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How Donald Trump Gave Canada a “Get Out of Jail Free” Card – Hugh Stephens Blog

Now that US Trade Representative (USTR) Katherine Tai in her recent meeting with Canada’s International Trade Minister Mary Ng has officially taken notice of the Online Streaming Act (Bill C-11), (“Ambassador Tai expressed concern about…pending legislation in the Canadian Parliament that could impact digital streaming services“) this raises the question as to whether aspects of the Bill might violate commitments Canada has made under international trade agreements, such as the updated NAFTA, known as CUSMA. We don’t know what concern was expressed by the US—it may simply have been a shot across the bow to let Canada know that USTR is carefully watching to ensure that any impact on US interests is taken into account as the legislation wends its tortuous way through the Canadian parliamentary process —but there is no question that whatever actions are taken by Canada regarding digital streaming services, they will not constitute a violation of the CUSMA/USMCA. They could, however, have violated Canada’s commitments under the Trans-Pacific Partnership (TPP) but Donald Trump inadvertently came to Canada’s rescue. More on this below.

Any measures taken by Canada to regulate US streaming services under CUSMA, even if discriminatory, would not violate the terms of the Agreement because of CUSMA’s cultural exemption clause. Under this clause, Article 32.6(2), aka Paragraph 2, the Agreement does not apply to any actions taken by Canada that relate to cultural industries (with two minor exceptions). The definition of cultural industries includes;

the production, distribution, sale, or exhibition of film or video recordings; the production, distribution, sale, or exhibition of audio or video music recordings”; and “all radio, television and cable broadcasting undertakings and all satellite programming and broadcast network services

There is, however, a sting in the tail of this exemption in the form of Paragraph 4 (Article 32.6 (4)

Notwithstanding any other provision of this Agreement, a Party may take a measure of equivalent commercial effect in response to an action by another Party that would have been inconsistent with this Agreement but for paragraph 2 or 3…” (Paragraph 3 allows the US or Mexico to take similar non-compliant actions to those taken by Canada if Canada initiates measures that violate the terms of the Agreement).

This retaliatory clause allows the US or Mexico to take equivalent economic measures against Canada in any area if Canada takes an action with regard to a cultural industry that would have been inconsistent with the Agreement but for the exemption clause. In other words, if Canada takes discriminatory measures against a US or Mexican entity in the name of protecting Canadian culture, negating a “national treatment” commitment it has made under CUSMA, it would not be obliged to reverse this measure, but it could suffer economic retaliation for having done so.

The “sting in the tail” comes from the original Canada-US Free Trade Agreement (FTA) of 1987, and was the compromise achieved at the time to allow the Canadian government to say that cultural industries were not covered by the FTA while providing a strong disincentive to override commitments in the Agreement in the name of protecting culture because of the punitive retaliation that could be exacted. (It is also worth noting that if Canada did take measures that negated provisions of the CUSMA, calculating the “equivalent commercial effect” would be a difficult and controversial process. Depending on the measure taken, it could be very difficult to measure what commercial impact it might have).

Therefore, while the CUSMA allows Canada to override commitments it made in the Agreement with respect to digital streaming services, the question is, would it do so given the potential cost?

And what are those commitments? They are spelled out clearly in CUSMA, Article 19.4;

“No Party shall accord less favorable treatment to a digital product created, produced, published, contracted for, commissioned, or first made available on commercial terms in the territory of another Party, or to a digital product of which the author, performer, producer, developer, or owner is a person of another Party, than it accords to other like digital products.”

This is a so-called “national treatment” commitment. You must treat a foreign product or entity no less favourably than the domestic equivalent.

While under CUSMA Canada retains the flexibility to undertake discriminatory measures against US streaming services (although subject to the constraint of retaliation), other trade commitments it made in the past would have clearly made it a treaty violation to do so, not only against US services, but also against streaming services from a number of other countries. This was the commitment Canada made in the 2015 Trans-Pacific Partnership (TPP) agreement whereby it would not adopt or maintain measures that imposed discriminatory requirements on service suppliers or investors to make financial contributions for Canadian content development.

In the TPP, which Canada joined late in the process thus reducing its negotiating leverage, it was unable to secure the kind of blanket exemption for cultural industries that it had negotiated in the original Canada-US FTA and NAFTA (and replicated in the CUSMA). Therefore, it took “reservations” on a chapter-by-chapter basis, specifying which areas would be exempt from commitments made in that chapter. In the chapter of the TPP dealing with Cross Border Trade in Services, Canada made the following reservation or exception;

“Canada reserves the right to adopt or maintain a measure that affects cultural industries and that has the objective of supporting, directly or indirectly, the creation, development or accessibility of Canadian artistic expression or content…,”

However, the US insisted on an “exception to this exception”. It read;

“…except:

(a) discriminatory requirements on service suppliers or investors to make financial contributions for Canadian content development; and

(b) measures restricting the access to on-line foreign audio-visual content.”

Canada had come late to the TPP negotiations which were well underway by the time it expressed interest in becoming a Party to the Agreement. US trade officials were not keen on adding Canada to the TPP mix but Prime Minister Harper reached out at the political level to President Obama and in 2012 Canada was finally admitted to the process. One of the conditions that Canada accepted was to agree to limitations on its ability to require foreign content providers to contribute to Canadian content development, while also renouncing the ultimate policy instrument of restricting access to foreign online audio-visual content providers. This latter concession was something not likely to be contemplated but was still a last resort measure that the Canadian government had now agreed to take off the table.

But then Donald Trump came to Canada’s rescue. In one of his braggadocio moments shortly after taking office, he withdrew the US from the TPP, effectively ending all prospects of the Agreement coming into force. The policy constraints that Canada had agreed to in the TPP regarding funding of Canadian content were now gone. After the US withdrawal, the other ten TPP members, led by Japan, decided to retain the main elements of the Agreement and to finalize a new text modelled largely on the original TPP, a process which eventually morphed into the renamed Comprehensive and Progressive Trans-Pacific Partnership, the CPTPP. Canada stayed “in the tent” and signed, then ratified the modified agreement. As part of the process of CPTPP finalization, however, Canada sought out and signed side letters with all the ten remaining members, nullifying the exception to the cultural exception. The other countries didn’t particularly care; the restriction had been imposed by the US and the US was no longer party to the Agreement.

The operative wording, taken from the side letter between Canada and Australia but identical to the side letters with all the CPTPP partners reads;

“Canada and Australia agree that, in continuing to give effect to the Agreement, notwithstanding the following language in Annex II – Canada – 16 and 17 – under the Cultural Industries Sector, first paragraph under the subheading “Description,” that states “except: (a) discriminatory requirements on service suppliers or investors to make financial contributions for Canadian content development; and (b) measures restricting the access to on-line foreign audio-visual content”, Canada may adopt or maintain discriminatory requirements on service suppliers or investors to make financial contributions for Canadian content development and may adopt or maintain measures that restrict access to on-line foreign audio-visual content.”

As a result, while Canada still has to bear in mind the restrictions placed on its policy options by the CUSMA with regard to requiring foreign (US) entities to financially contribute to the creation of Canadian culture in a way that could be discriminatory (unless it wants to accept the risk of economic retaliation), its firm commitment not to discriminate against foreign online service suppliers has disappeared. Canada has Donald Trump to thank for giving it extra policy flexibility as it grapples with the issue of regulating and requiring financial commitments from online streaming services and platforms. The removal of this commitment has thus provided the Canadian government with a bit more scope to deal with policy issues in the Online Streaming Act.

This still begs the question, however, as to whether Canada needs to discriminate against foreign streaming services in order to achieve the objectives of C-11. And what are those objectives exactly, you may well ask. Opinions are widely divided on the need for the bill, its impact and the means the government will use to achieve the stated goals of the legislation. There are a range of stakeholders, including of course the Canadian public, but also the Canadian broadcasting industry, Canadian content producers, foreign streaming services, various foreign internet platforms such as Youtube, Tik Tok, etc., and the government and its regulatory agencies. The legislation is complicated and tries to do a number of things. (Here is a concise summary from a leading law firm).

One of the outcomes of the bill, if it passes in its current form, will be a review of how Canadian content (Cancon) is defined, an issue that I discussed in a recent blog (Unravelling the Complexities of the Canadian Content Conundrum). Other elements include a requirement for “discoverability” of Cancon on streaming platforms, measures to require streaming services, both Canadian and foreign, to contribute a percentage of revenues to the creation of Cancon and greater authority for the broadcast regulator, the CRTC, to audit the books of broadcast undertakings. Behind all these measures is the fundamental objective of bringing online broadcasters such as streaming services (think Netflix, Disney Plus, Crave, CBC Gem etc) and social media platforms that distribute content under the purview of the Broadcasting Act, and thus making them subject to regulation by the CRTC.

We have noted that if Canada invokes CUSMA Article 32.6 to justify regulation of US streaming services, the US (and Mexico) could retaliate. However, for the retaliation to take place legally, the Canadian measure must be inconsistent with the Agreement but for the cultural exemption. This means that if Canada takes measures affecting cultural industries that apply to all players equally, both Canadian and non-Canadian, it is very likely that they would withstand a challenge under CUSMA/USMCA. Therefore, now that Canada is moving to classify online distribution of content as broadcasting, it needs to be careful to do so in a fully non-discriminatory manner, ensuring that regulatory measures apply equally to Canadian, US/Mexican, and other foreign entities.

It remains to be seen whether the Online Streaming Act (and the CRTC’s application of its expanded mandate flowing from the Act) will meet the non-discrimination standard. At the present time, for example, it is impossible for a foreign producer to produce anything that qualifies as Cancon because of the convoluted Cancon rules related to financing and intellectual property, yet US streaming services may be required to meet Cancon quotas just like their Canadian streaming counterparts. They may also be required to contribute to the production of content to which they themselves could never own the rights. Could this be considered discriminatory? The commitments it has made under USMCA/CUSMA Article 19.4 are clearly a factor the Canadian government needs to bear in mind when fashioning and implementing C-11.

What the final outcome will be remains to be seen. Most of the controversy over the bill to date revolves around whether user-generated content (UGC) is regulated. Critics charge that subjecting UGC to CRTC regulation will amount to censorship. The government maintains that the CRTC will not interfere with users or those posting content to platforms. Rather, the obligation will be on platforms to comply with discoverability and other requirements. With the bill now in the Senate for further review, it will take some time for this to play out.

In the meantime, the Canadian government will need to be careful to ensure that any obligations imposed on US online entities are non-discriminatory and consistent with national treatment or else it may open itself to a CUSMA challenge that could result in economic retaliation. (Quite apart from avoiding retaliation, I would argue that it is also good public policy to tackle the difficult issue of redefining broadcasting for the digital age through a fair and non-discriminatory approach.) CUSMA and possible economic retaliation aside, what Canada won’t have to worry about, thanks to Donald Trump, is being accused of directly violating a trade treaty commitment if it does impose a funding requirement on foreign streamers that turns out to be discriminatory. It’s like a “Get Out of Jail Free” card. Another ongoing Trump legacy.

© Hugh Stephens, 2022. All Rights Reserved.


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