Secretary Pompeo Meets With Canadian Foreign Minister Freeland by US Department of State, US government work, https://flic.kr/p/24iZVEm

Secretary Pompeo Meets With Canadian Foreign Minister Freeland by US Department of State, US government work, https://flic.kr/p/24iZVEm

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Compromising on Culture?: Why a Blanket Culture Exception in NAFTA is Unnecessary

As the NAFTA negotiations continue to inch along, one of the remaining contentious issues is the inclusion of a full cultural exception that would largely exclude the Canadian culture industries from the ambit of the agreement. The government has not been shy about speaking out against compromising on culture, noting the perceived risks of provisions that might permit foreign ownership of media organizations. Indeed, the culture issue has attracted considerable attention, with coverage pointing to media ownership rules and simultaneous substitution policies as hot button concerns. Yet as cultural groups cheer on the government’s insistence that cultural policy should be taken off the NAFTA table, the reality is that there remains plenty of room for compromise. This post focuses on three of the biggest issues: foreign ownership, simultaneous substitution, and the TPP culture exceptions.

Foreign Ownership of Media Organizations

For Prime Minister Justin Trudeau, the worst case scenario is the prospect of U.S. networks taking over the Canadian market. Last week, he stated “it is inconceivable to any Canadian that an American network might buy Canadian media affiliates, whether it is a newspaper or television stations or TV networks.” Yet beyond the fact that Canadian networks often act as little more than U.S. affiliates by retransmitting their programs with Canadian commercials and that networks such as Fox News are already available on Canadian cable television packages, the fears associated with foreign ownership of broadcasters are largely overblown as the connection between Canadian broadcasting ownership and Canadian culture is tenuous at best. In fact, those arguing that foreign ownership imperils Canadian content and culture with lost regulation are often the same groups who maintain that foreign online video services such as Netflix should be fully regulated in Canada.

Canadian law currently features both foreign ownership restrictions and content requirements. The foreign ownership rules generally limit licensees to 20 percent foreign ownership (up to 33 percent for a holding company). This covers all types of broadcasters including television, radio, and broadcast distributors. Many observers appear to assume that Canadian ownership and content requirements go hand-in-hand, fearing that a foreign owned broadcaster would be less likely to comply with Canadian content requirements. Yet there is little reason to believe this to be so.

The Canadian Radio-television and Telecommunications Commission’s active involvement in setting Canadian content requirements is a direct result of Canadian-owned broadcasters regularly seeking to limit the amount of Canadian content they are required to broadcast. Producing original Canadian content is simply more expensive than licensing foreign (largely U.S.) content. These fiscal realities – and the regulations that have arisen as a response – remain true regardless of the nationality of the broadcaster.

Foreign owned businesses face Canadian-specific regulations all the time – provincial regulations, tax laws, environmental rules, or financial reporting – and there is little evidence that Canadian businesses are more likely to comply with the law than foreign operators.  
Cultural businesses may raise particular sensitivities, but broadcasters that are dependent upon licensing from a national regulator can ill-afford to put that licence at risk by violating its terms or national law.

In fact, a review of other developed countries reveals that many have eliminated foreign ownership restrictions in their broadcasting sector but retain local content requirements. For example, Australia has no foreign ownership restrictions on broadcasters (Canwest was once the majority owner of one of its television networks), yet employs a wide range of local content requirements. The same is true in many European countries – Germany has eliminated foreign ownership restrictions but retains daily regional programming requirements, Ireland has no foreign ownership restrictions but establishes programming requirements for each broadcast licensee, and the Czech Republic has dropped its foreign ownership restrictions but relies on broadcasting licences to mandate local programming.  In other words, opening the door to greater foreign ownership of media assets does not mean that Cancon regulations will be lost in the process.

Simultaneous Substitution

The issues associated with culture and NAFTA is not limited to foreign ownership. The U.S. has also oddly been arguing both for and against simultaneous substitution, arguing for it in the context of the Super Bowl broadcast and against it with respect to compensation for U.S. stations situated near the border. Canada is unlikely to change simultaneous substitution via a trade deal, but the policy is nevertheless steadily declining in importance.

The growth of specialty channels, which now represent a far bigger slice of the broadcasting revenue pie than conventional channels, heralded the decreasing importance of simultaneous substitution with fewer programs substituted and subscription revenue surpassing conventional television advertising revenue. Moreover, consumers gaining increasing control over what they watch and when they watch it contribute to its declining importance. Recording television shows or watching them on demand eliminates the simultaneous substitution issue. Sports leagues now package their seasons for full streaming and many watch streamed versions of shows directly from broadcasters or through services like Netflix, Amazon and CraveTV. With the arrival of even more streaming options – including U.S. broadcasters such as CBS – simultaneous substitution matters less and less every year.

Not only has the relevance of simultaneous substitution declined in recent years, but the policy has arguably harmed the long-term success of the Canadian system. It effectively trades some additional revenue for loss of control over the Canadian programming schedule and turns the Canadian system into a country-wide U.S. affiliate with hundreds of millions of dollars spent on the rights to non-Canadian programming. The CRTC recognized several years ago that eliminating simultaneous substitution altogether would still create a shock to the system. Limiting the elimination to the Super Bowl had the practical benefit of starting to move the industry off the addiction to U.S. programming and toward competition rather than regulatory protection. The Canadian policy will continue to evolve (including through the courts), but resolving the issue through NAFTA makes little sense since the U.S. is arguing both for and against the practice.

TPP Culture Provisions

While these issues have captured the headlines, the more obvious target for the U.S. are the provisions found in the TPP, which were sidelined by Canadian officials once the U.S. dropped out in side letters with the remaining TPP countries. The TPP provision stated:

Canada reserves the right to adopt or maintain any measure that affects cultural industries and that has the objective of supporting, directly or indirectly, the creation, development or accessibility of Canadian artistic expression or content, except:

a) discriminatory requirements on services suppliers or investors to make financial contributions for Canadian content development; and 

b) measures restricting the access to on-line foreign audiovisual content. 


In other words, the full culture exception was limited in two ways that could resurface as part of the NAFTA negotiations. Canada’s starting position is that it opposes any exceptions to a full cultural exception, but neither TPP exception were bad policy on their own (whether any of this belongs in a trade deal is open to debate, however).

The first – a ban on discriminatory requirements to support Cancon development – raises a legitimate concern about the possibility of mandated Cancon payments by foreign providers. While Canadian groups have actively lobbied to require foreign providers such as Netflix to make payments similar to those paid by Canadian broadcasters and broadcast distributors, they have been less supportive of Netflix benefiting from those Cancon funding mechanisms. Payment mandates without the same benefits would likely (and rightly) be viewed as discriminatory. The TPP would have blocked such an approach. The government maintains it opposes a Netflix tax. While there is a healthy debate about whether there should be mandated payments (I’ve written here about the uneven playing field that grants significant advantages to Canadians), asking for equal treatment should be a mandated payment system be established seems fair.

The second exception – a ban on instituting restrictions to foreign online video services such as Netflix – would be a non-starter in Canada. Given its commitment to net neutrality – the principle of treating all content and applications equally – the government is unlikely to require Internet providers to block access to foreign services. Yet in the name of the cultural exception, the Canadian government is arguing that it cannot even agree to a no-blocking mandate. Reversing on that issue – as with several others – would have no practical policy cost to Canada, would allow Canada to focus on other digital policy issues such as copyright term (which would have a far more significant impact on access to Canadian culture), and would not put Canadian culture or identity at risk.

2 Comments

  1. Your site really has good content
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  2. A blanket cultural exception in NAFTA is absolutely necessary to maintain and advance Canadian national identity and cultural sovereignty. None of the three exceptions to the cultural exception that Michael Geist proposes is tenable.

    Canadian ownership and content requirements go hand-in-hand because a foreign owned broadcaster is less likely to comply with Canadian content requirements. Of course, it is difficult to demonstrate this general rule since current foreign ownership requirements for broadcasting have generally prevented a scenario where the hypothesis could be tested. But the US service Netflix has provided several telling examples. Prior to the creation of the CRTC’s hybrid regulatory approach to online video services in 2015, Canadian owned CraveTV and Shomi voluntarily followed the regulatory requirements of regulated S-VOD services. Netflix did not. When the CRTC asked Netflix to provide information about its subscriber numbers in Canada at the Let’s Talk TV hearing in 2014, Netflix flatly refused – even though Jean-Pierre Blais warned Netflix that the Commission had the power to issue an order in the Federal Court to obtain the information. No Canadian ownership group would have behaved this way. Netflix did. Generally speaking, a US owned broadcaster would be less likely than its Canadian counterpart to comply with Canadian requirements with which it disgrees, and consider the possibility of calling on the US government to intervene with the Canadian government and its agencies because that is the way the corporate world operates in the US. (See the softwood lumber saga.) Foreign broadcasters that were dependent upon licensing from a national regulator might hesitate to put that licence at risk by violating its terms or national law – if they could not bring pressure to bear from their national government on an issue of concern – but unlicensed foreign services such as Netflix, operating under an exemption order from the CRTC, could easily ignore the conditions of the exemption order if they so chose. Germany, Ireland and the Czech Republic are hardly examples for Canada to follow.

    No one has suggested that simultaneous substitution has become an issue in the NAFTA trade talks. Nor should it.

    In the blog above, referring to the TPP, Michael Geist says that Canada’s starting position in the NAFTA negotiations is that it opposes any exceptions to a full cultural exception, but two TPP exceptions are, in his opinion, bad policy and could be sacrificed in NAFTA. Two years ago (in a debate with Peter Grant), Michael Geist argued that “it is shocking to find the Canadian government locking itself into rules that restrict its ability to consider expanding Cancon contributions to entities currently exempt from payment or adopting rules that limit regulatory jurisdiction over foreign online video providers that target Canadian consumers.” Now he has flip flopped on this issue. He was right the first time – the Canadian government should not be locking itself into rules that restrict its ability to expand Cancon contributions by entities currently exempt from such contributions or restrict its ability to adopt rules that limit regulatory jurisdiction over foreign online video providers that target Canadian consumers.

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