TED Case Studies
Borders Books: Halted at the Border
Number: 546
Mnemonic: BORDERS
Author: Nicholas E. Standlick
1. The Issue:
In order to preserve the culture of the nation, the Canadian Parliament passed legislation in 1985 to curb excessive amounts of foreign investment in such cultural industries as the publication and sale of books among other readable media, and the production and sale of film and music. In 1995, both Borders Group, Incorporated and Barnes and Noble, Incorporated, made efforts to open retail sales operations in Canada. In both cases, the proposed investments by these American "book-superstores" were reviewed and rejected by the government bureau created in the "Investment Canada Act." The United States at the time was questioning the NAFTA legality of such cultural investment protection in cases such as the Sports Illustrated and Country Music Television debates. The current status of this case is in question because the progress made in the Multilateral Agreement on Investment (MAI) has stopped as of December 1998. The MAI was a treaty mandating certain rules for international investment and was being negotiated by the United States Trade Representative with officials from the member countries of the Organization for Economic Cooperation and Development (including Canada) and the European Union. The last draft of the MAI contains a section condoning cultural protectionism in certain areas. The question now is whether or not further progress should be made to standardize rules for investment so disputes like this do not occur in the future.
2. Description:
The area of international investmetn has long been a sore spot for many governments. This is demonstrated in the multiple battles between United States companies and the Canadian government. The corporations would like to spend their money as they please and have the so-called "free trade" that was given to them by the North American Free Trade Act, although Canadians fear that their culture and commercial power in such sectors as the publication and sales of books would be seriously jeopardized if they let groups like Borders Books open their "superstores" throughout the nation. The question is whether there should be a common law among many of the developed countries throughout the world to ensure that investors' rights are protected, as well as the rights of the home industries. There should be a common law to unite these countries, it will end many major disputes, such as the BORDERS case, and it will end the need to re-debate the investment policy with each new trade treaty that is established, since there is already a pre-negotiated, widely-agreed upon standard.
On June 20, 1985 the Investment Canada Act was enacted into Canadian law as both a protection and stimulant for Canadian industry. Although the act encourages the investment of capital by both Canadians and non-Canadians, there are provisions in the act to maintain the cultural equilibrium of the nation, to preserve the identity of the Canadian people. These provisions call for a strict review of the investment prospecti of cultural industries comprised of:
(a) the publication, distribution or sale of books, magazines, periodicals or newspapers in print or machine readable form, other than the sole activity of printing or typesetting of books, magazines, periodicals or newspapers,
(b) the production, distribution, sale or exhibition of film or video recordings,
(c) the production, distribution, sale or exhibition of audio or video music recordings,
(d) the publication, distribution or sale of music in print or machine readable form, or
(e) radio communication in which the transmissions are intended for direct reception by the general public, any radio, television and cable television broadcasting undertakings and any satellite programming and broadcast network services (Canadian Department of Justice).
Such industries must submit financial documentation stating that the organization will be more than fifty-percent owned and controlled by a Canadian or group of Canadians (Canadian Department of Justice). By maintaining such a quota, it is thought, by Parliament, that Canadian media will be preserved and not overrun by foreign culture, such as the American cultural juggernaut. The law decrees that if the Director of Investment Canada, the bureau created by this act, finds that there is not enough evidence to show that the company will be controlled by Canadians, it may be denied incorporation. Since the enactment of this law, the original intention has been questioned by many owners of American companies and various political figures in these industries. During a radio show discussing problems with the Canadian government over the ability to broadcast American music within Canada's borders, the chairman of the Recording Industry Association of America joked, "What's the difference between yogurt and Canada? Yogurt has an active culture. We're still trying to find out what Canada's active culture is." He argued that how can the country try to protect a separate culture when so much of its history and current status is wrapped into America. Since 1985 there have been unending cultural trade restriction arguments including the Country Music Television case and the argument against Sports Illustrated. In both cases cultural restrictions on media caused problems after they attempted to invest capital for new operations in Canada (Wildavsky 648:1996).
One of the most publicized cases in which the Canadian government used its authority to preempt an American cultural business from opening within its borders is the case of Borders Books and Barnes and Noble Bookstores. In 1995, both corporations decided that they wanted to move north of the border and open operations in Canada. Both companies saw tremendous potential in the expansion due to the fact that there is only one "national" bookstore chain in Canada, Chapters Books, which operates approximately four hundred stores. Both companies knew the rules and regulations for opening bookstores according to the Investment Canada Act, so each found their own way to start developing the market. Barnes and Noble made an aggressive move by declaring that it would purchase twenty percent of Chapters, much less than a controlling interest and then continue the purchasing of books through Canadian distributors (Bloomburg Business News). Borders Books made its own move to start selling books north of the border, starting from scratch and seemingly following the law by finding a group of Canadian investors who would purchase a fifty-one percent contolling interest through the donation of capital. A group consisting of businesswoman Heather Reisman and bookseller Edward Borins attempted to lead Borders through the red tape by issuing a prospectus stating that the new venture will be a Canadian shop (The Canadian Press C10:1995). Even though both groups followed the rules in its movement north, the Canadian government quickly cancelled both plans stating that the Canadian publishing business would be troubled should either company use the American affiliates' systems for ordering books electronically. These ordering systems will not be carrying a vast array of Canadian literature so the vast majority of what would be sold in Canada would be American literature (Turner D1:1996). This was considered a severe detriment to Canadian culture, one that had to be stopped.
In 1995, to help solve the many problems in international investing from the past few years of complex trade area creation, the Organization for Economic Cooperation and Development (OECD) began negotiating an agreement within its member nations to come to standard terms for when countries deal with each other for corporate investment. Called the Multilateral Agreement on Investment (MAI), it was meant to be a common ground upon which all developed countries could settle investment disputes. Unfortunately, in December of 1998, the negotiations disbanded, leaving the international investment world in as much confusion as before. OECD gave this statement in December 1998 to convey there feelings on the lost negotiations:
"Negotiations on the MAI are no longer taking place. However, the officials agreed on the importance of multidisciplinary work on investment at OECD. There are a number of important issues on which further analytical work and inter-governmental co-operation are needed. The officials agreed that this work should be carried out in a transparent manner and should involve all OECD members as well as interested non-member countries, including those that participated as observers in the negotiations. The officials reaffirmed the desirability of international rules for investment."
It is clear that they feel there should be some sort of international legislation to bind them together but feel that it would be best discussed at a later time to renegotiate. The actual text of the document states that provisions will be allowed within each individual treaty for protection of the host nation's culture. While this does not give the specific exceptions, it does settle the issue of whether cultural trade restictions are legal according to Most Favored Nation and free trade policy. OECD sees the need for each country to have its own identity and sees the need for those nation's to promote their language and heritage in the media by various means, including restricting importation from foreign entities (Multilateral Agreement on Investment 128:1998).
It is felt that there must be some kind of legal standard for the nations of the world to depend on for clarity. As the world is becoming more populous and trade barriers are being lifted, the global scenario for trade is becoming more and more complex in the small technical issues such as cultural trade restrictions. For there to be any progress in the future for free trade, it is necessary that these small contentious issues be ironed out before they become a hugely detrimental political issue. In this very issue over cultural trade practices, there have been several confrontations between the governments of Canada and the United States. During his term as the United States Trade Representative, Mickey Kantor had to threaten taking Canada to the World Trade Organization, challenging the restrictions (Wildavsky 648:1996). Such strife is not healthy for two large economic allies like the United States and Canada, and it could be prevented by laying out the issues in a general treaty format, which will give guidelines for all future treaties between the signing parties. This will prevent trouble by creating strict rules and verifying what is possible by law and what is not. In this case having a preliminary treaty explicitly allowing for the creation of cultural restrictions would have ended the disagreements before they even started because there is no vagueness in whether or not it is allowed: it clearly is by a multilateral statute. For this reason, it is believed that a treaty similar to the Multilateral Agreement on Investment should be negotiated and agreed upon, to strengthen ties and preempt future disagreements.
3. Related Cases:
CMTVCAN - Country Music Television and Canadian Cultural Protectionism
SPORTSIL - Magazine Industry and Canadian Cultural Protectionism
BEERCAN - Canadian Protectionism Regarding Imported Beer
ONTARIO - Canadian Protectionism Regarding Imported Beer
FRENCHTV - French Film Quotas and Cultural Protectionism
4. Draft Author:
Nicholas E. Standlick
Version Date - April 14, 1999
5. Discourse and Status:
- Discourse:
AGR: Multilateral Agreement on Investment
- Status:
INPROG: Although there are no longer negotiations on the Multilateral Agreement on Investment per se, the parties involved at OECD have agreed that further work is needed and will be continued to eventually have a cohesive agreement on international investment.
6. Forum and Scope:
- Forum:
Organization for Economic Cooperation and Development
- Scope:
MULTI
7. Decision Breadth:
29 member nations of the Organization for Economic Cooperation and Development
8. Legal Standing:
TREATY
9. Geographic Locations
- Geographic Domain:
NORTH AMERICA
- Geographic Site:
N/A
- Geographic Impact:
United States and Canada
10. Sub-National Factors:
N/A
11. Type of Habitat:
TEMPERATE
12. Type of Measure:
ADMIN: The member nations planned to institute specific regulations to promote non-discriminatory treatment for investors
13. Direct v. Indirect Impacts:
IND
14. Relation of Trade Measure to Environmental Impact
- Directly Related to Product:
N/A
- Indirectly Related to Product:
N/A
- Not Related to Product:
N/A
- Related to Process:
N/A
15. Trade Product Identification:
Cultural-based media such as books and music
16. Economic Data:
According to The Washington Post, the bookselling market is nearly saturated with Borders Books alone operating more than 1200 stores, while the Canadian market for book "superstores" and chains is relatively untouched with the Canadian English-speaking population being about 22 million people (Trueheart A18:1996).
17. Impact of Trade Restriction:
The impact of the trade restriction is that US booksellers will not be allowed to operate in Canada because of the cultural exceptions that would be laid out in the MAI. This would be a lost opportunity for Borders to market a new 22 million customers. Actual figures are not available due to the fact that there are no prior U. S. operations with which to compare the new "restrictions."
18. Industry Sector:
SOTH: media, such as books and music
19. Exporters and Importers:
- Case Exporter:
United States
- Case Importer:
Canada
20. Environmental Problem Type:
N/A
21. Name, Type, and Diversity of Species:
N/A
22. Resource Impact and Effect:
N/A
23. Urgency and Lifetime:
N/A
24. Substitutes:
N/A
25. Culture:
Canada believes that their national culture is being deteriorated by an infusion of American media. With the sale of American-written books, there is less need for Canadian authors and publishing companies. Thus, Canadian literature will be altogether lost in the popularity of the many professional American writers.
26. Trans-Boundary Issues:
NO
27. Rights:
NO
Bloomburg Business News. "U.S. book giant buys into Chapters," The Gazette (Montreal). June 28, 1996. D7.
Canadian Department of Justice. Investment Canada Act. . April 14, 1999.
Canadian Press, The. "Superstore Borders headed to Canada," Ottawa Citizen. December 6, 1995. C10.
Organization for Economic Cooperation and Development. Multilateral Agreement on Investment. . April 14, 1999.
Trueheart, Charles. "Canada Turns Down Borders Book Chain Expansion," The Washington Post. February 10, 1996. A18.
Turner, Craig. "Canada doesn't want U.S.-based bookseller to cross its borders," The Los Angeles Times. February 10, 1996. D1.
Wildavsky, Benjamin. "Culture Clashes," The National Journal. Vol. 28, No. 12: March 23, 1996. 648.
