The billion-dollar cultural trade war that was: the 1999 Canada-US split-run magazine dispute

Heritage Minister Sheila Copps, with assistance from PM Jean Chrétien, wrapping herself in the Canadian flag.

[20 minute read]

January 21, 2023

At the turn of the New Year 2023, reports appeared in both the English and French language press speculating on US trade retaliation against Bills C-11 and C-18. Neither was triggered by a news event of any substance.

We are the biggest trade partner of the United States, marked by a trillion dollars of cross-border commerce annually. We have the misfortune of being so good at it that we have rung up trade surpluses with the Americans every year going back to the 1980s.

When your older and bigger sibling owes you money, expect you’re going to pay for the privilege. It’s easy to lose count of the unwarranted US trade retaliations against Canada over the years in agricultural products, softwood lumber, auto parts and cultural products.

The cultural disputes are special because Canada regards culture as special. That’s why we have negotiated the famous “cultural exemption” in our bilateral trade deals with the US and other nations. The US of course, with its enormous volume in cultural exports reducing its overall trade deficit, regards culture as just another product.

Previously MediaPolicy.ca recounted the story of the US-Canada trade dispute over the CRTC licensing of Country Music Television (CMT) and a dozen other US cable stations in 1995, “the half-billion dollar trade war that wasn’t.”

But CMT was only a dry run for the next dispute. The sequel was an iconic cultural trade dispute with far more money at stake: the “split-run magazine” fight that began in 1993 and culminated in an ugly confrontation in 1999. It ended in Canada ceding significant market access to split-run US magazines.

Although even the worst quarrels between the US and Canada must be put in the perspective of a healthy economic and political relationship, this one featured the personal targeting of Heritage Minister Shiela Copps, the Americans’ wild success at turning Canadians against each other, and cynical US threats of sweeping (and illegal) trade actions against Canada.

***

Canadian cultural policy aims to push back against the continental market forces of American media to create enough space for Canadian content to reach Canadian audiences. In the dominant paradigm of trade liberalization, that makes us protectionist.

Our policy is based on the peculiar nature of cultural “goods” as holding almost of all their value as intellectual property. Unlike conventional goods emerging unit by unit from factory assembly lines, the cost of making cultural goods is heavily loaded at the front end of making one ‘master’ copy. Once those costs are recovered, the marginal costs of selling more to new customers and export markets are very low.

In addition, the high risk of making successful cultural products —-caused by consumer demand that is notoriously difficult to predict—— favours gatekeeping media companies with significant market power.

Ergo the relentless drive of American media companies to recover their costs in their domestic market and then drive pure-profit expansion into foreign markets. Canada is their largest.

In resistance to the US juggernaut, many nations including Canada have developed a “policy toolkit” consisting of government subsides, public broadcasting, Canadian ownership, tariffs, revenue tithing, Canadian content regulations and tax policy.

All of these tools are subject to legal challenges by the US Trade Representative under the multi-lateral GATT and GATS trade deals supervised by the World Trade Organization, or the series of bilateral trade deals between the US and Canada in 1987, 1994 and culminating in the USCMA in 2017.

The nature of those trade agreements is that direct subsidies of domestic producers and public ownership are presumptively trade compliant; the remaining toolkit measures less so.

***

In the 1990s the Canadian magazine market was worth over a billion dollars annually in revenue, the majority from advertising.

While foreign magazines dominated 90% of the $800 million news stand market, Canadian magazines were extremely successful in building a subscription market that was boosted by a postal subsidy existing since 1849.

The dominant Canadian magazines were published by Rogers’ MacLean Hunter —-Maclean’s and Chatelaine—- and also the Montréal-based Télémedia (Canadian Living, Harrowsmith, and licensed Canadian editions of Elle and TV Guide).

Foreign magazines were widely sold provided they were imported with their original foreign advertisements and did not undercut Canadian magazines by re-selling the same editorial content to Canadian advertisers.

This prohibition against foreign “split-run” magazines (those republishing American editorial content to a Canadian audience with Canadian advertising) was enforced beginning in 1965 by an import ban, Tariff 9958.

There were only two exceptions to the ban on split-runs: Time magazine had been grandfathered in the 1965 import ban and Reader’s Digest had contrived a Canadian owned publishing company for its Canadian distribution.

Sleeping dogs lay quiet until the US-owned Time Warner decided in 1993 to wake them up by converting its Sports Illustrated magazine into a “split-run” selling Canadian advertising. The opportunity arose because of new technology: print-ready digital pages with Canadian advertisements could evade the border ban on hard copy magazines and be sent electronically to a Toronto-based printing house. Without the physical barrier of the import ban, Time Warner quietly got pre-approval from Investment Canada.

When it became public, the Canadian magazine industry was horrified by the approval. Sports Illustrated already had big sales in Canada and so was poised to bite off a big chunk of Canadian advertising dollars. And a split-run Sports Illustrated would be the model for other popular American magazines that aimed to get paid twice for the same editorial content.

Once aware and engaged on the file, Heritage Canada improvised on the unenforceable import ban.

The Liberal government of PM Jean Chrétien stepped in with an Excise Tax on US split-runs set at 80% of Canadian revenue, roughly equivalent to the split-runs’ expected profit margins. Following the report of a perfunctory Task Force investigation, the legislation C-103 was introduced in September 1995 and came into force in December 1995.

Previously in January 1995 the US Trade Representative Mickey Kantor had responded to the Country Music TV licensing dispute by threatening unilateral trade sanctions authorized by the notorious section 301 of the US Trade Act, once described as “a stick used to bludgeon the weak.”

But in the case of the Excise Tax on split-run magazines, Kantor chose the less confrontational option of filing a trade dispute.

He decided against taking up his option for dispute resolution under the NAFTA agreement, which included Canada’s exemption of “cultural industries” such as magazines from trade obligations but allowed the US to levy countervailing trade sanctions “of equivalent value.”

Not surprisingly, he filed at the World Trade Organization, alleging Canada’s violation of the General Agreement on Tariffs and Trade (GATT), an agreement containing no cultural exemption.

It’s a matter of speculation why Kantor passed up the opportunity to retaliate immediately on the split-run Excise Tax as he had with CMT. Perhaps there were undisclosed politics in play. Perhaps he was confident of litigation success.

As it turned out, he had reason to be confident.

***

Trade law can bewilder the newcomer. It’s based on an overlapping series of commercial contracts between nations.

The Canada-US trade agreements include the bilateral 1987 Free Trade Agreement (CUSFTA) that evolved into the trilateral NAFTA 1994 and USMCA 2017 agreements with Mexico.

Canada and the US are also signatories to the multi-lateral agreements GATT (signed in 1947 but frequently updated) and the more limited 1994 General Agreement on Trade in Services (GATS).

The impetus for the agreements is the principle of trade liberalization. But in practice, that philosophy is more honoured in the breach than the observance. The reality is that nations negotiate these agreements with a view to opening up export markets in other countries while opening up their own as little as possible.

The centrepiece in each agreement is Article I, the Most Favored Nation provision —-nations must not play favourites among foreign exporters—- and also Article III(2) on National Treatment; nations must not discriminate against foreign producers competing with domestic producers.

But in practice the agreements are rife with industry-specific exemptions, exceptions, reservations, limitations, conflicting language and even deliberately ambiguous language papering over irreconcilable differences.

Moreover the agreements do not mesh seamlessly with each other.

GATT governs trade in “goods.” GATS governs trade in “services.” But in spite of a clear schedule in GATS specifying which products are “services,” it is possible for products to be both a good and a service (as we discovered in the split-run litigation).

NAFTA (now USMCA) governs both good and services but exempts “cultural industries” which GATT and GATS do not.

Those cultural industries make “goods” like magazines and music CDs, but also “services” like film, broadcasting and other audio-visual products. Canada has taken advantage of GATS’ opt-out for our cultural “services.”

So it is different rules for different agreements, and —to make it even more messy— the agreements permit forum shopping for dispute resolution at the WTO (for violations of GATT and GATS) or trade arbitration (for violations of NAFTA/USMCA).

***

There’s no deeper rabbit hole than legal analyses of the WTO split-run magazine case. It’s been the subject of many scholarly articles.

The bottom line is the Americans won. They won at the initial WTO adjudication and won even bigger on appeal, issued June 30, 1997.

Predictably, the import ban on magazines went down in flames as an impermissible quota (of zero) in violation of Article XI(1) of GATT. Given the new technology of cross-border transmission of pages, the ban was toothless anyway.

More importantly, the Excise Tax in Bill C-103 was struck down.

Canada defended the tax as a levy on “advertising services” listed under a GATS schedule to which Canada had never subscribed and was not bound.

The WTO didn’t buy it, ruling that the tax was levied per issue on magazines that were consumer “goods” even if they included “advertising services.”

The WTO panel reasoned that a product could be both a good and a service, so GATT still applied. The panel still had to perform some interpretive gymnastics in order to hold that the split-runs void of any Canadian editorial content were “like products” to Canadian magazines, but they found a way. The tax was ruled unlawful.

That wasn’t all.

The US also decided that, since all is fair in a love, war and trade disputes, it would take the opportunity to challenge successfully Canada Post’s rate subsidy for Canadian magazines as discrimination in the distribution of goods contrary to GATT Article III(4).

The postal rate issue was not a total defeat for Canada: it was still open to the federal government to recraft the preferential postal rate for Canadian magazines by paying subsidies directly to 1400 magazine owners.

As a side note (because it became relevant in the final settlement in 1999), the US never challenged section 19.1 of Canada’s Income Tax Act which restricted Canadian businesses’ right to deduct magazine advertising expenses to ads published in Canadian owned periodicals.

***

The Canadian magazine industry viewed the WTO ruling as an existential defeat.

But it had a sympathetic ear from Heritage Minister Sheila Copps, the take-no-prisoners MP from Hamilton, Ontario.

Her response was Bill C-55 tabled in the House on October 8, 1998. Figuring they had a workaround on the WTO ruling that the Excise Tax was an illegal levy on the “goods” of hard copy magazines, Heritage officials devised new legislation that prohibited foreign magazine publishers from selling advertising to Canadians. “Advertising services” were covered by GATS, not GATT, and Canada was not bound.

US officials denounced the Bill. The new US Trade Representative Charlene Barshefsky accused Canada of thumbing its nose at the WTO adjudication process and said C-55 was “unabashedly protectionist.”

Retaliatory trade sanctions were in the cards and even if the US had chosen to play by NAFTA trade rules it had the right under that agreement to countervail the protection of Canadian magazines with sanctions in any sector, although crucially of equivalent commercial effect.

Of course Barshefsky and the Clinton administration had no intention of launching equivalent retaliation, just as they had ignored the same principle in the Country TV Music dispute. Importantly, the stakes in the magazine dispute, while difficult to quantify precisely, were of an order of magnitude larger than the cable TV dispute.

Clinton was under pressure from Congress on the trade file, according to an analysis in the Globe & Mail. He wanted Congress to delegate more negotiating autonomy to the US Trade Representative and to get it he continually had to deliver trade wins. Canada’s insolent defiance of the WTO ruling wasn’t helpful.

On the Canadian side, Heritage Minister Copps had the magazine industry’s back and the Liberals’ Ontario caucus was said to be hawkish on cultural issues.

A predictable policy tension existed between Heritage and Trade Minister Sergio Marchi, but the Prime Minister went out of his way to publicly back Copps and C-55.

On the Opposition benches, the Reform Party was vocally opposed to Canadian cultural policy in general and had demonstrated this during the Country Music TV dispute.

Clinton knew exactly how to play his cards.

***

On January 11, 1999 deputy US Trade Representative Richard Fisher met with Canadian Ambassador Raymond Chrétien in Washington D.C. He gave Chrétien the expected ultimatum: withdraw Bill C-55 and comply with the WTO ruling, or else.

As it was an informal meeting, the “or else” was never written down or published, rather it was passed on by both sides to the news media by leak or unattributed statements.

The “or else” was a series of US ‘section 301’ retaliations in the form of trade tariffs or bans on Canadian products in steel, plastics, clothing and also wood products not already restricted by the softwood lumber agreement between the two countries.

Canadian officials put a dollar value on the proposed retaliations at $3 billion to $4 billion, figures that were neither documented nor officially confirmed by either side. Later, an American publication reported an unattributed number of $650 million (USD), closer to $1 billion CDN.

As in the CMT dispute, the retaliations would be of far greater than “equivalent” value to US losses and, unlike the CMT dispute, they would be delivered in key sectors outside of Canada’s cultural industry.

The US choice of retaliation sectors were customized for the two leading Canadian Ministers on the file. MP Copps represented Hamilton, the home of Canada’s steel industry. Trade Minister Marchi’s Toronto riding was host to several plastics factories.

Copps’ public response was to defend C-55 as trade compliant and invite the US to seek dispute resolution.

Litigation would have provided an excellent political off-ramp for the Canadian government. But the Americans had no intention of doing so having in their view already won at the WTO.

It’s also possible Copps was getting encouraging legal advice on the merits of C-55’s workaround on the original WTO ruling. But an article written a year later by a young Yasir Naqvi (destined to be Ontario’s Attorney-General) is convincing that our chances were less than 50/50.

Canada also had the option of launching our own trade complaints against the overreaching section 301 retaliations as either slam dunk violations of GATT or non-equivalent retaliation under NAFTA.

But of course that would take time, and the US retaliation strategy was to create facts on the ground for Canadian politicians.

***

The American divide and conquer tactics enjoyed considerable success.

The opposition Reform Party did not support any of the tools in the Canadian cultural policy toolkit and was not averse to saying so in the middle of a trade dispute as evidenced during the 1995 Parliamentary debate over the Country Music TV dispute.

Reform Heritage critic MP Inky Mark castigated C-55 investigators (armed with powers of search and seizure) as “culture police.”

MP Jason Kenney told the House “the bill is folly. I have not had a single one of my constituents call me to ask for this kind of protectionism. But many have called to say ‘Please do not let this crazy effort by the Minister of Heritage destroy our jobs and impair our industry by provoking the Americans into a bilateral trade war.’”

The Reform caucus promised to bog the Bill down in Parliamentary delay tactics but in fact C-55 spent only a month in Parliamentary Committee and spanned five months from first to third reading.

The Americans’ prime ally was the Association of Canadian Advertisers. Already opposed to existing rules against corporate tax deductions for advertising in non-Canadian media, the ACA viewed C-55 as just another obstacle to lower advertising prices.

Association President Ron Lund portrayed C-55 as a sweetheart deal for the two dominant Canadian magazine companies, Telemedia and Rogers. The US Trade Representative was quick to pick up the talking point.

Perhaps the most disappointing Canadian voice in the debate was the Wholesale Remanufacturing Lumber Association which launched a public campaign opposing the Bill. No Canadian industry had drawn down more on the federal government’s political capital battling US trade sanctions in the previous 50 years than the Canadian industry in wood products.

In Copps’ hometown of Hamilton, the CEO of steel giant Dofasco, Gord Forstner, wrote a scathing letter to the Prime Minister opposing C-55 and then promptly leaked it to the Press.

In retort, Copps got support from the Steelworkers’ Canadian chief Lawrence McBrearty who denounced the sanction threats.

“Maybe,” he told a Parliamentary committee, “someone thinks it’s just fine to have a regime for trade in goods and services that does nothing to prevent the kind of blackmail on cultural policy that the U.S. is attempting with the linkage to steel trade…Canadians, and Canadian steelworkers, cannot allow this kind of blackmail to succeed.”

And this story is not complete without an anecdote that was both repugnant and heartwarming.

A week after trade sanctions were threatened, the Canadian edition of the pornographic Hustler magazine published its February issue that included a vulgar “contest” targeting Copps.

Copps sued and the magazine publisher issued a public apology in the Hamilton Spectator. More importantly, 600 Canadian retail outlets pulled the February issue from their shelves.

***

Negotiations began in February 1999 and ran on and off for three months with the typical mix of posturing and conciliatory statements that characterizes bargaining in the public eye.

Trial balloons for a compromise were floated in both US and Canadian press reports from unattributed sources. These included capping the number of split run magazines that could be sold or joint ventures between Canadian and American magazine owners. The latter idea was advocated by the Association of Canadian Advertisers.

A joint venture had been part of the solution to the Country Music TV dispute three years earlier. Westinghouse had agreed to a 33% share of the Canadian channel that had knocked them off of the cable dial and then licensed their American brand and content back to the joint entity.

The oncoming Third Reading of the Bill in the House of Commons on March 16th provided a bargaining deadline. It was anticipated that the US Trade Representative would have to respond to the vote by officially publishing its retaliation list and triggering a 90-day countdown to implementation.

This end-game dynamic must have resulted in a framework of a deal. Four days before the vote, deputy US Trade Representative Fisher announced the US had no immediate plans to publish the list. “I hope it does not become necessary,” he said, “because we are making progress on this issue. Perhaps quite unusual for Americans, we are willing to exercise a modicum of patience. I think this thing has run down the track much further than it needs to run.”

Copps responded with similar encouragement and then pointedly added “the Americans have to do their homework on [editorial] content.”

In the House, Copps added that “any future discussions must hinge on the concept of majority Canadian content.”

In retrospect, it seems that in early March a framework deal was in place with hard bargaining remaining to put numbers to the percentages of advertising market share and the amount of Canadian content in split-runs.

On March 16th C-55 passed Third Reading by a 196-43 vote.

***

On May 26th a deal in principle was announced.

The terms were as follows:

* US split-run magazines were allowed to earn up to 18% of their advertising revenue from the Canadian market. Bill C-55 would be amended to include this in a new section 21.1.

* Split-runs could exceed the 18% cap of Canadian ads if they published a majority of Canadian editorial content.

* If a split-run had at least 50% Canadian content, Canadian advertisers could claim 50% of their advertising expenses on their corporate tax returns. If the split run attained 80% Canadian editorial content, advertisers could claim 100% of advertising expenses. These changes to section 19.1 of the Income Tax Act were made a year later in June 2000. Significantly, the change in tax policy was not required by the WTO ruling, nor had it even been challenged by the US.

* The US waived any objection to Canada introducing direct federal subsidies to Canadian magazines. This was a “gimme”: direct subsidies are presumptively trade compliant under GATT. A year later the Liberals introduced a three-year $50 million annual subsidy program in the 2000-2001 budget and rebooted the postal subsidy program through a WTO-compliant direct postal reimbursement to magazine owners.

* Canada would allow foreign publishers to set up shop in Canada and own 100% of any newly established (but not existing) Canadian based magazine, provided the business met the section 38 ‘net benefit to Canada’ test in the Investment Act. The test included compliance with cultural policy, Canadian editorial content, competitive impact, and contribution to the Canadian economy. A crucial caveat was that the test would be administered by the Minister of Heritage, not Investment Canada.

The breadth of the agreement must have come as a shock to outside observers.

American ownership of Canadian magazines and changes to the Income Tax Act were not even on the table during the WTO litigation of the Excise Tax. An American waiver on federal subsidies to magazines was not a concession, it was forbearance on future trade harassment.

The key trade off in the deal appeared to be the 18% limit on split-runs’ freedom to sell Canadian advertising in exchange for incentives for US split-runs to carry a majority of Canadian editorial content, even to the point of owning Canadian magazines. The guiding policy principle was more Canadian content, regardless of who published it.

Next came the official government statements.

Copps issued the perfunctory claim of victory: “The US has firmly recognized Canada’s right to protect culture in international trade agreements. I think this is a win-win for Canada.”

Not long afterwards she conceded that threats of trade retaliation had forced the compromise.

“I live in the world of the possible. I wanted a good loss. What we have here is a good loss. I think it’s a good defensible compromise….I haven’t been a political idiot and I’m not going to start now.”

US Trade Representative Barshefsky issued a dignified statement on May 26th: “I am pleased we have negotiated a settlement to this long standing dispute with our largest trading partner. This is how the dispute settlement system should work. The agreement opens Canada’s magazine market and in so doing offers clear benefits to both Canada and the United States.”

But in a Washington Post report the following day, US officials appeared to gloat, saying anything Canada got out of the deal was purely a courtesy shown by President Clinton in recognition of his good relationship with Prime Minister Chrétien.

A more diplomatic source in Barshefsky’s office told the Post “our right under normal rules of trade is to have full and open competition…The agreement gives reasonable but not unfettered access to our publishers to Canada’s advertising market.”

As for domestic Canadian reaction, it was mixed.

Cultural nationalist voices denounced it. But the lead editorial in the Liberal-friendly (and nationalist) Toronto Star pronounced the deal a reasonable compromise.

Ron Lund of the Association of Canadian Advertisers was naturally pleased and declared the agreement “a great first step in terms of opening markets.”

The Canadian magazine industry was hugely disappointed even though publishers had seen this moment coming for some time.

The chair of the Canadian Magazine Publishers Association John Thomson said “the risk that US publishers will offer discounted advertising and subscription rates in order to capture Canadian market share is great.”

He predicted that discounted advertising rates offered by a flood of US split-runs would drive a large number of Canadian magazines out of business in the next three years.

Even with hindsight it is difficult to declare the split-run deal a win, loss or draw for Canadian cultural policy given the American leverage of a favourable WTO ruling on the Excise Tax, the uncertainty over any future WTO ruling on Bill C-55, and of course the considerable threat of US sanctions.

In her post-mortem of the deal, Toronto Star political reporter Rosemary Speirs opined that Copps would have preferred to litigate C-55 at the WTO (an option not practically available to the Minister) and that it was Chrétien who had taken control of the file and negotiated the final agreement.

In her 2005 autobiography, Copps concedes without rancour that the Prime Minister’s Office did the deal and even embellished the account by claiming that Chrétien’s friendship with Clinton dislodged Barshefsky’s more extreme positions.

Speirs concluded that Copps salvaged from the wreckage promises from the PMO to launch a significant subsidy program as well as transferring control over foreign investment in Canadian magazines to Heritage.

***

It would require an in-depth investigation beyond the reach of this post to measure the impact of the 1999 split-run settlement on the fortunes of the Canadian magazine industry.

Five years later Sheila Copps suggested in her autobiography that the magazine industry was doing alright. Canadian communications lawyer Peter Grant made the same observation that year in his book on Canadian cultural policy, Blockbusters and Trade Wars.

In fact in his 2013 Changing Channels autobiography, Grant offered an explanation of why the Canadian magazine market did not end up being overrun by US split-runs.

The 18% limitation on Canadian advertising in split-run editions meant their publishers had to show American advertising revenue for the other 82%. That meant charging American advertisers extra for inclusion in the Canadian edition.

An analysis of Canada’s magazine advertising market published in 2007 by an American academic reported that US magazines had treaded water in the Canadian market since 1999, while larger English-language Canadian periodicals lost ground to smaller Canadian magazines. To the extent there was a link to the split-run settlement, it’s possible that downward pressure on advertising rates had hurt large Canadian magazines and helped small ones, while fears of American domination of the market were not realized.

The fate of government subsidies deserves its own study as well. The magazine industry had not sought out subsidies as its consolation prize, fearing future governments would get tired of the expense, which according to one analysis is exactly what happened during the Harper administration.

By the 2010s the industry landscape would be forever altered by the availability of free online content and the rise of online advertising Goliaths, Facebook and Google.

The Canadian Periodical Fund still provides subsidies to Canadian-owned magazines in 2023.

***

What lessons can be drawn from the split-run dispute?

The most obvious is the American ability to create facts on the ground by threatening trade sanctions instead of submitting disputes to either WTO or NAFTA/CUSMA dispute resolution.

As a corollary, we surely can see the leverage accruing to the US when Canadians fall prey to divide and conquer tactics such as sector-targeted trade sanctions, even when they are often illegal and can be ultimately defeated.

Even if playing the short game of negotiating our way out of trade threats, we can see the value of Canadian solidarity in driving an acceptable outcome. These deals get done. To the extent that the result of the split-run agreement was a disappointment to Canadian cultural nationalists, that was driven mostly by the Americans’ ability to capitalize on the vulnerability of magazines to GATT rules as a “good,” which is not the case for audio-visual based media.

It’s also possible that lessons from the Country Music TV and split-run disputes have been over-learned by Canadian politicians and especially federal civil servants responsible for advising them.

If you close your eyes you can imagine the risk-averse advice given to current Heritage Minister Pablo Rodriguez over at least two controversial elements within Bill C-11: the lack of guaranteed access of Canadian programming services to foreign online platforms [ss. 9(1)(h,i)] and the lesser obligations of US streamers and studios to hire Canadian talent when making Canadian content [s.3(1)(f)].

A final lesson is an obvious one: the US regards Canada as an extension of its domestic market for cultural products. That will never change. We will have to keep defending our cultural policy toolkit from the Americans and, by now, they have come to expect it.

***

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