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In between Curious Economics and l’exception culturelle: Implications of TAFTA | TTIP for the Cultural Sector

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This article was written by Markus A. Kirchschlager | Participating Expert at Internet & Society Collaboratory e.V. | | @extraverbal 

Abstract: The special role played by the cultural sector in free trade agreements is as old as trade liberalization itself. Informed by current negotiations on a transatlantic free trade area (TAFTA | TTIP), this article reviews the culture and trade debate and explains the economic characteristics of cultural products called “curious economics”. It argues that cultural products exhibit some distinct features that clearly distinguish them from other goods or services and highlights the “home market effect”, which gives a competitive advantage in international trade to the producers of cultural products in countries with large domestic markets. The second part briefly illustrates the genesis of the “cultural exception” in free trade agreements affiliated with the World Trade Organization (WTO) and touches on the background to the UNESCO Diversity Convention. In the light of France’s recent much publicized move for inclusion of l’exception culturelle in the TAFTA | TTIP negotiations, the article gives a critical examination of the usefulness of the special role of cultural products. It concludes by saying that, irrespective of whichever measures are preferred, the most important factor seems to be the preservation of cultural plurality as the basis for a well-functioning democratic society.


Berlin, the capital of Germany, is one of the most popular cities in the world right now because of its flourishing vibrant art, culture, and media sector, real engines of growth for the whole region. Besides the particular historical and structural features of Berlin, which are certainly one of the main reasons for the favorable conditions it offers, the German system of cultural promotion has been a major force behind the present boom of the city. But key tools for cultural promotion like fixed prices for books and a reduced rate of value-added-tax (VAT) for books, magazines and film funding could be revised in future.

In the current negotiations between the EU and the US for the Transatlantic Free Trade Agreement (TAFTA) or Transatlantic Trade and Investment Partnership (TTIP), both negotiating parties are seeking extensive trade liberalization in all sectors. Since a reduction in already low tariffs can hardly be expected to produce any economic growth (Felbermayr, Heid & Lehwald 2013), the agreement aims primarily at reducing so-called non-tariff barriers to trade. Thus, in the advent of a comprehensive liberalization of trade, there could well be legal grounds for contesting the promotion of the cultural sector by those companies, arguing that such promotion places them at a disadvantage.

The Culture and Trade Debate

The cultural sector is a highly complex but significantly increasing economic sector, although its contribution to the gross domestic product of a country (OECD approx. 5%, EU 2.6%) is far less than that of other sectors. Between 1980 and 1998, the global import of cultural products jumped by 347%, while between 2000-2005 the creative industry showed an average annual growth rate of 8.7% (Disdier et al. 2009, 576; Grant 2011, 337-338).

Every effort to liberalize the cultural sector has been met by controversy, as many states see the funding of cultural forms of expressions and cultural assets as a key resource of their societies. The discussion of the special role of cultural products in free trade is referred to as the “culture and trade debate”. Cultural products are seen as goods of a double character: they have both a tangible element, such as the platform of product format, and an intangible element, which determines their content and makes them reproducible as many times as desired. (UNESCO 2005b, 18). Hence, they are both creative performances and tradable goods (Schulz 2013a). In a special way, they facilitate self-reflection and discourse within society (Hahn 2006, 524). The trading of cultural products may be expected to have a substantial influence on the perceptions, values ​​and norms of the importing society (Disdier et al. 2009, 592). At the same time, trade in cultural products also contributes to cultural diversity within a society, because it increases the range of available cultural products (Hahn 2006, 520).

Even if in principle cultural products are subject to the same economic factors as other goods, they still have a number of particular features which can be aggregated as the “curious economics of cultural goods” (Crook & Micklethwait 2001). To start with, there is the difficulty of finding definitions: Are cultural products services or goods? Can the intangible value of cultural products be put in monetary terms? The UNESCO Institute for Statistics has found that only very few of current statistics give adequate expression to the intangible value of cultural products (UNESCO 2005b, 18). Even the place of origin of a cultural product is often hard to ascertain. Which is most relevant – the country where the intellectual value was created or the country where the final product, perhaps a data carrier, was produced (Grant 2011, 337)? On top of this, there are also difficulties in demarcating the borderline between the cultural sector and the more broadly defined creative industry. After all, doesn’t every product bear the imprint of culture in some way or another?

The audiovisual sector is a good example of the economic peculiarity of cultural products. Basically, it is characterized by three main special features: Firstly, the theory of comparative advantage generally won’t work in the field of cultural products. The theory is based on the assumption that products are not only comparable but substitutable and that the efficiency of production can be derived from comparing the marginal costs of one unit. Both assumptions cannot be applied to cultural products because their culture-specific content renders them non-substitutable, their value is linked to their intellectual content, and the marginal cost for each additional copy tends towards zero (Grant 2001, 341-342; Sauvé & Steinfatt 2000, 331 -332).

Secondly, due to the low marginal costs, producers who can rely on a large number of customers have at their disposal much larger production budgets and can cover their production costs more easily. This phenomenon is also called the “home market effect” (Sauvé & Steinfatt 2000, 329-330; Rauch & Trindade 2005, 1; Grant 2011, 338-340). In the case of the US, the English language home market is large enough to allow producers to offer audiovisual products at dumping prices abroad, even though their productions are usually more expensive and lavish than those of countries with a smaller domestic market. Consumers in the importing countries reinforce this effect as they usually tend to favor high budget audiovisual products like movies with high-tech special effects (Sauvé & Steinfatt 2000, 329-330).

Thirdly, unlike many other goods, cultural products are meant for social consumption. This means that the consumption of cultural products can affect the attitude or behavior of consumers and these in turn influence other consumers. This is the principle on which all forms of advertising are based (Sauvé & Steinfatt 2000, 333; Rauch & Trindade 2005, 2-4). From an economic perspective, this means that networking effects (externalities) are especially prevalent in the consumption of cultural products. From a social perspective, these effects can be both positive and negative – either enhancing welfare or causing costs. In both cases, however, the exporter of the cultural product is not affected by the network effects. Consequently, in the case of negative network effects, producers can fix the price of a cultural product below the price of overall social or economic costs it actually causes (Sauvé & Steinfatt 2000, 333-334).

This is the point at which the need for regulatory measures which a state needs to take for the benefit of society first becomes apparent. At the same time it becomes clear that government measures to protect cultural identity or preserve cultural diversity are not easy to implement in the context of globalized communication flows and can indeed have unintended effects. Rauch and Trindade (2005) show that barriers impeding market access do not necessarily lead to the preservation of cultural diversity, since in their advent domestic producers rather let themselves be guided by the style of the dominant culture induced by network effects, which inevitably leads to a loss of local cultural assets. What they recommend in place of market access barriers is a concerted policy of subsidies for domestic producers which can contribute to the conservation of hallmark cultural properties (ibid., 35).

This covers the two basic ways in which states can choose to protect their audiovisual sector from domination by foreign cultures: subsidies or market access barriers. In both cases some producers of the audiovisual sector are favoured and some are restricted. This should make it abundantly clear that the main argument against such measures must be the safeguarding of universal human rights such as freedom of speech and freedom of information.

Photo by Oliver H (CC BY-NC-ND 2.0)

Photo by Oliver H (CC BY-NC-ND 2.0)

L’Exception Culturelle

Given the vital role the audiovisual sector plays in terms of aiding social cohesion and constituting national identity, it is hardly surprising that the “cultural exemption” has been around ever since talk of trade liberalization first began. Article IV of the very first version of the General Agreement on Tariffs and Trade (GATT) in 1948 gave states the possibility of introducing quotas for “films of national origin” in the audiovisual sector (WTO 1986, 8; Hahn 2006, 522). Furthermore, Article XX sanctions government measures “necessary to protect public morals” and “national treasures of artistic, historic or archaeological value” (WTO 1986, 37). Even though the GATT has never enshrined any general exemption for cultural products, it is visible that the cultural sector does indeed play a special role in free trade agreements. As an example, one can look at how most states used the provisions of the General Agreement on Trade in Services (GATS) to leave their cultural sectors out of the scope of free trade regulations (Hahn 2006, 525-526 & 531-533; Grant 2011, 342).

Despite the special status enjoyed by the cultural sector, the WTO has been involved in repeated attempts to overturn its barriers or protective measures. Such attempts are justified by invoking the GATT which in principle covers all kinds of cultural goods except movies which enjoy special protection under Article IV. Some US media corporations have been particularly aggressive in their attempts to overthrow Canadian regulations and their efforts have received legal blessing from the arbitration courts of the WTO. The special economic characteristics of the cultural sector and the vital role they play in promoting cultural diversity were not recognized by the WTO side (Grant 2011, 343). Canada seized this as the opportunity to initiate a worldwide campaign that culminated in the adoption of the “UNESCO Convention on the Protection and Promotion of the Diversity of Cultural Expressions” – a legally binding international agreement that entered into force in 2007 and assures the right to an independent cultural policy for all signatory states (UNESCO 2005a; Grant 2011, 342-348; Hahn 2006, 533-538). To date the Convention has been ratified by 132 states and the European Union. To avoid obvious incompatibility with the equally binding international free trade agreements of the WTO, Article 20 of the Convention points out that rights and obligations under previous agreements remain unaffected and that the UNESCO Convention should be considered when interpreting these rights and obligations and when contemplating the form of new agreements (UNESCO 2005b: 10). The UNESCO Convention is also exposed to the risk of being instrumentalized to justify disregard of basic human rights. It would indeed achieve the very reverse of its intentions if freedom of speech and information were restricted under the guise of protecting cultural diversity. This is why Article 2 of the Convention takes care to state that “cultural diversity can be protected and promoted only if human rights and fundamental freedoms, such as freedom of expression, information and communication, as well as the ability of individuals to choose cultural expressions, are guaranteed.” (UNESCO 2005a, Article 2). Nevertheless, in practice it may be difficult to distinguish between preservation and restriction of cultural diversity.

The cultural sector has once more come in for special attention during the current rounds of TAFTA | TTIP negotiations. Aurélie Filippetti, the French Minister of Culture has forged an alliance with ministers of culture from 14 more EU states including Germany’s Bernd Neumann (CDU) to take the audiovisual sector off the negotiating agenda (French Embassy in London 2013; Schulz 2013a). The EU Parliament underscored these demands in a resolution calling for “exclusion of cultural and audiovisual services, including those provided online” (European Parliament 2013, No.11). Ultimately ​​France made its approval of the European Commission’s negotiating mandate dependent on adoption of l’exception culturelle and won the day to the delighted plaudits of Germany’s cultural sector (Zeit Online 2013; Kämpf 2013). Leaked one day after the official resolution, the present mandate explicitly excludes audiovisual services (Council of the European Union 2013: No. 21) and in various places also commits itself to the safeguarding of cultural diversity with direct reference to the UNESCO Convention. (Council of the European Union 2013, No. 6, No. 9).

So do we really need to worry about the cultural sector? Many politicians and cultural producers think that we do. They criticize the lack of explicit exceptions for the whole cultural industry, not just for the audiovisual sector alone (Deutscher Bundestag 2013, 4; Schulz 2013b, 1) And in particular they fear the prospect of large US corporations gaining unrestricted access to domestic markets through deregulation of new media and modern digital transmission technologies which are not covered by existing protection regimes. Again, the lack of transparency in the TAFTA | TTIP negotiations coupled with the vague formulations of the German Federal Government are generating concerns (Deutscher Bundestag 2013). Apart from which, TAFTA | TTIP is explicitly keeping open the prospect of further liberalization. After exclusion of the audiovisual sector, EU Trade Commissioner Karel de Gucht was at pains to emphasize that it could be reintroduced at any later date (Zeit Online 2013). And even now there is no shortage of initiatives for further liberalization: Since early 2012 representatives of the EU and the US have been deliberating in a group called “Really Good Friends of Services” on how to effect further openings in the service sector (Mildner & Schmucker 2013, 8).

Against this backdrop, we now need to ask whether exclusion of the cultural sector from any free trade agreement really does make sound sense. One key supporting argument here is the sector’s relatively low economic performance in comparison to other sectors of the economy and its obvious greater relevance for society. The audiovisual sector – the most important part of the cultural sector – accounts for a mere 2%t of the trade volume between the EU and the US (Hayer 2013). Referring to the film industry, Francois and Ypersele (2000) have pointed out that trade barriers between two countries can actually increase welfare gains. In their investigations of the curious economics of cultural products, both Rauch and Trindade (2005), and Sauvé and Steinfatt (2008) have shown the unintended effects market access barriers can have in today’s communicative globalized world. They suggest liberalization of markets in combination with concerted subsidies.

Apart from the danger of restricting fundamental human rights for the sake of protecting cultural diversity, there are other arguments against l’exception culturelle, especially with regard to TAFTA | TTIP. Firstly, the EU audiovisual and cultural market is already relatively open for US companies while US market access is still very limited for European companies (Lambsdorff 2013). Second, EU foreclosure in cultural matters vis-à-vis global markets stands in contradiction to the relatively advanced liberalization of the EU internal market (Formentini & Iapadre 2007, 5-6). Besides which, Hollywood movies still enjoy huge successes with audiences in Europe, even under the present cultural protection regime. And the German system of subsidized public-service broadcasting, for example, has often shown its resilience in the face of frequent attempts by private broadcasters to paint the license fee as illicit and market-distorting (Schulz 2013; Hanfeld 2013). What’s more, trade with cultural products mostly takes place over short distances between countries with strong cultural ties (Disdier et al 2009, 577). In this light, the very notion of cultural “assimilation” appears dubious and built on shaky foundations.

One really fascinating aspect of the culture and trade debate is the positions taken by NGOs and civil society. All are in agreement when it comes to rejection of the supposedly excessive power yielded by an imperial United States and threatening cultural diversity. Yet when it comes to l’exception culturelle, at least in terms of quotas and market access barriers, opinions diverge as they do in the debate on copyright. The strongest advocates of l’exception culturelle and stricter regulation of intellectual property rights are to be found in the ranks of culture producers and spokespersons for the cultural sector- after all, such issues have a direct impact on their professional earnings. Both network savvy consumers and NGOs working for free and uncensored internet access rightly criticize restrictions on online services and regulation of intellectual property rules – interestingly with the same argument put forward by advocates of the exception culturelle: Both groups wish to preserve the plurality of information sources as the basis for a well-functioning democratic society.


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