policies that should and should not be used to enhance cultural and linguistic diversity. Similarly, the SAGIT's suggestion that rules be developed on how trade disciplines would apply to cultural policy is a sensible proposition that would greatly reduce the uncertainty that presently exists.
For the SAGIT's cultural instrument to work, it will need to have some more meat on its bones. Concrete ideas will have to be developed and strategies refined. For this to succeed, trade negotiators and representatives of the cultural community will have to build a good working relationship. Are the two sides up to it?
Canadian trade negotiators will be under tremendous pressure to leave culture out of the next round of trade negotiations. Some of this pressure could well come from our own Minister for Canadian Heritage. There is a huge temptation to be protectionist about culture since that is the easiest path to follow. However, it is in the best interests of our cultural sector to resist this temptation strongly.
The Canadian cultural community faces some immediate concerns. The WTO decision on magazines has left us with much uncertainty about our cultural policy instruments. The American cultural industry can barely restrain its appetite for the balance of our market and is unlikely to be satisfied for long with its resounding win on magazines. Rather than being forced to negotiate market access with the United States on a case-by-case basis, as we did after our loss at the WTO, or travel regularly to defend ourselves in Geneva, we would be well advised to make some sense of the trade policy void that we now occupy.
Our first course of action should be to look critically at the measures we now use to support and promote culture in this country. Many of these policy instruments are already under serious pressure from technological innovation and have lost their usefulness. Others are blatantly inconsistent with our international trade obligations. Instead of vowing to defend our policy tools to the death, why not take the opportunity offered by the upcoming trade negotiations to bring our cultural policy into the twenty-first century?
This would mean less emphasis on ownership restrictions and content requirements, policies that are inadequate in the Internet and satellite age in any event. This will leave subsidies as the instrument of choice for supporting our cultural producers.
Subsidies are not favoured by their recipients in the cultural world who realize that they are easier for the public to observe and for governments to take away than other types of support. Their visibility makes them a bigger target than other more hidden but equally costly and more distorting forms of support. However, subsidies have many endearing qualities. First, they can be more effectively targeted to reward the types of activity that the public considers desirable. Instead of supporting book sellers, broadcasters and song writers just because they are Canadian, as our "Can-Con" and investment restrictions do, subsidy programmes can be designed to encourage the dissemination of Canadian stories, news and ideas. But the most important feature of subsidy programmes is their transparency. This is better from a trade perspective and it makes for better public policy.
In terms of a WTO agenda, negotiators need to focus on several things. First, they should attempt to clarify whether cultural products like films and magazines are bound by the provisions of the GATS or of the GATT agreements. Second, they should craft rules to ensure that certain subsidies to the cultural sector cannot be challenged by a foreign competitor, just as is already the case for R&D, environmental, and regional assistance subsidies,. Third, to ensure that countries do not take undue advantage of special rules for culture, negotiators should define culture and cultural industries as precisely as possible. Above all, negotiators should avoid drafting grandiose statements on the importance of such things as cultural diversity. Such pronouncements amount to little more than deceptive public relations for the folks back home and end up creating a lot of unnecessary confusion in the application of WTO provisions.
Ultimately, Canada's interests are best served by a system that affirms the basic principles of non-discrimination, fairness and transparency. These fundamental principles should guide the conduct of our domestic cultural policy and should govern the treatment of our cultural producers in world markets. The WTO negotiations offer a chance to develop solid rules to allow countries to support legitimate cultural endeavours while reducing the barriers facing cultural exporters. All that is needed is for us to stay focused and remind ourselves what really is at stake. It is not protection for its own sake. Rather, it is about the development and exchange of ideas by and about Canadians. Surely this is something that we have to take an expansive view of.
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