Trade in the Cultural Industries

• Economic Theory• Institutions & Balance of Trade• Trade Disputes:

– The Split Run Edition• Background on the Magazine Industry• The Dispute• The Ruling• The Outcome: The Cultural Diversity

Agreement

Economic Theory of Trade

• Adam Smith and doctrine of absolute advantage– Ricardo and doctrine of comparative advantage

Geopolitics of Trade

• US at the forefront of trade liberalisation since the 30s– Moved bilaterally and aggressively

• After the war, a series of international conventions and institutions entrenched the free flow of ideas

• In 70s, emerging nations contested this doctrine with demands for a New World Information Order, and fair trade

• US Regroups, and pushes for recognition of services in world GATS in 1990s ( trade central to US economy: at 30%)

Institutions

• GATS: General Agreement on Tariffs and Trade– First GATS article IV exempted theatrical screen quotas– Article XX excepts measures which protect national treasures– US denied this set a precedent for TV or other cultural industries

• Regional agreements:– 1988 free trade agreement exempted culture– NAFTA did as well

• But: Canada had to commit to international copyright convention, and cable TV had to start paying for right to carry US stations.

• And: an overarching retaliation clause affects even cultural industries.

– Definition of cultural industries as a business enterprise pervades NAFTA

WTO

• Established out of the Uruguay Round of GATS

• Establishes panels to hear complaints and rules in a timely fashion– and may hear imposition of sanctions if rules not followed.

• The preeminent institution of global cultural /economic governance

Regulatory/Legal Precedents in International Law

• Most Favoured Nation Rule:– Ensures that countries treat all partners equally by ensuring

the rules that apply are the best deal afforded any one party– IE non discrimination externally

• National Treatment Test:– Ensures that foreign products are treated like domestic ones

with regard to taxes and regulations– Ie non discrimination internally

• Reciprocity– a balance in concessions

Balance of Cultural Trade

• Statistics Canada measures business indicators:– In 2003, Canada sold 2.3 billion in cultural goods ( 90% to

US)– - but imported 3.6 billion, with a faster growth rate for imports

( 80% from the US)– Cultural Trade is cyclical

• From 1998 to 2003 film and sound recording had a trade surplus of about 140 million, but deficits prior

• Canada losing markets in UK and EU

• Trade with China growing

Globalization ( Macro Economics)

• Growth in world trade in last 20 years has been 7 times the average growth of GDP

• Canada’s Open Economy among the most trade dependent of the G-8– 30% of GDP derived from exports– Most of the trade still in resources but

for new exporters: Northern Telecom, Spar, Telcos

– Canada has a persistently high deficit in tech trade deficit, and high trade deficit in media hardware and software

– Free trade causes labor and social dislocation

Ways to Measure Trade Dominance

• Share of Domestic Markets ( individual nation basis)

• Share of total world trade

Fast Facts ( sales)

• Canadian Share of Books and Mags: 20%• Canadian Share of Sound recording..11%Canadian Share of English TV Entertainment …9%

• Canadian Share of Film: 3%– Source: Canadian Heritage cultural statistics program, 2003

Why the Dominance

• The Well kept Secret• The Embarrassing Facts• The Economic Reasoning

The Split Run Magazine Dispute ( 1997)

• Canada lost a major trade ruling before the WTO• Domestic magazine policies had to be revisited• Unlike the softwood lumber dispute, Canada did not

press its case again– A negotiated settlement– Not using the WTO– A parallel encirclement: the Cultural Diversity

Convention( UNESCO)

Economic Profile

• Now 2,000+ titles of magazines in Canada ( a three fold growth since 1970)

• Combined revenues are 1.2 billion annually ( relatively small compared to music, film, TV)– 30/70 split between subs and ad revenues

for an average publication• Employ 8,000 workers and 5,000 free lancers

Ownership Profile

• Of this, 2/3 are small indie owned publications• large owners are Rogers, Quebecor but they are

dwarfed before AOL Time Warner( People etc.)• A 40% market share of newsstand sales:

– despite the fact that only 15% of rack space is left for Canadian magazines

• A 70% share of subscription market ( Source: CMPA)

• Of those which are Canadian owned, 90% of the content is Canadian

Profile Cont’d

• If take share at the newsstand, a 40% share is significantly higher than TV, Film or Sound recording

• Industry has set a target of growth to 50% over next ten years before Standing Committee on Canadian Heritage

• On the face of it, a great success as a cultural industry: except margins are perilously low: 2-3%– 7 in 10 magazines don’t make it to the newsstand– 6% of Canadian titles are regularly on shelves

The Split Run Edition Case

– Time magazine one of the oldest of US imports• Grand fathered investment ownership restrictions

• About 150,000 circulation in the early 1990s

– Time Canada( controlled by AOL Time Warner) intended to publish a Canadian edition of Sports Illustrated

– Company consulted Investment Canada on rules, obtained verdict it was not inconsistent with Investment Act

– In 1993 tried 6 issues of split run Sports Illustrated Canada, • 30% Can Con, and 40 pages Canadian ads worth about $250,000

• Government established a Magazine Task Force in 1994…

– they sized the threat at 53-70 other cases. • Recommended Excise Tax: protectionist measure

Definition of Split Run edition

• A clone• Recycles parent edition• Wraps ‘local’ original content• Sells new ad space at a price substantially lower than

parent edition• The ‘automatic’ logic of enjoying economies of scale

– Close to the idea of dumping, but, since involves some republishing and some original content mixed in, sidesteps the classical definition

– But, leaves country of import at a disadvantage in relative costs

– Part of the small market diseconomies of scale seen in TV, and other cultural industries

Policy History: C-58

• In 1920s, magazines were one of the first industries to win a protectionism tariff ( except for film)

• The Conservative Government during the 30s argued it would also help manufacturers who might be hurt by imported mags advertising for their competitors

• When tariff introduced, Magder argues, there was a 60% drop in US sales..Tariff also established the branch plant side effect.

• A later commission: O Leary in 1950s found that 7 US companies controlled 40% of newsstand distribution ‘substantially impeding Canadian magazines from accessing their own market’

• Recommended Tax Legislation like C-58

C-58• Flowed from S. 19 of Income Tax Act ( Bill C-58)

– Also key in TV sector• Prohibits a tax deduction for advertising in non Canadian periodicals targeting a

domestic audience after 1965– Memoirs of Walter Gordon attribute the exemption for Time and Readers’ Digest to

State Department lobbying• Magder notes its undeniable positive effect on the Canadian market

( Candystore, p. 13) which was upheld by the OLeary Cttee. ( 28)– After passage of C-58, US Congress disallowed tax deductions for expenditures on

Conferences in Canada: retaliation– a high water mark for what Dorland calls a period of Canadian cultural nationalism

• After C-58 US Trade Act amended to include information services.• But, even in Split Run case, US did not attack C-58, and the WTO ruling found it

an “incentive” for placing ads on Canadian as opposed to foreign periodicals

Magazine Task Force Recommendations

• Found the Canadian Edition of SI was charging half of the ad rate in Canada it was in the US

– In other words, because American publishers can cover the fixed costs of production in their home market, they can undercut the standard Canadian advertising rate and thus compensate Canadian advertisers for their inability to deduct ad expenditures in such magazines

• Argued for an Excise Tax Act, ( as amended by Bill C-103 15 Dec. 95 )which imposed an excise tax on spit runs

– requires the imposition of a levy equal to 80% of the value of the ads.per issue. Calculated on gross.

• Task Force argued it was designed to prevent the diversion of advertising to low cost publications reproducing recycled editorial content

• Sized the threat at 40% of revenues, and 85% of operating profits

Excise Tax Bill C-103 in 1995

• Did not grandmother SI• Also prohibited Canadian split runs• Vigorously protested to single out a firm,

and punitive, not revenue generating• US claimed the bill violated Canada’s

commitments under GATT and thus not under NAFTA

Prohibitions on Imports: Excise Tax

• Tariff Code 9958 prohibited importation of certain split run periodicals ( administered by Department of National Revenue)

• Applied an excise tax if an issue was a special edition, including a split run or regional edition that contains ads directed to a Canadian market not like the edition in the country of origin

• …exempted mags in which the principal function to encourage fine arts, letters, scholarship or religion

• A measure vulnerable to attacks of unfair restraint on personal freedoms, but, direct personal subscription never targeted, only import on newssales.

• Thus: does not in any way restrict foreign magazines per se: only affects targeting of ads directed to readers ( Magder: 36)

Tariff Contd

• Hard to enforce if electronic transmission bypassed the border….

• how determine if targeted to Canadian market?– if enticements,if gst, if Canadian addresses, or specific invitations

to Canadian consumers• After AOL Time Warner’d move into Canada, CMPA forged a

coalition including the Canadian Advertising Foundation, the Institute of Canadian Advertising and Periodical Writers’ Association of Canada

Climate

• Extensive disputes: takeovers of Ginn publishing by Paramount

• Country Music Television: withdrawn from list of eligible satellite services for import in preference to a Canadian licensee in mid 80s

• 1994 Federal Court upheld Canadian CRTC decision, despite US company appeal; Supreme Court did not hear case

• US owner of CMT bought its legal limit of shares

US Case

• Tariff targets specific publications contrary to Article X!:1 of GATT 1994 which prohibits quotas

• Tariff grants a monopoly over local Canadian advertising ( disregarding spillover issue)

• Tariff unfairly discriminates between like products ( split runs and foreign or domestic editions)

• US did not challenge S. 19 of the Act.• Did challenge Excise tax and Postal Subsidy

Canadian Case

• Distinctive nature of magazines from ordinary products

• Distinction between types of editions: material distinction Time Canada and Macleans as example

• That excise tax an allowable tax on services permissable under the existing GATS

WTO Decision

• Excise Tax violated GATT because – like products, discriminatory tax levels.

• WTO panel also ruled that Postal subsidy discriminatory and in violation of GATT

• Only the Publication Assistance Program upheld• A 2 out of 3 loss for Canada– appeal body upheld body of

decision, but demurred on like product finding, leaving it open for further trade law development

• This issue: substitutiibility, is at the centre of competition and trade law

• But, panel argued that the ability of any Member to take measures to protect its cultural industries was not at issue in the present case

• Canada had 15 months to bring law into compliance

Industrial/Policy Programs

• Policies & Programs before 1999 were overturned by the WTO• Since 1999, now just two main programs:• The Canadian Magazine Fund

– Invests in marketing,distribution and professional development

– Established in 2000– $22 million to magazine editors for development of canadian

content• Postal Assistance Program ($45 million)

– Discounts mail subs for Canadian Programs– Now Harper and Canada Post want to withdraw it

• Foreign Purchase is not allowed

Bill C-55: Foreign Publishers Advertising Services Act

– Caps amount of ads that can be sold on the Canadian market for American firms coming into the market at 18%

– IE opened market to US publications to collect up to 18% revenues without penalty

• Income Tax Act (2000) amendment– If magazine has more than 80% CANCON, cost of ads can

be totally (100% written off)– Thus, market fully open if substantially Canadian Content– If only 20% content ( eg: Time Canada) only half can be written off(50% deductible)

Economic Impacts

• No major bankruptcies

• Full list of publications receiving grants

• No final economic evaluation yet made

Cultural Aftermath

• Sharp internal differences in Canadian bureaucracy: Investment Canada did not consult with Heritage; Trade Minister did not support the Heritage Minister in case; – The coming of age of Canadian culture may not depend on our

ability to protect it at home, but to project it on the world stage ( Magder, 48)

– Thus, not a cultural nationalist policy needed by a cultural global policy: what would this mean?

• Acheson and Maule:– What Canada needs is a policy in which the state creates an open

environment for individual and group creativity; in which cultural support is separate from industrial policy; and in which specific commercial, communal or governmental failures are targeted. ( Magder: 48)

Outcome:

• Negotiated an out of court settlement with the US• Got C-55 and two new programs in place• But, Minister of Canadian Heritage created a network

of 45 countries to push UN for an adoption of a convention on cultural diversity: to have equal political force as Declaration on Political and Civil Rights

• UNESCO passed a declaration on cultural diversity

• That is, to persuade countries to adopt it voluntarily

“ Convention”

• on the Protection of the Diversity of Cultural Contents and Artistic Expressions( Unesco: Tunis, 2005 in November) see www.mediatrademonitor.org

• Central civil society presence in drafting, but evidence of backsliding

• Hot Points:– Protection or encouragement or promotion?– List or open definition of cultural industries?– Relation to Intellectual Property agreements and other

binding international agreements– Protection of nation state sovereignty: supersession of

aboriginal or minority rights?– Definition of distinction between goods and services and

contents and expressions