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PostPosted: Sun Mar 11, 2007 3:51 pm    Post subject: Swaddled in nanny nation Reply with quote

Swaddled in nanny nation


Swaddled in nanny nation

Canada's tangled subsidies and trade restrictions are stunting economic growth and cheating consumers

Jacqueline Thorpe And Peter Koven
National Post

Saturday, March 10, 2007

While the developing world is embracing free trade and globalization, the Canadian economy is still protected by a vast array of foreign ownership restrictions, corporate subsidies, marketing boards, provincial trade barriers and other regulations that coddle domestic companies at the expense of the consumer. In a three-part series beginning today, the Financial Post investigates why it may be time for governments to consider a radical new notion -- putting the consumer first.

Daniel Lenko should be a happy man. His 2002 Syrah was recently named by Jancis Robinson, a British wine authority, as Canada's best wine, with a "wonderful purity of flavour, ripeness and density of fruit" that would stand up well to a top Crozes Hermitage from Cote du Rhone.

But the founder of Daniel Lenko Estate Winery in Beamsville, Ont., isn't satisfied. Under Ontario law, he can't open a retail outlet to sell his wine, and consumers can't buy alcohol in grocery stores or corner shops in the province.

His wines were available at Liquor Control Board of Ontario outlets, but the 60% tax and mark-up the monopoly took off made it uneconomical for a winery of his small size. The only way for consumers to get a taste of his product is to drive to Beamsville and buy it from his winery store.

"You can say I'm famous, I'm rich, but those two words don't go together," Mr. Lenko says.

It is ironic that the heavy hand of government regulation at home is preventing Canadian consumers from reaping the full spoils of an industry that has radically improved the quality of its product under the pressure of free trade from abroad.

But a provincial liquor monopoly is not the only government economic policy that is thwarting the Canadian consumer.

While the developing world is opening up to free trade and globalization, the Canadian economy is still protected by a vast array of foreign ownership restrictions, corporate subsidies, marketing boards, provincial trade barriers and other regulations that coddle domestic companies.

The result has been higher prices and less choice for consumers, less innovation and lagging productivity growth, say economists interviewed by the Financial Post. Lagging productivity growth is one of the key reasons Canada's per capita income is now $9,200 below the United States, the gap having tripled since the early 1980s, Ontario's Institute for Competitiveness and Prosperity (ICP) said last week.

The issue has become the subject of intense focus for the country's top policy thinkers over the past year. Preston Manning, former leader of the old Reform Party, and Mike Harris, former premier of Ontario, have issued a report called Building Prosperity. The Conference Board of Canada has put out The Canada Project, Mission Possible: Sustainable Prosperity for Canada and last week ICP held a conference on Canada's prosperity challenge. All have offered policy prescriptions, saying one of the best ways to boost productivity is to stop coddling Canadian companies, let loose the forces of competition and shift the focus of government policy to consumers.

"We haven't had a voice in Parliament in over 10 years," says Bruce Cran, president of the Consumers' Association of Canada. "There's no Cabinet minister that represents consumers in a meaningful way. The office of consumer affairs is a very minor section of the Industry Ministry. It's totally unacceptable and has huge conflicts in every instance. Not only are we not represented, we deal with the Minister of Industry."

On Thursday, even David Dodge, governor of the Bank of Canada, weighed in, calling for more flexibility throughout the economy, especially in labour markets.

"We need legal and regulatory frameworks in place that encourage competition and allow market incentives to flow through," he said in a speech in Calgary.

Investing in Canada isn't easy for foreigners. A recent report from the Organization for Economic Cooperation and Development said Canada has the most restrictive barriers to foreign direct investment in telecoms and the second-most in air transport among all member countries. It also rapped Canada on the knuckles for keeping foreign competition in banking restricted.

"In banking, telecom, transportation, they're all closed to international competition," says Walid Hejazi, assistant professor of international business at the University of Toronto's Rotman School of Management. "Those are the industries that grease the economy. If we did lift regulation against those, you would have this big influx of capital into those industries. And that would really raise the stock of inward investment that the Canadian government is trying to attract."

In telecom, foreign ownership by international carriers is capped at 20%, and they are effectively blocked from making major forays into Canada. The result: Some of the highest fees in the world. OECD statistics show that a moderate cellphone user in Canada pays a monthly fee of $48 a month. In Denmark it's $9.

Of course, Canada has the Canadian Radio-television and Telecommunications Commission, whose

mandate is to regulate competition in the sector. But Jeff Church, an economist at the University of Calgary, says the CRTC "fails Canadians miserably." It sets prices artificially high, which pleases incumbent companies here but is a barrier to new entrants, he says.

"The twisted logic was higher prices bring more competition and competition's good," he says. "It's the exact opposite! Competition brings lower prices, and if we have to pay for competition through higher prices, we don't want it."

In the banking industry, government rules make it difficult for such global giants as Citigroup Inc. to get a major foothold in Canada and offer, for example, more competitive fees.

The Federal Bank Act says that no individual investor can own more than 10% of a bank, and foreign holdings cannot exceed 25%. International banks can and do operate here, but the incumbent Canadian institutions are so entrenched that establishing a significant presence here is prohibitively expensive.

Of course, it works the other way as well. Canadian banks are not allowed to merge with each other and gain the scale of their larger foreign rivals. That makes it more difficult for them to gainmuch traction when they expand outside Canada, and some have suffered numerous failures on the international front.

The solution, competition experts say, is to strip out both the merger restrictions and the international competition limits. The result would be global champions in Canada offering lower fees and better service.

"People need to understand that if you want to have banks that are owned and controlled by Canadians, and those banks are going to be less efficient, it's costly," says Mr. Hejazi. "We can have that if that's we want. But Canadians need to be educated that is a cost."

It's not just foreign ownership restrictions that protect Canadian companies. High tariffs and supplymanagement boards still swaddle parts of Canada's agricultural industry.

The Conservatives have maded clear they want to get rid of the Canadian Wheat Marketing Board and adopt a more free-market approach to selling domestic grain. But the minority Tories have refused to tackle the marketing boards that keep consumers paying higher prices for two other key staples: milk and poultry. Import tariffs on milk are 241%, 299% on butter, 245% on cheese, 237% on yogourt and 238% on eggs.

Jason Clemens, director of fiscal studies at the Fraser Institute, says low-income families pay the heaviest price. "They're paying the price through higher prices for milk and butter and cheese and staples. If you ask the average Canadian if we should give these producers a monopoly price for their goods but poor people are going to pay for it, I don't think Canadians by and large [would] support that."

Farmers argue marketing boards offer guaranteed supply at reasonable prices. But Michael Hart, international trade expert and professor at Carleton University, says in reality, they stunt choice and access for consumers and food processors, limit innovation and retard adjustment to change. They are also unfair to other farmers who are sacrificed during international trade negotiations and even to efficient farmers who want to expand.

One argument put forward by farmers who want to maintain protection is that other countries, especially the United States, heavily subsidize their farmers.

"If the United States wants to subsidize an inordinate amount to cotton growers and if we want to trade for that cotton, then essentially what we're getting is the U.S. taxpayer subsidizing our use of cotton," says Mr. Clemens. "How is that a bad thing for Canadians, if we're getting cheaper cotton?"

Economists say a renaissance could occur if the milk, poultry and wheat industries were opened to market forces. In Canada, many farms would likely be consolidated as producers search out the economies of scale. The myth and romance of the family farm may fade into the sunset as larger argibusinesses moves in but new industries would also spring up.

Now, for example, Canadian wheat producers in the West can't sell their produce directly to Canadian processors. But there is a tier of pasta and food processors in the United States huddled along the Canadian border who are busy turning Canadian wheat, sold to them through the wheat board, into noodles and other products, says Barry Cooper, political science professor at the University of Alberta. Why can't the same value be added on the Prairies?

"We could be pasta giants in the world," Mr. Cooper says, only half joking.

One of the most flagrant ways Canadian industry is being coddled is through corporate subsidies.

In its recent publication On The Dole, the Canadian Taxpayers Federation calculated that between 1982 and 2005, Ottawa authorized $18.4-billion in grants and loans to various companies and organizations, of which $7.1-billion was repayable. To date, less than $1.3-billion has been repaid.

The top recipient was Pratt & Whitney Canada Corp., which was funnelled $1.5-billion during those years, followed by Bombardier Inc., which got $745-million.

What the figures show is quite simple, says John Williamson, federal director of the CTF: "Government officials just aren't capable of finding those companies that will in fact earn a return on corporate handouts."

Proponents of government subsidies argue that they create jobs, encourage research and development and spur economic growth. But often, the opposite happens.

CTF cites the auto sector as a prime example of failed corporate welfare. General Motors of Canada Ltd. and Ford Motor Co. of Canada Ltd. have received hundreds of millions of dollars in handouts from the Canadian government. But that hasn't stopped them from wrenching restructurings and slashing thousands of jobs as they find themselves unable to compete with their more efficient Asian competitors.

Recently, Prime Minister Stephen Harper announced that $350-million of the government's new $1.5- billion eco Trust fund to support provincial projects to cut greenhouse gases would go to Quebec, quite conveniently ahead of the provincial election.

So what would happen if Industry Canada abolished its corporate subsidy program?

It could realize annual savings of $2-billion to $4-billion, or enough for a two- to three-percentage point cut in corporate income taxes, says the CTF, a hefty cut that would benefit all businesses.

Interprovincial trade barriers are also inhibiting Canadian competitiveness at the expense of consumers --and workers.

"Probably of all the markets in Canada that are cluttered up with regulation, the labour market would be the biggest one and it's the workers themselves and employers that are penalized by the difficulty of moving from province to another," says Mr. Manning in an interview.

While Section 121 of Canada's Constitution prohibits tariff-based barriers to trade within the country, it says nothing about non-tariff barriers. And for 130 years provinces have erected a spider's web of licensing requirements, product standards and other rules and regulations that protect their own workers and local markets.

They have been aided by the fact that provinces have jurisdiction over labour. The OECD estimates more than 50 Canadian professions and 100 trades are regulated in more than one province.

Regulations governing the shipping of hay, for example, show how goods trade is thwarted, too. An Albertan farmer must restack his load to meet British Columbian standards when he crosses the border. The farmer could, however, take his load down into Montana, then through Idaho and then into B.C., without restacking.

A landmark Trade, Investment and Labour Mobility Agreement between Alberta and B.C. should go a long way to eliminating such barriers when it goes into effect next month. The Conference Board of Canada estimates it could add $4.8-billion to gross domestic product and create 70,000 jobs.

Analysts say other provinces could join, or more regional agreements could be made between Ontario and Quebec, or the Atlantic provinces, for example.

But there may be one way for the federal government to push the issue -- take it to the Supreme Court.

"We suggest a reference to the Supreme Court as to what power the federal government has to knock down the barriers," Mr. Manning said.

It is provincial policy that prevents Mr. Lenko of Daniel Lenko Estate Winery from being able to sell his wine at the local grocery store.

The wine industry did everything right to fight off cut-throat competition from the United States under the Free Trade Agreement. It ploughed under all its sour old grapes, spent heavily to hire winemakers and bring in new technology, eventually creating a thriving industry.

Yet because the provincial government insists on maintaining its alcohol monopoly the only viable place for Mr. Lenko to sell his wine is from his farm.

It's hard to see how Canadian consumers benefit from that.

"When you deregulate and allow foreign competition and break up domestic monopolies, what ends up happening is companies that want your business will work so much harder for it," says Mr. Hejazi. "They'll be more productive. And who will win in the end? The customer."

- - -



How subsidies and trade restrictions are coddling Canadian businesses and harming consumers.


Open Skies? Not in Canada. The coddling of our airlines, and why some don't like it.


Compare cellphone rates with other countries and ask why you see such a difference.

Trade barriers and corporate welfare, Pages FP4-6
National Post 2007

Joined: 30 Oct 2006
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votes: 5
Location: Nova Scotia

PostPosted: Sun Mar 11, 2007 4:07 pm    Post subject: Reply with quote

I thi k it's an interesting article, it may explain why transfer payments are occuring, so long as the free market is not allowed to flow such as allowing beers & wines to be sold & bougt in reguilar retail stores. The article also proves that while jobs were created during the Liberal mandate of 13 years protectionist policies have prevented many other potential jobs such the creation of noddle factories from taking shape thereby proving that the left as Canada's saviour for employment is a myth. I hope Harper being the descent Prime Minister he is changes Canada's policies towards a freer market, the amritimes should also benefit with this.

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PostPosted: Sun Mar 11, 2007 11:57 pm    Post subject: Reply with quote

Great article! Can you post up the other two parts when they're published?


Joined: 30 Oct 2006
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PostPosted: Mon Mar 12, 2007 7:55 am    Post subject: Reply with quote

Mac wrote:
Great article! Can you post up the other two parts when they're published?


Once I find them!

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PostPosted: Mon Mar 12, 2007 8:14 am    Post subject: Reply with quote

The sky that's limited
Chris Sorensen, Financial Post
Published: Monday, March 12, 2007

While the developing world is embracing free trade and globalization, the Canadian economy is still protected by a vast array of foreign ownership restrictions, corporate subsidies, marketing boards, provincial trade barriers and other regulations that coddle domestic companies at the expense of the consumer. In a three-part series, the Financial Post investigates why it may be time for governments to consider a radical new notion -- putting the consumer first.

Singapore Airline is widely regarded as one of the world's best air carriers, but many Canadians haven't a clue why.

That's because the customer service-oriented airline has been limited to serving one Canadian destination-- Vancouver -- a maximum of three times a week since 1992.

It's a situation that bewilders Campbell Wilson, the airline's vice-president for Canada, given the growing appetite for travel to and from Asia, where Singapore Airlines offers a vast network.

He chalks it up to a decade-old dispute with Air Canada, which complained in the early 1990s that Singapore Airlines, now a Star Alliance partner, was stealing its business through Toronto.

"There seems to be a concern about whether it will disrupt the local industry," Mr. Wilson says. "The consumer comes second."

Similarly, many Canadians have yet to experience another of the global industry's success stories: Emirates, a rapidly growing air carrier that aims to connect the world through its Dubai hub.

Emirates has said it's eager to add Toronto to its ballooning network, but is constrained by Ottawa's bilateral agreement with the United Arab Emirates, which currently limits the airline to three flights a week.

Not only are Canadian consumers missing out on the opportunity to fly two industry-leading carriers, but both airlines operate in parts of the world where Canada's airlines have little direct presence. That includes India, Africa and Southeast Asia.

Such is the logic behind the country's historically protectionist aviation regime -- an approach that was once the global norm, but is increasingly becoming an anachronism as more countries pursue "open skies" models that promote, rather than limit, competition in the interest of bolstering consumer choice.

While the federal Conservative government has pledged to pursue more liberalized bilateral accords, some say the time has come to consider more radical measures, including a unilateral decision to open our skies to whoever is interested in flying them.

The idea is that Canadians would benefit more from cheap air fares and a plethora of options than they do from flying across the country on planes that sport a maple leaf.

Anyone who has flown in Europe over the past decade knows there are tangible benefits to promoting airline competition. Thanks to deregulation and a single European Union aviation market, European air carriers are basically allowed to fly wherever they want inside the EU, as often as they want, charging as much or -- more often than not -- as little as they please.

The sky that's limited
Chris Sorensen, Financial Post
Published: Monday, March 12, 2007
While the shift has been tough on traditional carriers -- some, such as Belgium's Sabena, have gone out of business -- it has been a boon for travellers who now use airplanes like other people use buses.

Discount airlines such as Ireland's Ryanair, England's easy Jet and dozens of others routinely offer deeply discounted fares between major European cities -- and many minor ones -- that are equivalent to the price of an average taxi cab ride to the airport.

As a result, it's becoming increasingly common for Londoners, who are at the epicentre of the European discount airline industry, to zip away for a dinner in Paris, shopping in Milan or a night on the town in a former Soviet state. Others take advantage of cheap air fares to make weekly commutes to and from work in another country.

Not so in Canada, where the cost of domestic flying still makes air travel an indulgence for many. As well, travel options can be severely limited when trying to reach certain regions of the globe.

"In general terms, protective markets don't help customers," says Doug Reid, a professor at Queen's School of Business.

To its credit, the federal government, led by Prime Minister Stephen Harper, appears to have recognized that Canada's aviation policy is fast becoming outdated, and has promised to push things in the direction of more competition.

Transport Canada last November unveiled a new "Blue Sky" international aviation policy that pledges to make open-skies agreements with other countries a priority. At present, Canada has signed two open-skies accords, with the United States and the United Kingdom.

The United States, by contrast, has nearly 70 such accords in place.

But the pace of change can be slow, in part because bilateral aviation agreements are complicated beasts prone to political meddling. The United States, for example, has spent four years haggling with the EU over an open-skies pact, with stakeholders on both sides of the Atlantic worried the agreement is favouring the other.

Still, doing nothing is not an option, observers say.

"Canada has got to get moving on this," says Jim Facette, head of the Canadian Airports Council, which has been pushing hard for liberalization over the past year.

Not only are Canadians missing out on more and cheaper flight options, he argued, but the country's tourism industry risks missing a golden opportunity to cash in on overseas visitors.

Non-North American tourists are becoming increasingly important as U.S. citizens, historically the biggest tourism market for Canada, opt to stay home because of a slumping greenback, post-9/11 security measures and new passport regulations, Mr. Facette said.

"We've got to open our eyes and see the opportunities out there."

- - -

Ottawa's Blue Sky policy, while a step in the right direction, falls well short of making Canada a truly open airline market.

For one thing, it doesn't entertain the idea of cabotage rights, which would permit foreign airlines to fly between Canadian cities. The mere mention of the word is enough to give the Canadian airline industry a heart attack.

The sky that's limited
Chris Sorensen, Financial Post
Published: Monday, March 12, 2007
While major players such as Air Canada and WestJet Airlines Ltd. regularly boast about their competitive strengths, neither is fond of the idea of going head-to-head with international competitors in their home market. Why would they?

In fact, the only way the airline industry says it would be comfortable talking about cabotage would be with guarantees that other countries -- namely the United States -- would offer similar access. Even then, the level of enthusiasm can best be described as tempered.

"WestJet pretty much has the lowest sustainable costs in North America," said Sean Durfy, WestJet's president, in an interview. "So if the playing field was level, you could compete. All the economics say you could."

However, Mr. Durfy stressed that it would be necessary for Ottawa to cut its excise tax on jet fuel -- at least two recent studies have suggested jet kerosene is taxed at a higher rate in Canada than it is in the United States -- and rethink its policy on requiring the country's airport authorities to pay the federal government millions in airport rent every year, a cost that is passed along to airlines and their passengers.

He also said that, in addition to guaranteeing reciprocal cabotage rights, Canadian carriers would require assurances they could gain access to gates at busy U.S. airports, which can be difficult to wrest away from established U.S. carriers.

"It would take a tremendous effort by all parties, but you could not go into this without an equal playing field. It just wouldn't work." Or would it?

Prof. Reid argues that it shouldn't matter what happens south of the border if the goal is to provide Canadians with better and cheaper flight options. In other words, as long as foreign-controlled airlines meet Ottawa's safety standards, they should be able to fly here.

"Saying that we'll wait for the Americans to do it is a convenient diversion from the fact that the economics of enabling free trade for airlines would be very beneficial for Canadians."

While a strong domestic airline industry is a critical part of the country's transportation infrastructure, Prof. Reid argues there's no reason why the airlines providing the service need to be Canadian-owned or operated. It makes about as much sense as forcing Canadians to buy Canadian-built computers, he said.

Air Canada declined to comment, but Robert Milton, CEO of parent ACE Aviation Holdings Inc., has publicly mulled "whether the basic regulatory foundation of the airline industry ... needs to be not only modernized, but turned on its head."

Yet even without the kind of fundamental global change Mr. Milton was alluding to there is ample room for Ottawa to improve the competitive landscape for the benefit of Canadian travellers, observers say.

The airport council's Mr. Facette put it this way: "We've got to modernize, or else we're going to lose out on the opportunity and choice that comes with more liberalized regimes around the world."




How subsidies and trade restrictions are coddling Canadian businesses and harming consumers.


Open Skies? Not in Canada. The coddling of our airlines, and why some don't like it.


Compare cellphone rates with other countries and ask why you see such a difference.
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