"The Political Economy of Canada's Culture Policy: the 1990's," in André Lapiere, Patricia Smart and Pierre Savard, Langauage, Culture and Values in Canada at the Dawn of the 21st Century, Ottawa: Carleton University Press and the International Council for Canadian Studies, 1996.

During the past quarter century one of the most intransigent issues in the Canada-American trading relationship has been that of Canada's policies with regard to its cultural industries. Canadian's, in and out of government, have asserted Canada's right to insist that film, broadcasting, publishing and magazines must be considered to be a special case that does not fit easily into the standard model of trade in goods and services; U.S. political leaders and negotiators have with equal consistency argued that no such special treatment can be allowed. To put the conflict in the simplest of terms, Canadians have argued that radio and television broadcasting is a means of communication whereby Canadians can communicate with other Canadians and a unique Canadian culture can be articulated and find expression: a representative expression of the U.S. position was given by a former Federal Communications Commissioner who stated: "(t)elevision is just a toaster with a picture," that is, that it has no role in the transmission of cultural or political values.

This conflict over the nature of the cultural sector and the way it should be treated in trade negotiations was raised to the level of 'high politics' during the negotiations for the Canada-United States Free Trade Agreement (FTA), and became an equally prominent feature of the negotiations between the United States and the European Union in the latest GATT (General Agreement on Tariffs and Trade) round. This is an issue over which individuals of good will may disagree, but it is exacerbated by the fact that it is difficult for the participants in the negotiations to find a common language in which to speak. When we discuss tariffs or subsidies or dumping all participants have an extensive literature going back to Adam Smith on which to base their arguments. We all know the basic arguments for the benefits of free trade, for the costs of a tariff, for the desirability of freer movements of capital and for the consequences of formation of a customs union. But regarding trade in culture goods, individuals on opposite sides the issue do not refer to the same body of economic theory as the basis for their argumentation. The supporter of an activist cultural policy designed to promote the local or national cultural industries finds the other side speaking only of efforts to divert a stream of revenues from one (foreign) vendor to another (domestic) vendor. The free trader is confronted by the claim that he or she is a tool of those who would destroy another national culture. Hence the dispute quickly turns to a shouting match between "protectionists" and "imperialists," to use the language of the issue, and to intransigence on both sides.

In a paper written six years ago I presented a model of analyzing the cultural policy question that was based on mainstream economic theory. If this model has any value it will be that of enabling both sides of the policy debate to speak a language that is understandable to both, using theoretical argumentation that is uncontroversial. The practical value of elaboration of that model for Canada was two fold:

· An argument was derived that suggests a rationale, based in standard economic theory, for an activist cultural policy, especially for a smaller state.

· An approach was developed to analyzing the consequences of implementation of specific policies aimed at the cultural industries, and to determining which of those possible policies are least defensible, in a GATT environment, and are most likely to evoke a retaliatory response by the country's trading partner.

The policy debate and the implementation of new policies have continued since that paper was published in 1989 and it is most appropriate for this conference that an up-date be undertaken. The first step in this up-date will be a recapitulation of the basic argument to be used. Then the results of application of the model to the events of the 1970's and 1980's will be reviewed. Only then will we be in a position to examine the current situation for Canada in its relationship with the United States.

Before beginning the argument of the paper we must take a moment to make clear what is meant here by the term culture industries. At first glance the term seems to be an oxymoron. The word culture brings to mind works of creation and inspiration, while industry conjures up visions of factories and mind-numbing labor, although R. H. Tawney differentiated between profession and industry, with the former indicating craftsmanship and pride in work and the latter pecuniary motivation and purely financial gain. However in both activities, culture and industry or profession and industry, goods and services are produced for sale and individuals must gain enough income to pay the rent and survive. There is a second, and perhaps more fundamental conceptualization of culture industries that must be specified for this paper - what activities can legitimately be referred to by that term? In a recent paper Edward Comer defined culture industries as "those activities directly involved in the production and distribution of entertainment and information products and services." In this paper the guide to terminology will be the definition of the Oxford English Dictionary; that is, that culture must refer to "improvement or refinement by education and training" or "the intellectual side of civilization." Yes, there is popular or mass culture but as will be argued below it is difficult to argue that this is an area of activity the government ought to consider in formulating its culture policy. Comer's definition leads one into the morass in which culture goods cannot be distinguished from any others; that of the OED takes one out if it.

The Argument in Economic Theory.

The crucial point of disagreement between the United States and Canada regarding culture goods is whether they can be treated as any other goods or they must be considered a distinct category that requires special treatment. If they cannot be considered distinct then they must be treated exactly as one would shoes, bicycles or toasters. But if it can be demonstrated that cultural goods do have special characteristics then they must be treated as a special category of international trade. While trade theory has made no concession for cultural goods the theory of public finance does and it is to this area of economics that we must turn.

In his classic text on public finance, Richard Musgrave differentiated among three types of goods: private, social and merit. Private goods are those for which the market can be relied upon to provide for the optimal allocation of resources; consumer preferences are a sufficient guide as to what and how much of it should be produced. This is because the individual consumer captures all of the benefits from consumption and should therefore pay the entire cost of production of, say, apparel or consumer appliances. Social goods are goods for which there are positive externalities and thus the consume does not capture all of the benefits from consumption of that good. An example would be chest x-rays for tuberculosis; I benefit from the fact that you have had the X-ray in that the likelihood that I will be afflicted with tuberculosis is reduced. In this case the market will under-allocate resources to the good and another agent must intervene in the decision of how much of that good will be provided. With social goods the most efficient mechanism for optimal resource allocation is intervention by the state. A different sort of market failure is found with merit goods. In this instance some entity determines that the good is far more meritorious and worthy of being provided than individual consumers are capable of judging. Opera is a good example of this sort of good. For an opera company to cover all of its costs the price of a ticket would have to be several hundreds of dollars. At this price quantity demanded would plummet, the company would fail and the quantity of the good provided would be zero. For merit goods, the appropriate mechanism for allocation of resources has always been a benefactor or an elite of society who contribute from their wealth so that these goods can be provided in what they consider to be the optimal quantity.

Paraphrasing Musgrave, with social and merit goods "the very purpose may be one of interference by some,...into the want patterns of others." If this approach can be applied to cultural goods then there is an opening for the argument that a special case in international trade and trade relations must be made for them.

With Musgrave's taxonomy in mind it is possible to differentiate among three types of culture goods, for each of which there will be an appropriate mechanism for resource allocation. Most of the goods produced by what we have been referring to as the cultural industries (the Comer definition of the term), film, publishing, magazines and television programming, would have to be considered popular consumption products that would best be placed in the category 'private goods.' Individuals who purchase them are able to capture all of the benefit from their consumption and rightly therefore should pay their entire cost of purchase. Other culture goods, such as the New York Philharmonic playing a Beethoven symphony in London, are of a different order, that of so-called high culture, which is seen to be an expression of values that are common to mankind and which must be supported beyond that level which can be sustained by sales at prices that cover all the costs of their production. These goods are examples of 'merit goods,' goods that have always been supported by funding of a political or social elite.

In discussions of cultural goods policy the analysis never goes beyond the case of merit goods, an application known as the "Baumol-Bowen thesis." It is certainly useful to distinguish between private and merit goods in cultural policy because it leads one to the understanding that the market cannot be relied on for the optimal allocation of resources and it justifies an intervention in the marketplace. This approach was central to the Applebaum-Hébert Report, the Canadian government's 1982 review of federal cultural policy. The Baumol-Bowen approach has applicability to the situation of the United States but, I argue, is inappropriate for that of Canada due to differing size, market, linguistic and other characteristics and will lead to inappropriate policy recommendations for Canada.

In fact I would argue that for smaller countries such as Canada, and one could add France, there is a component of the cultural output of the economy that cannot be classified as either a private good or a merit good. This is the cultural goods that involve articulation and expression of the national culture; they are properly considered to be examples of the remaining classification, 'social goods.'

The social good that is at risk here is the continued understanding Canadians have of their unique historical, cultural, social and economic identity and their willingness to support whatever costs there may be in maintaining their continued existence as an independent nation. The sort of threat posed can be best clarified if we consider the different values Canadians and Americans have regarding the role of government, how government functions and how individuals relate to social institutions. It is universally accepted that, in comparison with Canadians, Americans as a people are relatively individualistic, they tend have a fundamental mistrust of government, they are less tolerant of others exhibiting different political beliefs and behavioral characteristics, they are more willing to resort to coercion and violence to resolve dispute - from personal to foreign policy conflicts, and they believe business and the private sector can be trusted to act in a socially beneficial manner. It is only to be expected that American culture goods would convey messages that would be in conformity with this set of values. It can be observed so uniformly in western and crime movies, in television "sit coms" and dramatic series, in popular music and even in broadcast and print news reportage that we need not give examples here.

The Canadian West was not settled by individuals with guns, but rather through the extension to areas of settlement of eastern economic and political institutions, such as the railroad, the Mounted Police and the Hudson's Bay store. The Canadian parliamentary system functions with less reliance on committees, lobbyists and the operational freedom of the individual elected member than is the case with the American presidential-congressional system. Canadian health care, education, and the social safety net all operate according to fundamental principles that are quite distinct from those of their American counterparts, as are their level of taxation, their foreign policy and their trade-off between personal freedom and social cohesion. That is to say, Canadian values and institutions are distinctive, and are different than those of their American neighbors.

I will assert that any people ought to have the choice of maintaining or altering the unique functioning of their national institutions. If Canadians chose to give theirs up in favor of American institutions because they see them as more effective in meeting their expectations, so be it. But if the cultural goods that elaborate and express those distinct Canadian national values are 'crowded out' by imports of cultural goods expressing foreign national values, because foreign market conditions allow those goods to be sold in Canada at prices Canadian creators and producers are incapable of meeting without subsidies, or because foreign firms are able to capture revenues from the sale of their products worldwide so that they can establish monopoly control of distribution, exhibition and display in Canada, thereby reducing Canadians' access to domestically created and produced culture goods - then a negative externality exists that results in a market failure.

Thus, we are left with the third and last category of culture goods, the 'social goods' - thhe category of goods that involve externalities. For social goods, society cannot rely on ticket sales for determination of the degree to which resources will be allocated to them, nor do these goods express universal human values, enabling us to rely on contributions of funding by an elite. The culture goods that express and articulate a national culture have the property of positive externality in that the consumption by one individual generates a benefit that is enjoyed by an other individual. Just as one citizen's having a chest x-ray for tuberculosis assures other that they will have a reduced likelihood of infection, so will each citizen be assured of the continued existence of the nation as a separate entity if other citizens have access to national culture goods and are thereby able to make an informed judgment as to the value of their distinctive national political and social institutions and processes. If other citizens in a society are deprived of access to the goods that express the national culture they may well undervalue their national values and institutions and accept changes in them that make assimilation into another society more likely; this is a negative externality for those remaining citizens who are able to gain a 'true' understanding of these values and institutions and attach a higher value to them.

If it is agreed that national culture goods ought to be treated as social goods then we must accept that the allocation of resources to this industry will not be optimal if either the market or an elite are used as the allocative mechanism. For social goods decision by government is the only effective mechanism for resource allocation, as is readily admitted when it comes to other social goods such as defense, public health and K-12 education. Brian Mulroney said as much in his Chicago speech of 1987 when he stated that while the United States often defends policies under the guise of national security, Canada defends its policies of intervention on grounds of cultural sovereignty. The seeming conflict between the two approaches is resolved if one accepts that both national defense and national culture are vital to the continued existence of the nation and that both must be treated as social goods - completely under the sole purview of the national government.

Perhaps one way to reduce the heat of the debate between the two governments regarding culture policy is for the Government of Canada to press the argument that national cultural goods are social goods, that they are not to be treated as goods comme les autres, and that no foreign government can intervene in culture policy any more than it can in public health policy or in decisions about purchases of national defense goods.

Application of the Model to Events up to the Canada-U.S. FTA.

The FTA was in many ways the defining moment for Canadian culture policy. The measures adopted prior to that event are important not only for their impact on the viability of Canada's culture industries but also for the context they set for the trade negotiations. These policy measures were concentrated in three areas of the industry: film, broadcasting and publishing. The policies chosen have been different in each area because of the distinctive nature of creation, production, distribution and consumption of each. For example, a book is the work of an individual that can be produced by a small press (one of scores or hundreds in that sector of the industry), distributed in a highly competitive market of book sellers and consumed by an individual wherever he or she chose to read it, while a film is the creation of a team, produced by a small army of specialized workers, distributed in many cases by nation-wide theater chains and consumed by a large number of views concentrated in a single place. Thus with market structures and the processes of creation and of consumption so dramatically different no single set of policies will be suitable for much of the culture goods industry.

In this section we will examine the policies implemented by the Canadian government for these three sectors of the industry prior to the Canada-United States Free Trade Agreement. Furthermore, for broadcasting we will be able to differentiate between two distinct periods: Phase I - through 1982, and Phase II - after 1982.

Film. Production of this culture good involves an enormous number of individual workers but is less complex in its overall structure than are the other areas of the culture industry, in that much of the creation, production and distribution is done by large companies that internalize these activities. So the policy response is accordingly less complex. The problem with film is the small percentage of film showings in Canada that are of Canadian films; about 94 per cent of all films shown are U.S. films and 2 per cent are "other foreign." The lack of Canadian films or of Canadian film-makers' access to screens, it is argued, deprives Canadian audiences of films that 'tell Canadian stories.' Production and distribution are taken to be the crucial areas in which effective policy is needed.

Film distribution was dominated by Odeon Theatres and Famous Players Theaters, the former was British-owned and the latter American-owned. It was argued that these owners were not sensitive to the desire of Canadian audiences to view Canadian films and that due to economic factors internal to the companies they were biased against local films. If only, the argument went, film distribution were to come under Canadian ownership the problem would be solved. This argument was shown to be erroneous when the Odeon group was purchased by Canadian interests and film distribution policy showed no improvement for Canadian film-makers. The Applebaum-Hébert report suggested this was ""perhaps because it is Canadian-owned and feel protected as such from the need to be more responsive to Canadian films." This supports the classic argument from the political left, during the foreign investment policy debate, that one should not expect a Canadian capitalist to behave differently from any other capitalist - they all maximize profit and act in precisely the same way. The only intervention here that can be expected to have a positive impact is specific performance requirements that legislate behavior. While France and the European Union have set quotas for local and foreign films, Canada has not taken this step, partly due to the certain retaliatory response from the U.S. government and partly due to the existing extraordinary domination of the industry by U.S. vendors and the lack of Canadian films that could fill the quota.

Production of film has always been supported by the government through its funding of the highly acclaimed National Film Board (established in 1939) and, since 1967, the Canadian Film Development Board. In June 1988 Minister of Communication, Flora Macdonald announced that the latter would be renamed Telefilm Canada and an additional $115 million would be allocated to it and the National Film Board for film production. Support of the creation of more Canadian films was a policy in the right direction, but distribution continued to be perceived as a problem, and other attempts to improve the situation failed to impress the culture industry. Perhaps the best comment on this is that of Steven Globerman:

Improving the competitiveness of Canada's feature film industry quite simply requires making more films that a greater number of people want to see. Commercially promising Canadian films will be distributed by the majors, since it is in the majors' self-inerest to do so. Commerically umpromising Candian films will require government subsidy regardless of who owns the distribution sector. In short, simply reducing foreign ownership in Canada's distribution sector will not promote the production of more Canadian films.

American films are popular not only in Canada but in other world markets as well. While Canadian nationalists are offended by the omnipresence of U.S. films, others are more sanguine; Ithiel de Sola Pool has argued "The Americanization of world culture so often commented on and deplored might be better described as the discovery of what world cultural tastes actually are." From this is becomes clear once again that we must be clear as to the definition of culture goods we are using, and to differentiate between the various types of culture goods - this being possible if the Musgrave terminology is adapted to this set of goods. American goods may dominate entertainment, the private good, but they certainly do not dominate high culture (merit goods) or national culture goods (social goods).

Even if one nation does dominate the entertainment sector of culture, some research suggests that this is not something that need generate much concern by nationalists, from Canada, France or anywhere else. The question hinges on how peoples of different cultures "de-code" the content of a film or television program. The text of the film or video can be viewed as a cultural imperialist device for weakening the attachment of views in cultures other than that of the maker, of showing the other culture as superior, in the sense of being more modern or progressive or as element in the success at global domination of the imperial center. But that culture good may also make it clear to the viewers that their own culture and institutions are: 1) different, 2) worthy in their own right, and 3) profoundly more satisfying to the viewer than are those of the cultural imperialist nation. Two researchers examined the interpretations of three distinct groups in Israel to viewing an episode of the U.S. television series "Dallas."

The Americans and the kibbutz members discuss the relationship between the programs and the more intimate spheres of self, family, good friends. The Russian statements are about "general social categories" - such as women, businesmen, parents, etc., protecting their privacy and aesthetic superiority by resisteing potential allusion to self, primary group or ethnic status. The Moroccans, like the Arabs, also contrast themselves with the Ewings - more as Israelis or Jews than as Moroccans...Some say it reminds them of Russian progaganda...Other, related mesages that viewers identify include "the rich are immoral" and "Americans are immoral." That "Americans are uncultured," judging from "Dallas" and its inhabitants, is a favorite Russia observation. Many of these messages evoke the response "And we are better off."

Canadian viewers may react quite differently to this programming than do Israelis, due to the Canadians similarity in income and life-style to Americans and to their close proximity and extensive cross border contact. Whether this is or is not true, however, what is clear is the necessity for Canadian policy being clear in its focus on national culture goods, rather than on any broader conceptualization of concern about culture, in its on-going policy dispute with the United States.

Broadcasting. Broadcasting presents some rather unique problems for Canada. The spatial location of the population, with 80 per cent living within 75 miles of the U.S. border, has meant that U.S. radio and television signals could be picked up by the vast majority of Canadians, thus making it virtually impossible for Canadian authorities to regulate access to foreign products. The problem has been exacerbated by the impressive advances that have been made in micro-wave and especially in cable transmission. Canada is today one of the world's most completely 'cabled' television markets and consumers are given a full array of U.S. networks and independent stations that carry American films and reruns of American television programming. These features have made it an especially difficult part of the industry to bring into compliance with Canadian nationalist objectives.

Canadian broadcast policy was implemented at first by Liberal Party governments during the 1960's and 1970's, and then after 1982 by the Conservatives. The two adopted different approaches due to party ideology as well as to the error learning process.

Phase I. The approach of the Liberals was to place faith in Canadian broadcasters in hopes that they would respond as desired by increasing the production and scheduling of Canadian programming; five specific policies were implemented with this end in mind. 1) Canadian content regulations for broadcasters were imposed by the Canadian Radio and Television Commission (CRTC) in 1970. The initial limit was set at 40 per cent foreign and 60 per cent Canadian content of total broadcasting, with no more that three-fourths of the foreign quote being provided by any one country. The CBC has made a sincere effort to offer dramatic programming and has now reduced foreign programming to less than 20 per cent, however the private networks have always attempted to meet their Canadian content requirements with news, sports events, game shows and imitations of U.S. programs.

2) Cable priorities were introduced in 1970 according to which local broadcasters were required to give highest priority to CBC stations (French and English language), and decreasing priority to seven other categories from Canadian private down to U.S. networks. If strictly applied in those early days of only a few channels this policy could have had a significant effect, but the following year the priorities were watered down to give greater accessibility to popular U.S. programming. Television analyst Robert Babe has concluded "one would suspect that the CRTC realized that such a regulation was politically impossible; however, the threat did exist in the announcement." The policy was mooted by technological developments, however, when cable brought scores of channels into the viewers home and only minority of them could be filled with signals of Canadian origin.

3) Commercial deletion was implemented for one year, in 1971. Commercial messages on U.S. stations carried on Canadian cable systems were randomly deleted, with public service announcements shown in their place, thus making reach to Canadian consumers very uncertain for Canadian advertisers; the only safe approach would be to advertise on a Canadian station. This policy was replaced by tax incentives.

4) Tax incentives, in the form of Bill C-58, denied Canadian purchasers of television advertising a business expense deduction on their income tax for advertising placed on U.S. stations. Thus a Toronto firm would have an incentive to advertise on a Toronto station, rather than on one in Buffalo, if it wanted to reach Canadian consumers.

5) Ownership regulations introduced in 1972 mandated that all Canadian cable broadcasting systems must be at least 80 per cent Canadian-owned.

The intent of all of these policies, except the Canadian content regulations, was that of giving the Canadian television industry increased revenues on the assumption that this would result in increased production of Canadian programming.

Phase II. After 1982, and the election of the Conservative government of Brian Mulroney, policy toward broadcasting became less directly interventionist. Funding was reduced for public sector production of programming and shifted to support of efforts to elicit a response from the private sector. Telefilm Canada was given additional funding for participation in projects of Canadian producers in recognition of the "limited license fees earned in Canada;" the same comment could have been made regarding inadequate advertising revenues that were available to broadcasters in the small Canadian market. The policy was not without effect in that Canadian program production doubled between 1985 and 1986, but coming on such a low initial level of activity the networks remained dominated by imports of U.S. programming. Indeed during the 1987 review of its license, CTV (one of the private networks) was put on notice that more would be expected in the future. However the CRTC issued this warning often and did little in the way of enforcement.

What is significant about this period is that where as the earlier policies, as will be discussed more fully below, were almost designed to maximize the reaction from the broadcasters across the border, there was little U.S. interests could object to in a policy that sought only to increase the quantity of Canadian programming available to the market place without any obligation imposed on Canadian broadcasters that it be shown in place of U.S. programs. Given the enormous advantage U.S. program producers had in terms of revenues available to them they could be fairly certain that in any arms length program decision based on audience acceptance or popularity there would always be a ready market for them in Canada.

Publishing. The book and periodical publishing industries share some of the same economic disadvantages that were shown to be present in film and broadcasting: a market that is too small to generate sufficient revenues for a healthy domestic production sector, especially if it is shared with U.S. suppliers, and foreign ownership. The policy approaches taken for books and periodicals were, however, not quite identical. Profit figures for book publishing in the early 1980's show clearly the benefits of some connection with the external market: profits for foreign owned subsidiaries ranged between 5 and 10 per cent, those for Canadian owned firms than also act as distributors had profits of 3-6 per cent, while Canadian publishing only firms were not profitable. Book publishing in a relatively small country such as Canada is simply not profitable per se, it must have some additional source of funding. That source may be a foreign parent, a non-publishing parent or activity, or support from the state. The Applebaum-Hébert Report stated the role of government in this area very nicely: "the Department of Communications' Canadian Book Publishing Development Program attempts to build companies, while the various Canada Council programs for publishing attempt to build books and authors." The two programs could be taken to represent the book publishing counterpart of the Phase I and Phase II policy division in broadcasting policy.

Take-over of Canadian publishing houses by U.S. companies received a lot of negative comment in the press and from nationalist culture policy critics: Ryerson Press was purchased by McGraw-Hill as was Gage Educational by Scott Foresman in 1970, in 1976 McClelland and Stewart was merged with Bantam Books, and in 1985 Gulf and Western took over Prentice-Hall and its Canadian subsidiaries. But the criticism was muted by the facts that Ryerson was about to fail, McClelland and Stewart had been propped up with a million dollar bail-out by the Ontario government, Seal Books (owned jointly by McClelland and Stewart and Bantam) soon became a major publisher of Canadian fiction, and Prentice-Hall was considered by many to be "an exemplary foreign-owned firm, with more than one-third of its sales coming from Canadian-authored titles."

For magazine publishers the issues were pretty much what they are today: "Canadian" or, to use contemporary terminology, "split" editions of U.S. magazines. The U.S. edition of the magazine is fully profitable from advertising and sales in the home market and the marginal cost of running off a few more copies, even those with an insert of Canadian content, is so low that the advertising rates that can be charged to Canadian advertisers can undercut dramatically those that must be charged by a magazine the circulation of which is limited to the Canadian market, one tenth the size of that of the U.S. The above-mentioned Bill C-58, disallowing tax deductions for Canadian advertisers in U.S. magazines, has had significantly more effect for periodicals than it has had for broadcasting. A measure that supports this tax code policy is the denial of entry into Canada of a periodical that has more than 5 per cent of its total advertising added specially for the Canadian market and not included in foreign issues. Casual empiricism by any frequent visitor to Canada during the past twenty years will attest to the substantial increase in the number of Canadian magazines on sale, from the weekly Maclean's to rather specialized titles. Both of these magazine policies are considered crucial to this success, and to be indispensable and non-negotiable by the industry.

Cultural Policy in the Canadian-American Relationship in the FTA Era.

The Canada-U.S. Free Trade Agreement was seen by cultural nationalists as a pivotal event that could 'lock into place' practices that would leave Canada's culture industries in a condition of permanent weakness and marginality. In the words of Edward Comor: "the Free Trade Agreement, as a reflection of the political and intellectual environment, has itself institutionalized the conditions of Canada's cultural and information dependency on U.S.-based producers." Liberal Member of Parliament, and culture critic, the Hon. Sheila Finestone declared: "This is not a culturally sovereign country. I would say that it is a culturally occupied land." Most free traders, however, would agree with Charles McMillan's position that the agreement "will not lead...to a cultural imperialism or a domination of peoples, institutions, public policies, or cultures by one of the parties."

The specific concerns of the cultural nationalists are focused primarily on Article 2005 of the FTA which states in its first paragraph that: "Cultural industries are exempt from the provision of this agreement..," and in its second that: "Notwithstanding any other provision of this Agreement, a Party may take measures of equivalent commercial effect in response to actions that would have been inconsistent with this Agreement but for paragraph 1." To Susan Crean this means that: "The U.S. recognizes the importance to Canada of maintaining its cultural identity. At the same time, however, the U.S. wants to ensure that Canadian cultural policies do not constitute an unnecessary barrier to U.S. trade." Toronto attorney Graham Scott essentially agrees: "While the possibility of retaliation exists without the Agreement, the opportunity for the U.S. to override the Agreement to realize a measure of 'equivalent commercial effect' provides an incentive for the Canadian policy-maker to exercise sober second thought." As to how the option of retaliation will be utilized, nothing is certain at this moment in time, however, the comments of U.S. Ambassador Blanchard in January 1995 are instructive. In responding to a question, Scott Haggett of The Financial Post reported that "Blanchard warned that although cultural industries were't subject to free trade agreements, the U.S. will not tolerate protectionism in this area." The FTA is a document written by lawyers and must be considered to be a document whose application to actual situations will require interpretation by politicians and public policy officials years after its adoption.

Another concern is the definition of "cultural industry" in the Agreement. The term is used to refer to "an enterprise engaged in any of the following activities:" essentially the publication, distribution, sale or exhibition of "books, magazines, periodicals, or newspapers...but not including the sole activity of printing or typesetting", "film or video recordings," "audio or video music recordings" and "music in print or machine readable form," and "radio communication in which the transmissions are intended for direct reception by the general public, and all radio, television and cable television broadcasting undertakings and all satellite programming and broadcast network services." In The Investment Canada Act "cultural industry" had previously specified activities "related to Canada's cultural heritage or national identity." Colleen Fuller has noted that: "Canada now has established a commercial definition of culture, something that had never been done before, and is done nowhere else in the world (except in the Untied States)." No distinction is made between culture goods that are intended to meet the demands of the mass entertainment (private goods) or the high culture (merit goods) markets, and those that are intended to articulate and express Canada's unique national culture (social goods). If Canada seeks to continue to argue that the latter must be treated differently than the former, that case has yet to be made in a compelling fashion, and until it is one should anticipate a continuing series of challenges and retaliatory measures in response to any significant Canadian initiative in this area.

The sum impact of these two aspects of the FTA is to make it more explicitly costly than before for Canada to adopt measures designed to protect the creation, production and distribution of culture goods that are essential to its long term survival as a nation, in the sense that this is developed in an earlier section of this paper. The U.S. is now authorized by the Agreement to limit access to its market for some Canadian producers in activities that are totally unrelated to culture as retaliation for implementation of a policy that, in the Musgrave-inspired model, may be the equivalent to a policy in the area of K-12 education, public health or national defense.

An additional consequence of this is the explicit policy linkage it implies, linkage that has always been avoided in the past by both governments. Graham Carr states emphatically that: "the Canadian government has leashed the treatment of culture to other areas of the agreement by consenting to the retaliation clause in Article 2005(2). In this respect, the cultural provisions of the FTA establish a precedent which goes far beyond the limits of the agreement and has immense implications for the conduct of bilateral negotiations as a whole." In the earlier cited interview, Ambassador Blanchard specifically linked recent culture policies to possible retaliation against "Canadian fur and fur coats, newspapers, magazines, movies, live pigs and maple sugar exports - worth $1.6 billion."

It is of course impossible to know what transpired behind closed doors in conversations among the Canadian negotiators or between them and their American counterparts. But the account given by three members of Simon Reisman's team, Michael Hart, Bill Dymond and Colin Robertson, should confirm many of the worst suspicions of cultural nationalists. The three negotiators refer to those presenting the cultural nationalist argument as "intellectual apologists" and "the culture mafia," and to their arguments as "(r)ooted in fear of the unknown," marked by "shrillness" and "betraying an underlying anti-Americanism." Fair comments in the rough and tumble arena of public policy debate, but hardly inspiring of confidence for members of the culture community in Canada who were relying on their trade negotiators to give as fair a hearing to their concerns as would be given to those of grain growers in Saskatchewan or the financial services industry in Toronto. Nowhere in their account is the argument of the culture industry given any credibility whatsoever.

Perhaps it would be best to close a discussion on the consequences of the FTA on culture policy with the conclusion of a legal specialist who is mildly sympathetic to the culture industry's view point: "The impact of the FTA on cultural matters in Canada is, at least on paper, marginal. Only time will tell if the nature of the Agreement will bring about unexpected changes in the impact of our cultural trade." This may not only be a compromise view; it may also be the most accurate.

No one thought that once the FTA was negotiated all controversy in culture goods would cease. It should be no surprise given the history of this issue that the U.S. industry continues to have a long list of grievances, but fortunately only a few have been taken up by the U.S. government and have been presented to Canadian authorities as being worthy of discussion. Colleen Fuller presents a useful listing of the industries perceptions of barriers erected by Canada in 1984. In addition to those the government brought to Canada's attention, issues such as Bill C-58, cable substitution and content regulations, the U.S. entertainment industry objected to public funding of the CBC, Telefilm Canada and the NFB - policies that are defensible both in economic theory and according to the practice of every government with sufficient revenues to engage in them.

The Liberals gave a hint of their approach to culture policy in the so-called "red book," containing the party platform, which was issued prior to the 1994 election. "Enhancing Canadian Cultural Identity" was only one page out of a document of over 100 pages, but it did attack the Conservatives for funding cuts to such institutions as the CBC and Telefilm, and it promised to help Canadian producers of culture goods to "increase their share of the domestic market and "to export their work to international markets." To accomplish this they promised "investment tax credits for the production of Canadian films, sound recordings, and books", "stable multyyear financing for national cultural institutions," and "income-averaging mechanisms in the Income Tax Act for Canadian artists."

While it is a bit early to comment extensive on whether this promise has been met, the Liberals got off on the wrong foot with the culture community when they allowed the sale of Ginn Publishing. Ginn was sold back to a subsidiary, Paramount, of the company, Gulf and Western, from which the Canadian Development Investment Corporation had purchased a majority share in the company in 1989, with the assurance that Ginn would be sold to a Canadian company in the near future. This was just the sort of sale that was supposed to have been precluded by Conservative Communication Minister Marcel Masse when he introduced the "Baie-Comeau" policy in 1985. Baie-Comeau required that any foreign interest that purchased a Canadian publisher would have to sell at least 51 per cent control to Canadian interests at a fair market price within two years of the purchase. The Conservatives had changed the policy themselves in 1992 when Masse's replacement, Perrin Beatty, introduced the less stringent 'net benefit to Canada' criterion. Critics of the culture community in Canada declared the sale of Ginn to Paramount to be a complete abandonment of that policy, as well as the policy the Liberals had set out in the red book.

The Canadian Conference of the Arts criticized the February, 1995, budget of Finance Minister Paul Martin for its proposed cut in support of cultural programs by 23.3 per cent over three years, including continued erosion in the funding for the three primary producers of Canadian film and television programming - the National Film Board, the CBC and Telefilm. Other subsidies to culture goods production and distribution, such as an 8 per cent reduction in the postal subsidy for Canadian magazines, were to be cut "to reflect tighter fiscal circumstances."

To the Liberals favor, however, was the emphasis placed on Canadian culture in the recent foreign policy review. In its response to the report of the Joint Parliamentary Committee, the government essentially agreed to undertake a variety of "cultural foreign policy" measures designed to: "make Canada a leader in the new world economy by projecting the image of a country that is unique, creative, innovative and hence competitive," "protect our cultural sovereignty," "undergird the Canadian identity by exhibiting its most creative aspects on the international scene," and "promote the growth and vitality of the culture and education sectors, and thereby help create jobs." However, when discussing the government's position on the exemption of culture industries in the Canada-U.S. FTA and NAFTA and the possibility for U.S. retaliation with measures of "equivalent commercial effect," it was noted that it would be necessary to "balance all these considerations in choosing the appropriate policy instruments for protecting and promoting Canadian culture" - a somewhat less ringing commitment than the culture community would have liked.

Currently, the U.S. government is focusing its attention on two highly publicized issues in the culture policy of the Crétien Liberals: Country Music Television and Sports Illustrated. The CRTC forced Nashville-based Country Music Television off Canadian cable systems, after being carried for ten years, and ordered that it be replaced by a Canadian imitation, New Country Network, and on February 6, 1995, the Office of the U.S. Trade Representative initiated a Section 301 ("Unfair trading practices") investigation. To an impartial observer, this action by the Canadians does seem to be a blatant grab for revenues of the sort that could only lead to retaliation by the U.S. and to some sensible solution such as joint production or allowing both channels to be viewed, even if only after a start-up period for New Country Network.

The Sports Illustrated case, however, is just the latest example of an issue of long duration, and the validity of the U.S. complaint is far less certain. Two decades ago, two U.S. periodicals, Time and Reader's Digest had very substantial circulation in Canada and it was argued that since they were able to print "Canadian editions" at a very low marginal cost they charged advertising rates so low that it was impossible for a Canadian competing magazine to be viable. As was noted above, the Canadian government passed Bill C-58 in 1975, an act which disallowed advertising expenditures as an income tax business deduction for companies that advertised on foreign publications and on television. In 1994 the issue was raised again as Sports Illustrated attempted print a "split edition" in Canada, that is a magazine with content virtually identical to the U.S. version that would be printed in Canada rather than trucked across the border. The new twist is that the content of each issue of the magazine is transmitted electronically directly to the Canadian printer, so there is no physical good on which to impose a constraint at the border. The government responded with a tax of 80 per cent on advertising placed in such split editions. While it may be true that technology has vaulted ahead of specific policy, the precedent offered by Canada's earlier response to essentially the same initiative by a U.S. magazine should suggest that the Canadians will not back down on this, nor should they be expected to do so.

It is a bit of a stretch to make the argument that either New Country Network or Sports Illustrated are direct threats to the production and distribution of culture goods that would be considered social goods and thus worthy of protection. But in an indirect way both can be viewed a precedents that could if left unanswered by the Canadian government lead to erosion of the industrial base that supports production and distribution those goods that do in fact articulate and express Canada's unique national culture.

What Can we Conclude about Canada's Cultural Policies?

If we are to evaluate the wisdom and effectiveness of Canada's culture policies, we must have at our disposal an explicit set of criteria or a model according to which we may make our judgments. The criteria to be used will emerge from the objectives that the policies were implemented to meet. The model presented will be developed with the impact of policy on Canada's largest trading partner, the United States.

The criteria. The first objective of Canada's culture policy, and the primary one, ought to be that of making goods available to Canadians that articulate and express Canada's unique national culture, its values, and how its social and political processes and institutions operate and relate to the lives of Canadians. Unless this is always the first consideration for culture policy, anything Canada does will be open to the claim by their U.S. counterparts that the policy is nothing more than a grab for revenues and for jobs. Crucial for this objective is a clear statement as to why culture goods should be considered differently than all of the other goods traded by nations. It was demonstrated above that the identification of national culture goods as a social good, in the Musgrave taxonomy, provides such a definition.

The inescapable reality for Canada consists of its proximity to the U.S., the easy access Canadians have to culture goods produced there, and the fact that about 80 per cent of Canada's trade is with the U.S. Any culture policy adopted by Canada is bound to have an impact on U.S. vendors and to have the potential of a high-level response from the U.S. government. Thus the second objective of Canadian policy ought to be that of choosing, from among policies that will have the desired result, that policy that will create the least antagonism in the U.S. The Culture Policy Matrix to be presented below will assist us in making that sort of evaluation.

The third objective of culture policy is related to employment but, again, this objective must be justified in a way that distinguishes it from employment in other industries; otherwise the policy will be perceived by outsiders as purely protectionist. An analogy can be made with the court cases currently being heard in the United States regarding the Endangered Species Act and the spotted owl. Market-oriented industry spokespersons argue that while one cannot kill a spotted owl, one can cut down all of the trees except the one in which the owls are nesting. But when the owls leave the nest to seek food, that nest may then be considered to be "empty" and that tree can be cut. Conservationists argue that the law must be interpreted to preclude cutting of trees within a radius of two miles of the nest, so that the environment which sustains the endangered owl will continue to support that population.

Similarly, one can argue either that support is warranted for the individual creative artist producing national culture goods or that the industrial base which supports that artist is equally worthy of protection. For national culture goods to be created and made available to consumers, the creative artist needs a small army of, e.g., printers, film and television technicians, editors, directors, graphic designers, and, of course, gaffers and best boys (whatever they are!). Thus an argument can be made that for the desired goods (those that articulate and express the nation's unique culture) to be made available, production and distribution of a broader array of culture and entertainment goods must be supported to a certain minimum degree. If this is not done the creative works will remain in the mind or the imagination of the artist, as the production and distribution infrastructure necessary for their realization will be lacking. Differentiating between this minimum necessary level of protection and pure revenue and jobs protection has to be done carefully, but it must be done if the reaction and retaliation of affected trading partners, in this instance the powerful entertainment and media industries of the U.S., is to be controlled.

The model. The evaluative model to be used presents an approach to analysis of the specific forms of interventions that may be adopted by government. Intervention in the market may be conducted by direct or indirect means and on the side of supply or that of demand. Direct intervention on supply would involve the government actually producing the culture good while that on the demand side would have the government purchase culture goods produced by others. Indirect intervention refers to inducements the government could offer to private sector entities either to purchase or to produce culture goods. This can be put in the form of a Culture Policy Matrix, as given in Table 1. The policies actually adopted by the Canadian government during the past two decades are placed in the appropriate position in that table. Explanation of couple of the entries will make clear the rationale of the Matrix. A film produced by the National Film

TABLE 1

Culture Policy Matrix

Direct Indirect

Supply Government Production Subsidies to Production (Capital

National Film Board Cost Allowance)

Canadian Film Development Canadian Film Development Board

Board/Telefilm Board/Telefilm

Demand Canadian Broadcasting Tax Incentives (Bill C-58)

Corporation Commercial Deletion Content Rules Ownership Rules

Country Music Television Cable Priorities

Reprinted from: Peter Karl Kresl, "Your Soul for a Case of Coors?: Canada-U.S. Free Trade and Canadian Culture Policy, in Peter Karl Kresl (ed.), Seen from the South, Provo: Brigham Young University Press, 1989, p. 177.

Board is a direct intervention in supply, in that a culture good is made available to the distributors, cinemas and television broadcasters that was not previously there. But the same film could have been produced by an independent producer through the indirect intervention of a Capital Cost Allowance (CCA). Similarly, that film could be shown by the CBC, a direct intervention on demand, or, indirectly, Canadian ownership of a television station could be mandated in hopes that the Canadian owner would be more likely to show Canadian programming than would be an American owner.

Comments on the policies. Since the objectives of culture policy have been specified and a model for evaluation of some aspects of policy has been developed, we are now in a position to comment on the culture policies actually implemented by the government of Canada. The CBC and the National Film Board are initiatives which were introduced in the 1930's and have received support from all governments and are likely to do so, in varying degrees, in the future, so they will be excluded them from the analysis that follows.

The First Objective: increased access to Canadian culture goods. The focus here must be on access to goods which express and articulate Canada's unique national culture - the social goods of the culture industry. The conflict here is shown clearly by Acheson and Maule in their study of the Capital Cost Allowance (CCA) program introduced in 1974 to stimulate Canadian film production. The CCA initially granted a 100 per cent tax write off for any film "produced in Canada," with elegibility determined by a point system based on Canadian employment content. The problem with this policy in the context of this first objective lay in the fact that there was no discrimination among the films produced according to the degree to which they express and articulate unique Canadian values - any film meeting the certification criteria could get the CCA. Thus, the effect of the policy was a blanket subsidization of culture and entertainment films with not attempt to limit its benefits to social goods. Neither was any attention paid to quality of the films produced.

The alternative policy was that of supporting a discretionary funding scheme, such as that through Telefilm Canada, in which a board of specialists selected specific projects for funding according to criteria that gave priority to quality and the 'Canadian values' content of the proposed films. Acheson and Maule report the results of a survey of Canadian viewers in which the films supported by this discretionary procedure were rated higher on both quality and 'Canadian values' criteria. In terms of the Matrix, direct intervention on supply is to be prefered to indirect intervention, from the standpoint of this first objective of culture policy.

The Second Objective: minimizing trade irritation. Using the Matrix we can discern a shift in the basic approach taken by Canada with the change from the Liberal government of Pierre Trudeau to that of the Conservatives and Brian Mulroney. During the 1970's the primary policy initiatives were Canadian content rules, cable priorities, Bill C-58, commercial deletion and Canadian ownership rules. These policy initiatives were concentrated on demand and were primarily indirect in nature. The Conservatives changed the approach to concentrate on indirect action on supply, mainly subsidies to production of one sort or another. Demand-indirect intervention has the effect of restricting access to the home market for foreign goods; it can easily be perceived as an approach that is design to maximize the negative impact on foreign suppliers and thereby to maximize the likelihood of retaliation from the foreign government. The response of the U.S. government to the Trudeau initatives was indeed very quick and very sharp, including a limitation on the number of professional conferences Americans could attend in Canada and a Congressional threat of measures which were never adopted by the government. These Canadian iniatives and American retaliation brought the bilateral relationship to one of its most acrimonious moments.

The Mulroney measures, on the other hand, had as their aim the increase in the availability of Canadian culture goods. There was little or no insistance that distributors were under an obligation to show the Canadian goods rather than those imported from the United States, hence there was no legitimate objection raised by U.S. interests. Stimulating the production of more culture goods is certainly of direct benefit to consumers in Canada, but also to those in the U.S. as more Canadian culture goods are being shown on U.S. television as the increasing number of cable networks, both pay and free, search for distinctive and attractive programming. One could object that governments have accepted constraints, both in the GATT negotiations and also in most regional trade pacts such as the FTA and NAFTA, on their ability to use subsidies as a means of achieving an economic objective. However, culture goods is an area which has generally and for a long period of time been exempt from this stricture. Furthermore, Canadians take great pleasure in making the entirely legitimate point, usually overlooked or ignored by their American counterparts, that the U.S. has always provided, and does now, substantial protection and subsidization of its entertainment and culture sectors.

The FTA stabilized the trade and trade irritation situation by reducing uncertainty, although what was in fact accomplished will be subject to interpretation and adjudication for years to come. Canada could have created a more favorable condition for itself and for its culture goods industries by being clearer and more aggressive in defining and stating the objectives of its culture policy and the principles upon which it is based. As it stands, the justification for culture policy is clear neither to Canadians nor to their major trading partner, and future initiatives may continue to have the character of ad hoc protectionism and of a blatant diversion of a stream of revenues from foreign vendors to Canadians. The most recent initiatives of the Crétien government, especially the Country Music Television issue but to a lesser degree Sports Illustrated as well, are graphic illustration of this.

The Third Objective: increased employment. Analogous to the situation in Objective One, attention must be concentrated on employment for culture industry workers required for the production of the social goods in Canada's culture goods industry. Note is often taken of the fact that there are 585,000 jobs in the "cultural activities" sector of the Canadian economy and $14.7 billion in revenues, accounting for 3.8 per cent of Canadian Gross Domestic Product. However, 52 per cent of federal government expenditure on cultural activities is devoted to all aspects of broadcasting and, as defined by Statistics Canada, cultural activities includes support to librairies and to Heritage Resources (including parks and museums), almost a quarter of all funding. Some would explicitly include tourism in the definition of culture, adding $26 billion to total "culture" revenues, "more than what Canada receives from sales of wheat, natural gas, pulp and paper, metal and minerals." The argument then becomes converted from support for the expression and articulation of Canada's unique culture to: "you have to remember above all that culture is essential to the growth of Canada's economy." Steven Globerman also suggests that while culture policy should be expected to increase the payments to factors of production in the industry, an inordinate share of these increased incomes are diverted from writers, actors and other creative individuals to those in the corporate structure end of the business - accountants, lawyers, agents, and so forth.

Here, as at several points in the argument presented in this paper, it must be stressed that there are arguments that justify a rather broad support of employment in the culture industry. The industrial base of infrastructure, of creative individuals and of trained technical and prodution specialists is required for a viable production of the social goods component of culture goods. Canadians have failed to make that argument and as a consequence their culture policy is generally viewed in the U.S. as an employment scheme that has little justification in a global economy in which such barriers to trade are under continual pressure to be lowered and to stay lowered.

As a final comment, I would take note of the assertion of two of the analysts of Canadian culture policy that Canada's approach may well become the model for the coming century, although the reasoning does not take precisely the same approach. In his appearance before the foreign policy review joint committee, John Ralston Saul stated that the "standard Twentieth Century approach towards nationhood" is "centralized, monocultural and advances beneath the sails of triumphant mythology," and argued that the "originality of both our experiment and our experience in this massive, cooperative, decentralized country with its strong aboriginal presence and bicultural population...resembles what may well be the nation of the next century." Richard Collins, finding inspiration in Pierre Trudeau's argument that "a divorce, between the paired concepts and practices of culture and politics that nationalism has wedded, is necessary in order to create stable and decent contemporary societies," concludes that "Canada in the twentieth century demonstrates that culture and politics can be similarly decoupled without political institutions crumbling." While not going that far, Graham Carr agrees that "Canadians must break away from the nationalist paradigm which has traditionally determined their thinking on culture and examine the political economy of culture in an international context."

In this paper it has been argued that Canada must indeed reconsider its approach to culture policy. In a world of increasing: 1) interdependence, 2) institution building in trade relations, 3) expenditure on cultural goods and 4) technological capacity for access to those goods, Canada must be far more explicit on the fundamental principles on which its policy is based. If those principles are expressed in terms of generally recognized economic theory Canada will be able to respond to retaliation by its major trading partner with argumentation that is compelling to an impartial observer. If this is accomplished then Canada may indeed have something to show to the rest of the world.