CASE NUMBER: 352
CASE MNEMONIC: SPORTSILL
CASE NAME: CANADIAN MAGAZINE BAN
The Canadian
government recently placed an 80% excise tax on all foreign
magazines sold in Canada that do not contain at least 80% Candian
content. The tax was imposed in response to Time Warner Inc.
Printing of its Candian split-run version of Sports Illustrated in
Canada. In the early 1990's the US magazine giant began beaming
content electronically to a Canadian printer in order to
circumvent Canada's 30-year old ban on split-run magazines. Time-
Warner argued that it was established in Canada consistent with
Canadian trade law and with the full knowledge of Canadian
government. It sees the tax imposed upon its magazine not as an
effort to protect cultural identity, but as an economic commercial
directive. Canada argues that it already competes with US
magazines, and that split-run magazine give the US an unfair
advantage in their market -- that the practice is the equivalent of
"cultural dumping" (1). Canada, wishing to avoid setting any kind
of a precedent by allowing Sports Illustrated to run its split-run
publication, placed the 80 percent excise tax on the magazines
advertising profits. The US trade representative reacted by
preparing its for the World trade Organization. The case is
expected to take at least 8 months and both countries have
indicated they will abide by the final ruling (2).
2. DESCRIPTION
Canadians share many basic attributes with their American
neighbors; they speak the same language, watch many of the same
films and television programs and read the same best-selling
books. In addition to these similarities, proximity allows
satellite and radio programming to cross the border between the US
and Canada with very little difficulty. This is particuliarly so
because despite the fact that Canada is the largest nation in the
world behind Russia, 90% of the Canadian population is
concentrated in the region of the country which borders the United
States. Because of this mix of programming across national borders
and due to the huge success of US books, magazines and film in
Canada, the nation has begun to feel that its individual cultural
identity is being compromised.
The issue has gone beyond trade policy and regulation to
protecting Candians from the highly permeable atmosphere and its
tendency to make Canada vulnerable to US cultural industries and
integration. Canadians have a strong sense of their identity and
what makes them different. In order to protect that individuality
it has taken precautionary steps to protect what it has come to
view as the integral elements of Canadian culture. One of the
integral elements of culture that Canada feels needs protection is
the magazine publishing business.
THE SPLIT-RUN ISSUE
30 years ago Canada began to build its defenses against a
cultural "meltdown" by banning imports of "split-run magazines".
It saw the infiltration of publications from other nations as a
threat to its cultural identity and autonomy. A split-run
magazine is one that is originally created as a US "main edition"
magazine and then is made into a "canadian edition" when one or
two Canadian stories are added. The publisher then sells the
magazine as a "Canadian" edition and is able to sell advertising
in Canada at discounted rates. These bargain rates are possible
because the magazine has already made a profit on sales of the main
edition of the magazine in the US market. Canada believes that
this competition could devastate its national magazines because
Canadian publishers would lose their advertising pool in Canada.
The issue's most recent develpoment occurred when the the US
magazine giant Time-Warner began beaming content electronically to
a Canadian printer in order to circumvent Canada's 30 year-old
ban. With this strategy Time-Warner published six Canadian issues
a year of Sports Illustrated through Satellite operations in
Montreal (3). Time-Warner argued that it was established in Canada
consistent with Canadian trade law and with the full knowledge of
Canadian government.
The company argues that the tax imposed upon its magazine is
not as an effort to protect cultural identity, but as an economic
commercial directive. Because there is no Canadian general-
interest sports-magazine, Time -Warner also argued that it was not
competing with anyone.
Canada argues that it already competes with US magazines, and
that split-run magazine give the US an unfair advantage in their
market -- that the practice is the equivalent of "cultural
dumping" (4). Canada, wishing to avoid setting any kind of a
precedent by allowing Sports Illustrated to get away with its slit-
run publication, placed an 80 percent excise tax on the magazines
advertising profits. The US reacted by preparing its case to be
heard at the WTO over the next year. The case is expected to take
at least 8 months and both countries have indicated they will abide
by the final ruling (5).
US CANADIAN TRADE RELATIONSHIP
The United States and Canada enjoy the largest exchange of
goods and services in the world. They also share a rather large
number of trade disputes -- since 1989 there have been 80 minor
conflicts between the two neighboring nations -- suggesting that
perhaps the old cliche "good fences make good neighbors" holds
some validity. The result of the huge exchange between the
nations has raised the concern that perhaps that fence is not big
enough.
Canada's market of 26 million people has become saturated by
American culture distributed by cultural industries in the US and
Canada. In Canada Between 60 and 95 percent of film, television,
music and publishing markets are controlled by Americans (6). Four
in every five magazines sold in Canada are foreign publications
(7).
Canadian artists fear that US domination would be even more
dramatic had governments not created subsidies, trade barriers and
tax policies to protect Canada's cultural marketplace -- and by
extension, the identity of the nation itself (8). This year,
cultural industries have become the focus of a large number of
trade disputes between the United States and Canada. When the
Canadian government passed a law last December making an 80% excise
tax on split-run editions from foreign publishers whose Canadian
editions do not contain 80 percent original Canadian content the US
reacted immediately. In March US trade representative Mickey Kantor
was requested a World Trade Organization reversal of the Canadian
tax measure against Sports Illustrated's "Canadian" edition.
Kantor also placed Canada on the "hit list" of a new "trade
enforcement" task force which will review issues such as cable tv
licensing, satellite transmissions and book distribution.
While Canada usually makes the US watch list, this is the
first time recently that the list has dealt exclusively with
cultural issues (9). The United States feels that Canada's actions
contradict Canada's 1987 bilateral trade agreement with the US as
well as the North American Free Trade Agreement. Canada, however,
has demanded and received exemption for cultural industries in both
agreements and has continued to do so in every agreement since
1987. The US repeatedly demands that the cultural issue be re-
evaluated, and Canada repeatedly refuses.
Canadian publishers argue that if Sports Illustrated was not
made an example, and the tax was not imposed, about 50 US consumer
magazines with circulations above 50,000 in Canada-- as well as a
wide range of trade titles -- could enter the Canadian market and
drain a substantial amount of advertising away from Canadian
publishers.
US publishers are still free to sell their regular editions in
Canada and US magazines already dominate newsstand sales (10).The
United States exports $591,358 thousand in printed materials such
as books, newspapers and periodicals every year. They see the crux
of the argument resting simply difference of viewpoints between
Americans and Canadians. "The Americans regard these things as
entertainment and service industries. Canadians view them as
integral elements of our culture" (11).
The US is anxious to set an example with Canada on these
issues because of the potential proliferation of trade disputes
exactly like this one throughout the world. >See French TV Case<.
By making an international example out of Canada's protection of
cultural industries the US also sends a message to nations imposing
similar restrictions on US Cultural industries in Europe, Asia and
Australia. The argument that Canadian publishing in any way effects
Canada's national cultural identity wins little sympathy in the
United States.The US intends to complain that Canada is denying US
corporations "national treatment"(12). The US states that it has no
problem with subsidies in Canada -- only with policies that
penalize US industries and make those industries pay the cost. So
disgruntled is the United States that it has threatened to
retaliate by using a "special 301". Section 301 of American trade
law empowers President Clinton to strike at imports from countries
that make unfair trade actions against US exports (13).
Under international trading laws, governments must treat
foreign and domestic corporations identically. Canadian officials
point out that the new legislation "does not discriminate on the
basis of ownership." If a Canadian company publishes a split-run
edition in the US and does not include sufficient original content,
the government will impose 80 percent tax on the Canadian edition
(14). The US traditionally protects what it considers fragile
industries such as lumber. Canada feels it has the same right to
protect its fragile cultural industries. The US is the largest
cultural exporter in the world with entertainment as the second-
largest US export industry, after aerospace. Ironically, less than
2 percent of time on US television is given to foreign programming.
Under NAFTA cultural industries are exempt from trade
requirements preventing trade barriers. Canada does not violate the
accord by taking discrimatory actions against Sports Illustrated
publisher Time Warner, but on the other hand, the United States
does not violate the agreement by retaliating (15). Both countries
seem to feel justified, but surprisingly both have also agreed to
abide by the final ruling of the WTO when it is determined sometime
in the next 8 months (16).
3. Related Cases
(1) 
FRENCHTV
(2) CMTCAN
(3) QUICK CASE REFERENCE TABLE
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