Would a Borderless North America Kill Canadian Culture? James W. Dean Ross Distinguished Professor of Canada-U.S.

Business and Economic Relations Western Washington University and Professor of Economics Simon Fraser University jdean@sfu.ca Vivek H. Dehejia Associate Professor of Economics Carleton University, CESifo, and RIIM vdehejia@ccs.carleton.ca

We thank Makarand Paranjape of Jawaharlal Nehru University in Dehli for conversations on this and related subjects. We are particularly grateful to Paul Storer of the College of Business and Economics at Western Washington University for his very helpful comments on an earlier draft.

The Social Dimensions of Globalization: NAFTA Ten Years On

Would a Borderless North America Kill Canadian Culture?

Since late 2004, a high-level, trilateral Independent Task Force on the Future of North America has met under the auspices of the Council of Foreign Relations in New York. Their report will be issued in mid-2005. In early 2005, the Chairmen, John Manley of Canada, Pedro Aspe of Mexico and William Weld of the US, issued a statement in anticipation of the trilateral leaders meeting scheduled for March 23 in Texas. They propose creation by 2010 of common external tariff barrier around North America, a common outer security barrier, and a common energy and natural-resource security strategy.

This paper starts from the premise that in the near future closer economic and security integration between Canada and the US is inevitable. The border as we know it could conceivably disappear. We ask whether Canadian culture, broadly defined, might disappear with it.

In Canada, debates around culture form part of a larger national debate on how closely the country should integrate, economically and otherwise, with the United States, and to what extent it should mimic American institutions, be they political, social, or cultural. It is fair to say that in Canada, fears about globalization are more precisely fears about Americanization, in contrast to emerging economies, of either the developing or transition varieties, where cultural nationalists worry about globalization writ large, and

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not Americanization per se. On the contrary, a healthy dose of Americanization is often seen as welcome relief from the legacies of colonial rule or Soviet-style socialism, or often both, which left economies in Eastern Europe, Asia, and Africa shackled by overregulation.

It is important to distinguish globalization from liberalization. By the latter, we mean the freeing up of internal prices and wages, and the dismantling of excessive and burdensome regulation, while by the former we mean the international aspects of economic liberalization, in particular, the free movement of goods, service, capital, and people. The two raise analytically distinct issues. All sensible analysts of economies, whether developing, developed, or in transition from communism to capitalism, agree that there was, and continues to be, need for internal liberalization, but as for external liberalization, the question is more nuanced. Perhaps, particularly for cultural reasons, countries should stop short of maximal globalization. There may (or may not!) be an optimal, rather than maximal, extent to which countries like Canada should lay themselves bare to unprotected intercourse with their neighbours.

Economists studying globalization are notoriously reticent about culture: in particular, about examining globalizations impacts on national culture and the reverse. It is noteworthy that three recent and much-cited books on the subject, by Joseph Stiglitz, Jagdish Bhagwati, and Martin Wolf, have little or nothing to say on the subject. By contrast, scholars working in the humanities, such as cultural studies, have a great deal to

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say on the subject, but often the Marxist and post-colonial lenses through which they view globalization bias them toward negative assessments.

Given what is, to us, an astonishing lacuna in the economics literature on the subject, we propose to take a modest first step in this paper, by framing the relevant questions analytically, and by examining the experience of Canada, in which there has been and continues to be debate about the effects on culture of globalization (or Americanization), and economic liberalization more generally.1

Why is Canada worried about Americanization, rather than globalization more generally?2 It is often said that Canada is like a mouse sleeping with an elephant, who fears that the tiniest move of the elephant may crush him. In Canada, fully 85 per cent of exports and imports are to and from the United States, and the United States is also the largest foreign investor in Canada. The two countries share a 3000 mile border, the longest undefended border in the world. And, most significantly, in the cultural context, Canadians, like the rest of the world, are voracious consumers of American television, cinema, popular music, magazines, books, fashions, and fast food: in short, of the whole gamut of American culture. This wholesale embrace of American culture-broadly-defined is a particular policy issue in a country which has, historically, had such a fragile sense of

We review the globalization debate, in the context of developing, transition, and developed economies, in our previous essay, available as a working paper, Dean, Dehejia, et al. (2004). We draw also on Dean and Dehejia (2004), which compares the experiences of Canada and India. 2 The now-classic reference is Granatstein (1996).

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national identity, having been shaped first by British culture, and then by American, the latter coming to dominate in the post-Second World War period.

The national debate on culture was at its most vigorous in 1987 and 1988, as the Canada US Free Trade Agreement (CUFTA) had been negotiated and became a primary election issue in the 1988 general election. The country was fairly evenly split on the agreement, and CUFTA passed only because the re-elected Conservative government of Prime Minister Brian Mulroney enjoyed a parliamentary majority.

Contentious issues

The three contentious issues in the CUFTA debate were natural resources agriculture and culture. To this, more recently as a matter of national debate, can be added common security. The common theme is evidently birthright, or national sovereignty. The debate over natural resources was spurred by fears of an insatiable American appetite for Canadas water, oil, timber, and all the rest. That fear has since abated, and been transferred to China, which has recently begun negotiating to lock in large quantities of Canadian resources. The debate over agriculture concerned a perceived need to preserve the Canadian wheat, dairy, and poultry marketing board monopolies from competition by cheaper US products. As it turned out, due to a weak Canadian dollar in the 1990s, Canadian wheat, dairy, and poultry products were probably about as cheap as American, thus blunting this particular concern. The debate on common security is more recent, and concerns the American proposal for a National Missile Defense, which would, inter alia,

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establish a common security perimeter around North America. The issue was very publicly raised by newly re-elected US President George Bush on his visit to Canada in November 2004, and evidently discomfited his Canadian host, Prime Minister Paul Martin, who was still on the fence as to whether Canada should join. By early 2005, Martins new minority government had decided to opt out.

Most important for our purposes, concerns over American cultural domination of Canada led to a series of exemptions for cultural industries being written into the CUFTA. These were carried over to its successor, the North American Free Trade Agreement (NAFTA). In particular, the agreement enshrined Canadas right to impose Canadian content requirements on radio and television, restrict foreign investment and ownership, and to permit government subsidies of cultural industries such as publishing, music, and cinema. Evidently, there was a fear that, in an unfettered market, Canada would be swamped by cheaper (more popular?) American music, cinema, and the rest.

An economic argument for cultural protection

There is an economic argument for cultural protection. Because of a huge domestic market, American cultural products can be exported abroad at almost zero marginal cost. Thus a blockbuster Hollywood movie can recoup its expenses in the US market, and can be distributed worldwide at low cost to increase studio profits further. In the case of Canada, with English a shared language, there isnt even the additional cost of dubbing the soundtrack into a foreign language. This putatively predatory behavior, which is

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actually efficient for the US firm, deriving from differential market size, gives rise to an argument for a subsidy to protect the higher-cost Canadian industry, assuming that the nation believes, as evidently it does, that its domestic cultural industries are worth preserving. However, economic theory does not furnish a first-best case for quantitative restrictions or quotas. Rather, the goal of preserving economically fragile national culture could be met at lower social cost, and with fewer impediments to individual choice, with direct subsidies. In short, Canada is better advised to foster its culture via subsidies than by restricting or taxing cultural imports.3

Apart from the economic arguments, there was a subtler and more important motivation for Canadian cultural protection policies: the widely shared sense of fragility of the Canadian national identity itself. Truth be told, Canadians are perhaps 90 per cent Americanized. This of course increases the urgency of preserving the remaining 10 per cent of difference.

One of the most important and controversial dimensions of Canadian cultural protection is restriction of foreign ownership in the print and broadcast media, notably newspapers and television. Unsurprisingly to economists, this has resulted in a very high level of concentration. In particular, two conglomerates, Bell Globemedia and Canwest Global, own or control the vast preponderance of daily newspapers and private television networks in Canada. There are only two major exceptions: the publicly owned Canadian

Eleven years ago, Globerman and Vining (1994, pp. 50-51) offered the following assessment: the balance of forces suggests that cultural protectionism may become less of a bilateral cultural issue than in the past. However, overt government subsidies may become a more prominent source of bilateral conflict.

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Broadcasting Corporation, which runs television and radio services in English and French, and the Toronto Star, the only major independent daily newspaper in English in the country.

Would less protection strengthen Canadian culture?

This gives rise to a testable hypothesis: Industries protected from inward foreign investment will exhibit excess rates of return (or quasi-rents). Assuming that these industries are commercially driven, an opening up to foreign investment will lead to entry into the industry and a disappearance of these excess returns. The most noteworthy example of such an industry in Canada, apart from cultural industries, is the banking industry, which, at least at the level of casual empiricism, does indeed exhibit high levels of (accounting) profit and hence, presumably, excess returns. It is reasonable to conjecture that an opening up of Canadian banks to foreign competition would lead to intensified competition: new entry, and presumably more choice for consumers, as domestic and foreign banks compete for custom. This raises the question of whether a similar situation would occur if cultural industries were opened up. Or would, instead, domestic firms, whether in media or publishing, wither under intense competition from lower-cost foreign (mainly American) rivals?

In short, does the current success of Canadian culture (on which, more below) result from cultural protection? And would this be threatened by opening up? Canada has been remarkably successful in engendering its cultural industries, especially book publishing

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(with the aid of subsidies), popular music (without subsidies), and, particularly in the French language, cinema (with both federal and provincial subsidies). Writers such as Margaret Atwood, Alice Monro, and Rohinton Mistry have achieved worldwide success, and are taught in English literature courses in universities. Popular musicians, especially female singers like Celine Dion, Shania Twain, and Alannis Morissette, are at the top of the charts. Canada produces more than its share of North American comedians. In some cases this results from Canadians ability to poke fun at American foibles that Canadians fully understand but stand ever so slightly apart from: Jim Carey comes to mind. Another native of Toronto, Mike Myers, of Austin Powers fame does the same thing to the Brits. And filmmakers such as Denys Arcand regularly win prizes and woo audiences at major film festivals.

To what extent these successes are due to cultural protection is difficult to determine.4 A related issue is whether by producers of Canadian culture we mean Canadians producing cultural products that are distinctly Canadian, Canadian (or even foreign) artists, writers, entertainers etc. who actually live in Canada, or simply Canadians who live and work anywhere.

As the case may be, by its broadest definition, Canadian culture is thriving, and fears about the fragility of Canadian culture have, in our view, turn out to be unfounded. Perhaps, drawing an analogy from trade theory, one can make an infant industry argument about Canadian culture: Having been nurtured behind protective barriers, the

Difficult because, as ever in economics, we do not observe the counter-factual, i.e., what would have happened had the cultural protection not been in place.

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industry has now matured, and may be in a position to compete on an equal footing following an unrestricted and unsubsidized opening up to foreign imports and investment.

More subtly, and even more difficult to quantify, there appears, to us at least, to be at present a great self-confidence in Canada about its culture, and its distinctness from the United States. Canadian culture, we believe, has become less, rather than more, fragile since the CUFTA. The sense of distinctness has been sharpened in recent years by a markedly neo-conservative turn in US foreign and domestic social policy under the Bush administration, especially since 9/11 and most recently since its 2004 re-election.

There is an argument, too, that new technology, such as the internet, mobile telephones, and wireless data transfer, make it increasingly possible for a country to export its cultural resources without the corresponding human resources being drained away. For example, a writer can live in Toronto but be in daily contact with a publisher in New York, or a musician in Montreal can record in a local studio for a record label in Europe.

Two hypotheses

The experience of Canada suggests two ideas, that one could grandiosely call hypotheses: First, that economic convergence does not necessarily induce, nor does it require, social, cultural, or political convergence; and, second, that economic liberalization, including globalization, by increasing prosperity, strengthens rather than weakens a nations culture and cultural identity.

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Some cautionary notes are certainly in order, to provide nuance to this largely optimistic epistle. Makarand Paranjape of Jawaharlal Nehru University in Dehli, draws a distinction between the globalization of culture and the culture of globalization. We have focused on the former in this essay. The latter refers to the socio-cultural mindset of a nation, in particular, how attuned it is to the forces of the market and thus how readily adaptable to succeeding in the global capitalist economy. This notion is a direct descendant of the Weberian argument that it is the Protestant ethic, which stresses personal virtue, thrift, hard work, and austerity, that made possible the rise of capitalism in the Anglo-Saxon world. Indeed, one could argue that the Brahmanical Hindu culture of India, or the Mandarin culture of China, which are both traditional cultures of the risen bourgeoisie, stress exactly the same qualities, so that perhaps these arguments are as applicable to Canada as they are to the two largest and most important emerging economies in the world.

Deepening

These considerations lead us to our second major theme: Where should NAFTA go from here? There are two dimensions in current debates: what are known as widening and deepening.5 The first concerns the expansion of NAFTA beyond its current membership of Canada, Mexico, and the United States to include other Latin American

Both sets of issues have recently gained increased attention with the creation of a high level commission by the New York-based Council on Foreign Relations, with co-chairs John Manley of Canada, Pedro Aspe of Mexico, and William Weld of the United States. Their brief includes an examination of the merits of moving to a customs union, and of a common security perimeter for North America.

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countries, eventually leading to a full-fledged Free Trade Area of the Americas (FTAA). The second concerns the expansion to new areas of the existing NAFTA, or, even more narrowly, to expanded Canada-US integration on a faster track than further liberalization of either country with Mexico, thus giving rise to a two speed NAFTA. We shall focus in the remainder of this paper on the deepening issues.

From a Canadian perspective, the deepening issue boils down, in the first instance, to whether Canada should open up sensitive areas, notably cultural, banking, agricultural and natural resource industries, thus allowing greater integration with their counterparts in the United States. In the second instance, it asks whether the two countries should coordinate, or perhaps even converge, on common immigration, visitor, and security policies. To put it more sharply and colourfully, what would it take to eliminate all those annoying immigration and customs officials on both sides of the border?

One element of eliminating border controls might involve a harmonization of excise taxes (what the Europeans call value added taxes or VAT). This is what has happened in the European Union (EU), or more particularly the subset of EU countries that belong to the so-called Schengen Agreement, which permits borderless transit for people and goods within the area covered by the agreement. Another element would involve moving NAFTA, or at least its CUFTA component, from a free trade area without harmonized external tariffs and hence cumbersome and opaque rules of origin (ROO) requirements, to a full-fledged customs union, again as in the EU.

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It is worth noting that the so-called border effect is not trivial. In a famous study in the American Economic Review, the economist John McCallum, later Canadian Defence (and currently Veterans Affairs) Minister, demonstrated econometrically that there is more trade amongst Canadian provinces and amongst US states, and less trade across the border between Canadian provinces and US states, than one would predict based on economic variables, most notably economic activity and geographical distance.6 This finding has been confirmed by later studies, including those by the economist John Helliwell and many others. One theoretical explanation that has been put forward by the economist Kei-Mu Yi and co-authors is the notion of vertical specialization, which implies that components and semi-finished goods must cross the border multiple times before the final product is assembled.7 If this is the case, then even a small border barrier has a magnified effect. There is corroborating evidence, by economists Steven Globerman and Paul Storer, of a failure of price convergence between Canada and the United States, which might suggest that the border is still a significant trade barrier (although these authors stress that it is volatility in the exchange rate which accounts for most of the non-convergence). This obliquely raises yet another deep integration issue: movement to a common currency (or outright dollarization in Canada), which we do not pursue at length here, except to point out that there is a debate, mainly amongst Canadian academics, although notably not amongst policymakers, of the costs and benefits to Canada of monetary integration with the United States.

Technically, this is done through a so-called gravity model, which regresses pairs of bilateral trade relations on a vector of explanatory variables, including GDP per capita and distance, plus a dummy variable for the border. 7 The most famous example is the highly integrated auto industry, in which an automobile typically crosses the Ontario Michigan border an average of 7 times before it is delivered to a car dealership!

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Other, perhaps less important areas in which a borderless Canada and United States would require policy reform, in both countries but especially in Canada, concern the barriers to trade on liquor and tobacco products amongst provinces (and states), arising from the difference in excise taxes on these commodities, and, in the case of Canada, complicated further by provincial liquor retail monopolies (except Alberta, plus Vermont). Most economists favour the elimination of these barriers, both on theoretical grounds and presumably as consumers of one or both commodities! It is notable that both within Canada and within the U.S. free trade in liquor and tobacco coexists workably with widely different excise taxes between provinces and between states. Indeed, so too does intra-country free trade in the wide range of goods and services that are subject to very different sales taxes between provinces and between states.

Would deeper integration lead to a more Americanized Canada?

To focus sharply and bring our two themes (culture, and deeper integration) together, we would argue that integration of Canada with the United States, insofar as this is understood as free trade in goods, services, capital, and (to a more limited extent) people, has not undermined Canadian culture. Nor do we believe that further liberalization of excise taxes, elimination of liquor and tobacco monopolies, or moving to a customs union, would have this effect. The important question that remains is: Would elimination of protective barriers on cultural industries per se threaten Canadian culture and lead to the Americanization that is the bane of cultural nationalists? Or, would this engender a

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further strengthening of Canadian culture, as domestic industries begin to compete vigorously and on an even footing with their American and other foreign counterparts?

Our gut instinct, guided both by our reading of recent experience and, perhaps, our native optimism, inclines to the latter possibility. As we have noted, at least at a popular level, Canada and the United States have diverged socially and culturally just as they have converged economically. Canadas political culture, founded as it is on Westminster-style parliamentary democracy, is distinct from the Presidential-Congressional republic model of the United States. Socially, Canada is much more progressive, on matters such as gay marriage, abortion, capital punishment, and many others, and more so since the recent neo-conservative turn in American policy. Canadian foreign policy has also always been distinct, stressing peacekeeping and nation building (originally maligned, now embraced, by US President George Bush) rather than military intervention.

At a subtler level, too, Canadian society and culture is more egalitarian and less elitist, driven, perhaps, by the socialization of medicine and quasi-socialization of education in Canada, and by a more even distribution of income. A telling statistic is that median purchasing power parity (PPP)-adjusted household income is higher in Canada than United States, while the opposite is true for mean income. This suggests a less skewed income distribution in Canada than the United States, accomplished to some extent no doubt by the more steeply progressive income tax schedule in Canada. If account were taken of the public goods of health and education, and the stronger safety networks in

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Canada than the United States, the case for a higher measured median standard of living in Canada would be further reinforced.

Conclusion

The nexus between economic liberalization, globalization in particular, and culture is important, and worthy of serious analysis, and thus far largely neglected by economists. We have taken a very preliminary first step in this paper, by reviewing the Canadian experience, and interpreting it in a fashion that we believe may provide some lessons for other putative and actual globalizers, for example India and China. Our two, very tentative, conclusions are, that cultural convergence need not be a handmaiden of economic convergence, and that globalization, by increasing prosperity, can indeed strengthen cultural identity. Hence fears of cultural domination of Canada by the United States or anyone else seem exaggerated and probably reflect a nostalgia for a putatively pure past by cultural nationalists.

A living culture, as opposed to a dead or museum culture, will undergo constant and revivifying change, which can only strengthen it. Far from being a threat, globalization and economic liberalization are perhaps the greatest engines of national cultural identity as we enter the new millennium. We are sure, of course, that many people will not agree with us, but will be delighted if this modest contribution will play a role in enlivening the never-ending and fascinating debates around globalization and culture.

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REFERENCES Bhagwati, Jagdish (2004) In Defense of Globalization, Oxford University Press. Dean, James W. and Vivek H. Dehejia (2004) Optimal Globalization and National Welfare, Carleton Economic Papers No. 2004-17, November. Available on-line at: http://www.carleton.ca/economics. Dean, James W. and Vivek H. Dehejia (2004) Does Globalization Threaten Culture? mimeo, Simon Fraser University, December. Globerman, Steven and Aidan Vining (1994) Trade, Investment and the Cultural Industries: Bilateral Relations in the Post-Nafta Era, Northwest Journal of Business and Economics, Special Edition. Globerman, Steven and Paul Storer (2004) Canada-U.S. Free Trade and Price Convergence In North America mimeo, Western Washington University, April. Granatstein, Jack (1996) Yankee Go Home: Canadians and Anti-Americanism HarperCollins. Stiglitz, Joseph (2002) Globalization and Its Discontents, Norton Publishers. Wolf, Martin (2004) Why Globalization Works, Yale University Press.

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