What We Can Learn About Open Markets From Wine and Wheat

Commentary, Agriculture, Frontier Centre

Canadian history is filled with tales of protected industries destined for oblivion because of free trade, foreign threats or lost subsidies. But the worst-case scenario rarely plays out as predicted.

Consider two prominent examples from the past quarter-century: the advent of free trade for Ontario’s wine industry and the end of the subsidized freight rates for Western grain farmers. In both cases, disaster was predicted. Yet both sectors adapted and emerged stronger.

There is a lesson here for other Canadian industries that remain shielded from the full impact of the competitive pressures other businesses face every day. Think about broadcasting, wireless, banks and vast swaths of Canadian agriculture.

The conventional wisdom is that these sectors are so vulnerable, or so special, that they need the protection of Big Brother. There may also be a touch of collective economic inferiority – a sense that these sectors aren’t innovative enough to make it on their own. But the experience of the grain and wine industries shows that open markets are not a death sentence.

In the mid-1990s, grain farmers lost the preferential Crow freight rate, a pillar of Western agricultural policy for nearly a century and a relic of the building of the Canadian Pacific Railway. And last year, Ottawa ended the Canadian Wheat Board’s monopoly on marketing grain.

The end did not come for farmers. Canada remains a global wheat-exporting colossus.

The rise and fall, and subsequent rebirth, of the wine industry is even more telling. In the mid-1980s, Canada was a high-cost producer of plonk. High tariffs and discriminatory pricing policies of the Liquor Control Board of Ontario kept the industry afloat.

Those protections disappeared in the face of a successful trade complaint brought by the U.S. and Europe, followed by the 1989 Canada-U.S. free-trade agreement.

Grape growers and wine makers said their world would end.

That’s not what happened. Ottawa provided nearly $50-million in transition assistance. Growers used the money to rip out their hardy labrusca vines and replaced them with higher quality, wine-making vinifera vines.

More than 8,000 acres of grapes were removed in Ontario alone. The number of growers dwindled to 478 in 2011 from more than 800 in 1986.

But the end result was more vines and higher grape prices. Wine production soared.

More importantly, the transformation created a viable industry, producing quality wines that Canadians wanted to buy, and drink.

The industry now generates $1.2-billion a year in revenue across the country – more than three times what it did before free trade. The number of wineries has grown rapidly to nearly 500 in 2011, according to a recent industry-funded economic impact report, up from a few dozen in the mid-1980s. And the industry has expanded to British Columbia, Quebec and Nova Scotia.

Ottawa’s transition help has been repaid several times over through tax revenues and markups at provincial liquor stores.

Most Canadian wine, with the exception of ice wine, is still sold domestically. But the bottom line is that Canadian wineries now compete on a level playing field in a marketplace dominated by imported wine, and they’re thriving.

Canadians shouldn’t assume that disaster will ensue if Canada’s mobile or banking markets are exposed to more foreign competition.

Similarly, there is no reason Canadian dairy and poultry farmers wouldn’t survive, and even thrive, without the massive tariff wall that now keeps out most imports.

That doesn’t mean that Canada should recklessly and unilaterally open its borders to all comers, without regard to the consequences.

But policy makers should at least be investigating the risks, and the opportunities, of more open markets. What would happen to the banking industry if a foreign financial institution acquired one of the major banks? How might the government phase out the supply management regime in dairy and poultry, and what would it cost? Are there still good policy reasons for maintaining foreign ownership restrictions in the wireless industry?

The government doesn’t know because it isn’t asking these questions, at least not in public.

Doing that groundwork now would put Ottawa in a better position to control what happens down the road. That’s what it did with wine and grain.