by Daniel Schwanen
Commentary 91, C.D. Howe Institute, Apr. 1997
Republished with permission

Canada's cultural policies are coming under pressure from the trends toward trade and investment liberalization, technological change, budget constraints, and Canada's interests in accessing foreign markets for its own cultural exports. In its recent decision striking down certain measures in support of Canada's magazine industry, a World Trade Organization panel emphasized that its ruling was not against measures supporting cultural industries in general. Nevertheless, the cumulation of events suggests that a new focus on the objectives of cultural policy is required. The traditional policy objective of ensuring that Canadians have access to Canadian cultural output remains a valid reason for public intervention in this area. In addition, however, it is important to promote a well functioning private market for culture, which, for creators of cultural products, implies strengthening their intellectual property rights and ensuring fair competition in accessing cultural distribution systems.

In light of these objectives, it is time to revise a number of policies put in place to foster Canadian culture. The definition of "Canadian content" used for tax, subsidy, or broadcasting content rules should be less focused on Canadian ownership and production expenditures per se, and more on Canadian creative output and Canadian interests. Investment restrictions in the cultural industries that have not demonstrably boosted Canadian cultural output should be overhauled. And the policy of requiring some level of Canadian content on all Canadian TV and radio stations should be replaced, over time, by one of providing "shelf space" for signals with high levels of Canadian content across a range of broadcasting technologies.

Summary of Main Findings

• Canadian policies to foster domestic cultural industries are under pressure from a number of fronts, including a recent World Trade Organization (WTO) panel ruling against certain measures to protect the Canadian magazine industry, as well as steps toward further trade liberalization, rapid technological changes, constraints on the public purse, and the growing export success of Canada's cultural products.
• These changes do not invalidate the reasons underlying Canada's support of its cultural sector - particularly the "public-good" aspect of encouraging Canadians to share their experiences with, and information about, other Canadians. But changes call for a renewed focus on the objectives of cultural policy.
• It is crucial for the development of Canada's cultural output that direct public intervention in the cultural sector be accompanied by steps to ensure a well functioning private market for Canadian cultural goods and services.
• A well functioning market for cultural products implies, in particular, ensuring that copyrights are respected, and that foreign-owned distributors of cultural products do not use their market position gained as a result of scale advantages or vertical integration to shut Canadian cultural products out of the market. In these areas, Investment Canada and, ultimately, the Bureau of Competition Policy have important roles to play.
• The definition of what is "Canadian" for subsidy, tax, or broadcasting purposes seems to give too much weight to Canadian ownership of the production company and to non-creative expenditures in Canada, and not enough to Canadian creative material or to material about Canada or Canadians. This balance should be altered so that the definition reflects as much as possible Canadian creations or Canadian interests.
• Given the imminence of the "500-channel universe" and wide access to global information sources through the Internet, maintaining "shelf space" for broadcast signals carrying consistently high Canadian content across a range of electronic media makes more sense than attempting to regulate a set ratio of Canadian content on an increasingly large number of channels.
• Private broadcasters, perhaps including a privatized Canadian Broadcasting Corporation, would compete to provide products with high Canadian content in this shelf space for the lowest subsidies from the public purse.
• The assumption that there is an automatic link between Canadian ownership of a firm distributing cultural products and the national content of the product being distributed is dubious in theory and often contradicted by the facts. Ownership restrictions in these sectors should thus be lifted, subject to Investment Canada's review of "net benefits" of these investments to Canada.
• The WTO ruling on magazines, while striking down measures that discriminate between a "like" domestic and foreign product, did not, in fact, imply that Canadian and US cultural products were to be considered "like goods" in general.
• While the door therefore remains open for a wide range of measures supporting the production and dissemination of Canadian cultural content, it is in Canada's interest to clarify through international negotiations the extent to which subsidies and tax incentives can be used to this effect.

Early this year, a World Trade Organization (WTO) dispute settlement panel ruled against Canada on a complaint by the United States about Canada's use of certain measures to protect its magazine industry. Specifically, the panel found that Canada's tariff on "split-run" editions of magazines (magazines with the same or similar editorial content as those published in one country or region but containing advertising aimed at another's market), lower commercial postal rates for Canadian magazines than for imported ones, and an excise tax on advertising in split-run editions were inconsistent with Canada's international obligations. The WTO panel stated specifically that its ruling did not constitute a general challenge to policies aimed at protecting a country's cultural identity. Nevertheless, reactions to the decision in the Canadian media and government and in the United States have dwelled on its implications for a wide range of cultural policies. Indeed, a number of commentators have suggested that the magazine case would prompt similar challenges in other sectors.

Canadian commentators and government officials are divided as to how to confront this situation, with some stating that the ruling is a sign that Canada's policies to protect its culture should be opened to general reappraisal, while others argue that Canada's cultural defences should be bolstered. The WTO decision on magazines, in fact, reflects just one of a series of disputes between Canada and the United States over the past few years on "cultural" issues. Other contentious issues have included:

• Canada's restrictions on US investment in book publishing and retailing;
• a decision by Canada's regulatory authorities to de-list a previously authorized US country-music TV channel in favor of a Canadian applicant;
• attempts by Canada to bolster domestic firms in the market for film distribution rights in Canada;
• an alleged lack of protection for US performers under Canada's proposed copyright legislation; and
• a long-standing Canadian policy of denying the tax deductibility of advertising expenses when the advertising is carried by foreign broadcast and print media and the advertising is directed primarily at Canadians.

Issues such as these indicate just some of the pressures coming to bear on Canadian cultural policies. The effects of rapid technological changes and budgetary constraints also loom large on existing and future policy choices. Against that backdrop, in this commentary I elaborate on some of the principal pressures for change in Canada's cultural environment, examine the reasons generally advanced for public intervention in the cultural sector, and review Canada's use of some key cultural policy instruments. I then go on to identify cases where these policies may have outlived their usefulness and others where current policies could be strengthened or made more effective. Finally, I describe how these proposed changes could affect the policy mix in each cultural industry. In summary, I argue that Canada's cultural policy should focus more on the objective of improving Canadians' access to products of their own culture, while becoming more modern in its choice of policy instruments -- by using technological and market forces rather than opposing them, and by devising rules that are fully consistent with Canada's international trade and investment interests. In more detail, I recommend:

• Introducing simpler but more meaningful guidelines for "Canadian content" for cultural endeavours that receive subsidies or protection against competitors.
• Providing direct subsidies and tax incentives to producers, distributors, and exhibitors of products with high Canadian content in such a way as to reward success in exposing the public to Canadian cultural output rather than increasing the quantity of output or Canadian ownership of the medium.
• Given the proliferation of channels, gradually replacing current across-the-board Canadian-content requirements in TV and radio by ensuring minimum "shelf space" across available cable, satellite, and broadcast signals for channels carrying a high Canadian content.
• Allowing competition for this shelf space by private, profit, and non-profit purveyors of cultural products, possibly including a privatized Canadian Broadcasting Corporation (CBC) television service, with subsidies available to bidders if a sufficient number of interested parties cannot profitably operate the space without public funds.
• Removing outdated restrictions on foreign investment across a range of media, including book retailing and film distribution, when the need to support Canadians' exposure to their culture and their ability to choose Canadian cultural products is not demonstrably linked to Canadian ownership of cultural industries -- subject to national security considerations and reciprocity with other countries.
• Maintaining Investment Canada's scrutiny of investments in cultural industries, and ensuring fair competition for Canadian products, notably with respect to distribution channels.
• Ensuring full copyright protection for Canadian artists, by adopting the current copyright bill (Bill C-32), suitably amended to better reflect the practical circumstances of users and the social benefit of disseminating cultural products.
• Providing a stable, multiyear target for funding the total federal envelope for culture, including tax deductions, expressed as a share of federal expenditures or even of gross domestic product, a step that could greatly improve the transparency of cultural subsidies and allay concerns about the predictability of funding.

The Changing Environment for Cultural Products

Should Canada lose its appeal of the WTO panel ruling on the magazine case, Ottawa will have to decide within the next 18 months whether to change the offending policies, offer concessions of equivalent effect to the United States, or await that country's retaliatory measures. Regardless of which option is chosen, however, pressures to modify cultural policies generally will likely increase for four main reasons: the continuing move toward freer global trade and investment; technological advances; budget constraints; and the need to bolster Canada's international position in cultural industries. I briefly examine each in turn.

Freer Global Trade and Investment

One main source of pressure on policies to protect cultural industries comes from the trend toward freer global trade and investment. Canada's economic interests in most sectors demand that it participate in this liberalization, because a rules-based economic system actually works in favor of medium-sized economic powers such as Canada by, inter alia, permitting the market access negotiated among larger powers to be extended to all, and by establishing a dispute settlement mechanism that is reasonably immune from considerations of relative economic size between the disputing parties. In fact, Canada worked hard to get the 1994 WTO deal under whose rules the magazine decision was taken, precisely because, unlike the system previously in place, losing parties to a dispute cannot block the adoption of dispute settlement panel reports.

These trade pressures will not go away. Indeed, as a matter of vital importance to its economic future, Canada eventually will participate in a more comprehensive global deal on trade in services than the existing one, as it already has on trade in goods. The narrow, technical nature of Canada's defence of its magazine policies before the WTO may be construed as an admission that these and other policies protecting cultural industries are difficult to defend on principled grounds, even when the policy concerns cultural services rather than goods such as magazines.

On the investment front, too, an eventual global liberalizing agreement may contain a most favoured nation clause that states that treatment accorded in Canada to the nationals of one country must be accorded to all. Of course, as with all such agreements, there will be exceptions and the grandfathering of some existing privileges. But Canada's recent rejection of Dutch-based Polygram's bid to distribute foreign independent films in this country -- by denying a European investor what other interests are already allowed to do in Canada seems to illustrate the lack of a principled basis of Canada's position in this area.

Technological Advances

Cultural policy is also coming under pressure from rapid technological innovations, as several observers have recently noted. The magazine case at the WTO was, in fact, triggered by a specific technological advance: the US owner of Sports Illustrated magazine, Time Inc., was able to transmit pages of the magazine electronically by satellite from the United States to a printing plant in Canada, thus circumventing a prohibitive Canadian tariff in place since 1965 against the importation of split-run editions of periodicals. Yet attempts to suppress or somehow control the spread of technology with a view to limiting its applications would only cause Canada to become an economic and cultural back-water in the long run. Indeed, such attempts are unlikely to succeed as a practical matter.

For example, Canadian delays in implementing a policy on direct-to-home (DTH) satellite broadcasting have simply led to increased penetration of the Canadian market by un-authorized US signals and to the piracy of those signals by Canadian viewers using black market satellite dishes. Policing such activities is expensive, and often seems at odds with basic individual freedoms or, on a less fundamental scale, with other policy objectives such as free trade and the pursuit of export opportunities for Canada's own technologies. The alternative, then, is openness to new technology, which, while it may increase the short-term penetration of foreign cultural products into a country, can just as effectively promote the spread of domestic content within a country. For example, the existence of a significant degree of Canadian content on the Internet, relative to Canada's economic size, is said to be directly related to previous deregulation in the telecommunications industry.

The Canadian public is quite aware of the constraints these changes impose on policies aimed at promoting Canadian culture. In a poll released a few days before the WTO panel decision, 46 percent of respondents said that the Canadian government should "pay more attention to protecting our cultural industries," while only 10 percent said they thought it should pay less attention. However, only 39 percent of respondents thought that continuing to protect culture in the new electronic age was even possible.  At the very least, it seems, cultural policy should be adapted to these new technological realities.

Budget Constraints

Another source of pressure on cultural policy is the need for the federal government to get its financial house in order. Under both the Mulroney Conservatives and the Chrétien Liberals, cultural programs have not escaped the effects of attempts to fight burgeoning deficits. And even though Canada's federal budget is expected finally to come into balance over the next few years, funding pressures on cultural industries are unlikely to ease. This is because attempts will likely be made to reduce the high outstanding public debt, and pressure may build for at least some reduction in those taxes that have the most perverse effect on economic growth, while competing demands, such as for health care or, indeed, for objectives equally relevant to Canadians' cultural future, such as improved literacy, will be made on any increased funds available from the public purse.

This is not to suggest that funding for culture should decrease further, only that it is naive to think that it will stop doing so, given the current fiscal environment, unless the objectives of the expenditure are made clear and the expenditure is measured against results from time to time. In my view, what is important is not first and foremost the amount of money spent on culture, but whether Canadians are getting the best value for it. If they are, then the appropriate funding is more likely to follow.

Canada's Position in the International Cultural Marketplace

A fourth significant source of pressure on cultural policy stems from Canada's need to solidify its growing presence in the international marketplace for cultural products. Canada's policies to protect its cultural industries are thus increasingly vulnerable to tit-for-tat retaliation by its trade and investment partners. The North American Free Trade Agreement (NAFTA) allows a blanket "exemption" for Canadian cultural policies, but it does not take away the right of other member countries to retaliate in kind or even to take measures of equivalent commercial effect against other Canadian sectors, if they feel that these policies impose a cost on their nationals. There may have been a time when such retaliation would have had a less direct impact on Canada's cultural sector than it would now, but there is plenty of evidence that Canadians are increasingly successful in the international cultural marketplace.

The country's revenues from cultural exports reached close to $3 billion in 1995, according to Statistics Canada, a whopping 83 percent increase in the space of five years. Regardless of the actual "Canadian content" of these cultural exports, clearly a lot of jobs and talent in this industry depend on the global market. For example, a third of Canadian film and video producers' royalties now stem from foreign sales, and Canadian songwriters and composers earn more royalties from international than from domestic airplay. Quite simply, ill-conceived policies to protect Canadian culture could hurt the Canadian cultural products industry.

On a more positive note, international rules in the area of trade and investment in "culture" are still in the process of being defined, notwithstanding the apparent US contention that rules governing trade in goods should apply to magazines, films, and other physical products whose value is chiefly determined by the cultural content they carry. A policy package that would serve the needs of Canadians, but that would be flexible enough to face the challenges posed by emerging technologies and freer trade and investment, could have a more universal appeal than policies limited to the Canadian market. Such a package would also position Canada to strongly influence the outcome of the discussions on this issue in the international arena.

Public Intervention in Culture: The Need to Focus

Canada needs to put its policy making on culture on a less ad hoc, less crisis-driven footing. What is needed is a principled approach to policy in this sector, one general enough to underpin policy in a wide range of cultural sectors, but flexible enough to permit policies to be tailored to fit specific market structures and technology in each sector, consistent with the overall approach. Because of the various constraints Canada faces, however, a clearer
idea is needed of the objectives that the policy should seek to achieve. With this in mind, this section provides an overview of the reasons generally advanced for public intervention in the cultural field, with a view to identifying the ones most relevant in the contemporary Canadian context.

Cultural Policy: An Ongoing Canadian Concern

With the growing number, importance, and complexity of forms of cultural expression, successive Canadian governments have struggled to define a cultural policy for the country. Throughout, the concerns have been, on the one hand, to enhance Canadians' exposure to products of their own culture in the face of the increasing availability of foreign, mainly US, cultural products and, on the other hand, to foster products with original Canadian cultural content.

Over the years, numerous commissions, panels, government officials, and other experts have examined specific challenges to Canadian culture. Typically, these challenges have come from technological advances and the increased penetration of foreign cultural products, particularly from the United States. As early as 1929, the Royal Commission on Radio Broadcasting (Aird Commission), expressed concern that the growth of the new medium of radio would "mould the minds of the young people in the homes to ideals and opinions that are not Canadian." It also hoped that, "[i]n a country of the vast geographical dimensions of Canada, broadcasting will undoubtedly become a great force in fostering a national spirit and interpreting national citizenship."

The commission went on to recommend the creation of a national broadcasting company along the lines of a public utility supported in part by public funds. In 1951, the report of the Royal Commission on National Development in the Arts, Letters and Sciences (the landmark Massey Report) articulated a vision of cultural policy for a postwar, increasingly urban Canada facing the emergence of mass, professional, cultural media. It lauded Canadian newspapers and periodicals in particular as "probably the chief source of knowledge to Canadians of their country and of one another." In a similar vein, in 1957, the Royal Commission on Broadcasting (Fowler Commission) reported that, while "we could have cheaper radio and television service if Canadian stations became outlets of American networks," it would not be possible to have a country at all if this were so. It was therefore the legitimate role of government to "compensate for our disabilities of geography, sparse population and vast distances." Over the years, these and other reports spurred the creation of a number of key publicly funded Canadian cultural institutions, notably the CBC (1936) and the Canada Council for the Arts, Humanities and Social Sciences (1957), now the Canada Council for the Arts, which dispenses funds to creators, producers, and exhibitors of Canadian cultural output. As well, the 1966 White Paper on Broadcasting, the precursor to the 1968 Broadcasting Act, signaled an era of increasing use of content rules and fiscal measures designed to ensure a certain relative level of Canadian expression in key Canadian media. In radio and television, these rules are currently administered under the aegis of the Canadian radio-television and Telecommunications Commission (CRTC), which awards licenses to operate broadcasting services.

More recent reports on cultural issues have not had the same propelling impact on policy. According to Tom Henighan, an advocate of continued support for Canadian culture: [T]he Federal Cultural Policy Review Committee of 1980­82 (Applebaum-Hébert) in retrospect looks like a timely but somewhat uncertain attempt to prune and shape the growth established after the first (Massey-inspired) cultivation of the Canadian "bush garden" alluded to by Northrop Frye. While several of the key recommendations in the Applebaum-Hébert report were acted upon, many of its critics suggested that it failed to chart a consistent path for the future. Also, some of the real pressures on our culture emerged clearly only after it had concluded its inquiry. Two other major reports devoted to the future of broadcasting policy generally and to that of the CBC more particularly, the 1986 Caplan-Sauvageau Report and the 1996 Juneau Report, recommended strengthening the CBC's sources of public or publicly mandated revenues, even as successive governments were weakening them in the face of severe fiscal restraints -- surely indicative of the loss of a certain sense of direction.

According to Henighan, this loss has occurred because we have reached the end of one era in our cultural development but have not yet found a way to the next. We may well have entered what might be called "the second phase" of our postwar cultural growth [the first, successful, one having been initiated by the Massey Report] without really acknowledging or taking on the challenges that derive from this fact. In short, Canada has long asserted that it is in the public interest to have access to, and to support, distinctly Canadian cultural products in order to provide a counterweight to the culture carried by commercially stronger, foreign -- particularly US -- cultural products and distribution channels.

In practice, however, this policy is now beset by pressures for change and by an increasingly cloudy view on where the resources to support culture should be concentrated. In this light, I review below the analytical basis for the claims underlying calls for government intervention in the cultural sector, with a view to suggesting where Canada's cultural policy objectives might be refocused. My own focus is on economic concepts, which tend to put cultural policy in a relative light, rather than on concepts such as "identity," which tend to hold cultural policy as an absolute need. Yet, as I hope will be clear, economic analysis is flexible enough to take in the importance of cultural elements that make up a sense of belonging to a community. And since, in practical public policy terms, cultural protection must be reflected in "hard" policies, such as cash subsidies, tax deductions, and protective regulations having an economic impact, and since many supporters of active cultural policies use economic arguments to bolster their case, an economic point of view should provide insights into the proper use of cultural policy instruments.

Daniel Schwanen's full commentary and analysis may be obtained online at the C.D. Howe Institute in Adobe format, or by contacting the Institute:

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