Walled From the World: Too many industries are still protected from foreign competition[y[;

Commentary, Frontier Centre, Regulation, Worth A Look

One of my favourite government reports in the past several decades was Compete to Win, a 2008 document developed by an Industry Canada committee chaired by Red Wilson, a former CEO of Bell Canada. Its intent was to address our lagging productivity performance, which has remained a challenging problem despite the much better fiscal policy climate created by governments in the past decade and half.

The Wilson report promoted increased competition among Canadian businesses to improve innovation and economic performance. It was a brilliant insight heeding Adam Smith’s invisible hand that became the basis for understanding competition’s critical role in industrial growth. Some of these ideas have entered into public policy, including the elimination of the Canadian Wheat Board trading monopoly, new negotiations of free trade agreements and the removal of some tariffs on imported goods and interest withholding taxes.

Nevertheless, Canadians, following the 2009 recession, are forgetting the importance of the Wilson recommendations. We are becoming far too tolerant of industrial policies that protect businesses and their management from competition. As a result, many business leaders, with cozy government support and little economic pressure to develop new processes and products, have failed to be sufficiently innovative.

Perhaps this is a leftover of the John A. Macdonald industrial policy, which protected manufacturing industries from foreign competition, including through the nationalization or subsidization of public companies to create national champions. However, Canada is no longer the primitive capital-importer with infant industries that cannot compete at a global scale. Many Canadian-controlled global companies operate today, typically in industries that are little protected from ­competition.

Protected industries today account for a significant share of Canada’s GDP. If the Occupiers ever figured out that these industries’ various regulatory, tax and ownership regimes are really about protecting incomes paid to some management or owners in protected markets, they would face a more receptive audience among those who understand the importance of capitalism in generating ideas and economic growth. Instead, Occupiers focus on more regulations, higher taxes and government ownership, policies that undermine innovation and productivity.

Take the utility industry. Outside Alberta, provincial power generation and distribution companies are generally state-owned enterprises that focus on Canada with relatively little penetration in foreign markets. Electrical markets are messy, with little innovation except for highly subsidized alternative energy markets that are not otherwise competitive. Yet, some Canadian power companies have shown they can compete internationally — Alberta’s ATCO has become a significant player in Australia, for example.Advertisement

The communications sector is also protected by regulation and Canadian ownership rules: Management faces little possibility of takeover and competition from foreign companies. While the world can talk about Apples, RIMs and IBMs that face competitive pressures of various sorts, our Ma Bell, as good as she gets, is not an international superstar. Telephone companies do face some domestic competition from Rogers and Telus, a significant change from state-dominated telephone companies of yesteryear, except for Sasktel, which remains a slow-to-innovate state-owned enterprise.

Add on the transport sector. Canadian ownership and licensing restrictions are required for ­airlines, taxis, buses, helicopters and passenger trains. When CN was privatized, an inefficient ­domestic train company became a North American success. We also see the value of competitive ­markets with the latest proxy ­battle at CP, which has resulted in the replacement of its management.

Add on the finance and insurance sectors, protected from foreign ownership and competitive entry. While more competition has been promoted since the 1970s, when it was impossible to become a new bank, regulations severely restrict new entrants in banking. The protected domestic market has enabled financial institutions to earn good domestic profits at a cost to depositors and borrowers, who support their international operations. Some other countries have more competitive financial markets without undermining the regulations needed to ensure financial stability.

Canada’s latest protectionist salvo involves the potential creation of a new public utility formed by the acquisition of the TMX, Alpha and CDS operations by Maple Group. Initially, the acquisition was meant to create a national champion by forestalling the merger of the TMX with the London Stock Exchange. ­Instead, we may see the conversion of a dynamic competitive market into a regulated utility, saddled with rules to protect consumer ­interests. Hopefully, the federal Competition Bureau will put the kibosh to this arrangement.

This is not the end of the story. Dairy, poultry and egg marketing boards protect small-scale farmers from foreign competition, resulting in excessively priced products, many of them sold to domestic consumers in lower-income families. Yet, New Zealand and Australian producers, facing much more competition, now are major exporters to Asia as well as serving local markets. Canada doesn’t have to be insular. When the Saskatchewan Wheat Pool was privatized, we ended up with a global company, Viterra, that was eventually subject to a takeover. Canadian owners and workers benefited.

If it isn’t ownership restrictions or regulations limiting new entry, it is government subsidies and tax preferences to protect Canadian businesses from the vagaries of the market. Accelerated depreciation and investment tax credits for manufacturing and resource companies, withholding taxes on income paid to foreign investors and dividend tax credits for Canadian resident companies all add up to one giant system of protecting Canadian companies from competitive forces.

It is time to limit, not enhance, the various regulations, fiscal measures and public ownership rules that constrain competition. Federal and provincial governments should start dismantling protection one step at a time.