Magazine Deal Between Canada, US

During long months of tortuous negotiations, the clash of viewpoints was bracingly clear. The Americans said the magazine business was just that - business. The Canadians clung to the position that it was something more - culture.

During long months of tortuous negotiations, the clash of viewpoints was bracingly clear. The Americans said the magazine business was just that - business. The Canadians clung to the position that it was something more - culture. So while Washington insisted normal trade rules must apply, Ottawa countered that special consideration was essential. But in the deal finally struck last week, those tidy statements of principle were mussed up beyond recognition. The United States seemed to have bowed - or at least nodded curtly - to the notion that trade involving culture needs its own rule book. As for Canada, the federal government will never again be able to credibly claim that its cultural policies are excluded from the sort of compromises that emerge when over-caffeinated trade negotiators engage in prolonged, high-stakes bargaining.

Both sides toasted the deal with the customary claim that it was a win-win outcome. But the truce announced on May 26 in a dispute stretching back to 1995 can just as easily be regarded as lose-lose. After all, the Americans accepted limits on their access to Canada's magazine advertising marketplace, a potentially troublesome precedent for the next time Washington tries to pry a foreign market open to U.S. entertainment exports. In Canada, though, the problems are more immediate. Canadian magazine publishers find themselves stripped of much of the CULTURAL PROTECTION armour that Ottawa had promised - until very near the end - never to give up. Women's magazines, in particular, were left vulnerable to an onslaught of thick, glossy U.S. rivals vying for Canadian advertising. "It's not about culture any more," said Brian Segal, president and chief executive of Maclean Hunter Publishing Ltd., Canada's biggest publisher of magazines, including Maclean's and Chatelaine. "This deal says we're now in an environment based on pure business principles."

Politicians tried hard to cast the outcome in less stark terms. "There is nothing inconsistent about a vigorous and open trade policy and an equally strong defence of one's own culture," insisted Trade Minister Sergio Marchi. Maybe not. But judging from the unwieldy bundle of policies that ultimately put the conflict to rest, reconciling cultural and trade considerations was no easy feat. The deal opens up at least three avenues for U.S. publishers to make incursions into the Canadian magazine sector. In return, millions in new federal subsidies are promised for the Canadian publishers - a solution the industry has always said it did not want, and one that runs counter to the tide away from government handouts. The amount to be made available and how it might be divided remains far from clear. "We've barely begun to talk about the money," admitted one weary senior federal official.

Precisely which magazines will end up needing an injection of assistance will depend on how U.S. publishers decide to exploit their new access to the Canadian marketplace. The most likely strategy will be to keep shipping the same magazines already widely sold in Canada, but to start scooping up Canadian advertising profits, too. American magazines will be allowed, after a three-year phase-in period, to sell up to 18 per cent of their ad space to Canadian advertisers - without being required to spend a cent on Canadian articles or photographs. For three decades, Ottawa banned this sort of publication, known as a split run, and allowing them now is a major concession. Copps said the 18-per-cent limit would preserve advertising for homegrown magazines. But Canadian publishers warned the impact could be severe. They noted, for instance, that if the 13 most popular U.S. women's magazines sold the allowed 18 per cent of their ad pages to Canadian clients, they would grab the equivalent of 70 per cent of all the ads now run in Canada's seven biggest women's magazines.

A more ambitious strategy for U.S. publishers would be to set up new versions of their magazines in Canada. New York City-based Hearst Corp. suggested it might launch northern spinoffs of magazines such as Cosmopolitan and Good Housekeeping. But under the new rules, more than half of the editorial content in these issues would have to be produced by Canadians, or be specially commissioned for this market. Industry insiders doubted U.S. publishers would be tempted to assume such high editorial costs. "I predict there will be very few magazines that will establish here by putting in an investment proposal and committing to 50-per-cent Canadian content," said Ron Atkey, a Toronto lawyer who represents publishing and entertainment giant Time Warner Inc. in Canada.

A third option for U.S. publishers is to find Canadian partners. And all indications are that at least some of the Canadians are eager to talk. Up to now, foreign companies have been limited to owning 25 per cent of Canadian magazine publishers. The new guidelines will permit them to buy as much as 49 per cent.

No sooner had the magazine ceasefire been announced than Canadian publishers began musing about linking up with the U.S. powerhouses. The opportunities range from U.S. investors buying bigger shares of Canadian publishers, to joint ventures in which the Canadian player would hold the majority stake and the U.S. partner would bring well-known magazine titles. The advent of such arrangements need not spell the end of familiar Canadian publications, Segal said. "If one looks at potential for joint ventures and other opportunities, that doesn't mean Maclean's and Chatelaine and Flare and all of our magazines won't be operating," he said. "It's not substitution. It's a question of where are there opportunities for growth?"

Talk of opportunities could not disguise the deep gloom that fell over the Canadian magazine sector. Among the daunting changes, the industry faces losing a large part of a key tax advantage designed to help sell ad space. Advertisers can deduct the full cost of placing ads in Canadian magazines. Under the new regime, they will also be able to deduct half these costs in any foreign periodicals that sell advertising under the 18-per-cent threshold. The same 50-per-cent deduction would apply to any new foreign-owned publication launched in Canada that complies with the majority Canadian content rule. And if any foreign-owned magazine ever manages to provide at least 80-per-cent Canadian content, the full deduction would be allowed. Privately, federal officials admitted the erosion of the tax advantage will almost certainly be fatal for a few magazines. "We're not going to pretend that every Canadian magazine now being published is going to be there five years from now," said one senior bureaucrat, who spoke on the condition he not be identified.

Marchi told Maclean's he believes the outcome for Canadian magazines could have been much worse. Had negotiations broken down entirely - as they threatened to do more than once - the U.S. vowed to retaliate with trade sanctions against Canadian steel, textiles or plastics. "Then the business community would have heaped a lot of pressure on the government and its backbenchers," he said. "We may have had to go back to the negotiating table in the middle of a trade war, and who knows what kind of an arrangement we would have been able to cut."

But could the result have been more favourable? Ottawa's critical misstep - made with enthusiastic support from the magazine industry - may have come in 1995. That was when the Liberal government imposed an 80-per-cent tax on the ad revenues of split runs, a punitive levy designed to outlaw the Canadian edition of Time Warner's Sports Illustrated, which was launched in 1993. Many trade experts doubted from the outset that the tax would withstand a U.S. trade challenge, so it was no big surprise when it was ruled illegal by a World Trade Organization panel in 1997. When Ottawa responded in 1998 with a new measure - a ban on advertising sales in split runs - the Americans predictably cried foul: Canada was refusing to comply with the spirit of the WTO decision. This substitute law, Bill C-55, was more cleverly designed to withstand the technicalities of a trade challenge, but that hardly mattered. Washington rejected the notion of another round at the WTO. And the blunt threat of a costly trade war replaced nuanced debate on the niceties of trade law.

Canada's other cultural industries watched nervously as the magazine saga moved towards its unsettling conclusion. "We've always felt that Canadian ownership is critical to generating Canadian content," said Roy MacSkimming, policy director of the Association of Canadian Publishers, the book industry's main lobby group. "That's been a cardinal rule in book policy and it was in magazine policy - until now." While Copps reassured other cultural industries they need not worry about being dragged into the magazine slipstream, fears abound. MacSkimming calls the move to let foreign magazine publishers set up shop in Canada, even with Canadian content requirements, a "troubling departure."

Yet he finds a silver lining in a little-noted detail of the new federal policy. The authority to approve or reject all future changes in foreign ownership of Canadian cultural enterprises is being transferred from Industry Canada's investment review branch to the Canadian heritage department - a key consolation prize for Copps. MacSkimming is confident Heritage will prove tougher than Industry in demanding cultural benefits when Canadian subsidiaries of global entertainment conglomerates change hands. U.S. trade insiders view Heritage as Ottawa's main bastion of cultural protectionism. Bill Merkin, a veteran Washington-based trade consultant who was the second-ranking U.S. negotiator of the 1988 Canada-U.S. Free Trade Agreement, said the move is "the big sleeper" in the resolution of the magazine dispute. Atkey termed it "a power grab" with "huge implications."

For Canada's magazine publishers, however, anything Copps's department can salvage from the collapse of its magazine policy is no solace. A glum Michael Rea, chairman of the Canadian Magazine Publishers Association, said it is impossible to predict which U.S. magazines will move first - only that they are bound to move. "There is very easy money on the table," Rea said, "so I imagine they will take it." And in this case, easy money for the Americans means harder days ahead for their Canadian rivals.

Maclean's June 7, 1999