This article originally appeared in the Hub.
By David Collins, November 1, 2024
Competition policy has climbed up the priority list in recent years as Canadian policymakers struggle to address Canada’s ongoing productivity challenges. This is a positive development.
Legislative restrictions on competition—especially foreign ownership restrictions in the airline and telecommunications sector—diminish the market pressure for Canadian-based firms to seek out comparative advantages on network quality or price. Although any pro-competition reforms need to account for national security considerations, particularly in the context of geopolitical tensions with countries like China, there’s scope for opening up the market to international suppliers in the name of enhancing competition. Canada has done a good job of attracting foreign direct investment, but most of it goes to the manufacturing sector, not services.
Currently, Canada’s telecommunications sector is governed by stringent regulations that restrict foreign ownership. According to the Telecommunications Act, any telecom entity with over 10 percent market share must be at least 80 percent Canadian-owned in terms of both board representation and voting shares. These limitations dissuade foreign competitors, including major U.S. firms like AT&T and Verizon, from meaningfully entering the Canadian market. Similarly, the Canada Transportation Act imposes significant restrictions on foreign airlines, preventing them from operating domestic routes, which limits consumer choice and leads to higher prices. Canada has relatively high internet and air travel costs compared to many other developed countries, ranking among the most expensive in the world.
Successive governments have sought to address these issues by tinkering on the margins. The “fourth-player policy” in telecoms is a good example. Although it has injected more competition into the market on the margins, it hasn’t fundamentally changed the market structure. The market share of incumbent firms remains essentially unchanged.
To create the conditions for greater competition, policymakers should go further and open up the airline and telecom sectors to foreign competition from trusted allies, particularly those in the Five Eyes alliance—namely, the U.S., U.K., Australia, and New Zealand. Ideally, this would be done multilaterally by extending Canada’s commitments under the World Trade Organization’s General Agreement on Trade in Services (GATS). Alternatively, Canada could open up these sectors to selected trade partners through bilateral treaties like the Canada US Mexico Agreement (CUSMA) or the 12-nation Comprehensive Progressive Trans-Pacific Partnership (CPTPP).
Fully opening up the market (as opposed to tinkering) would create real competitive pressures in these industries and in turn incentivize investment, innovation, and price competition. One way to achieve this while safeguarding national security interests would be by limiting it to the Five Eyes. The existing collaboration on intelligence-sharing with these countries provides a framework for ensuring that sensitive telecom infrastructure remains secure. The recently modernized Investment Canada Act already contains strong national security protections, including enhanced disclosure requirements and information sharing with international partners.
Furthermore, recent global developments, such as Japan’s inclusion in the Global Coalition on Telecommunications, indicate potential for expanding the pool of foreign partners Canada could consider for market entry, particularly in less sensitive areas.
In the airline sector, for instance, the case for increased foreign competition is even more compelling. Countries with strong safety records, such as Germany and France, should be allowed to operate within Canada. This would not only enhance competition but could also make domestic air travel more affordable, negating the need for substantial investment in alternative transport options like high-speed rail. While a good portion of the high costs in the airline sector include taxes like fuel surcharges and sales tax, the lack of genuine competition keeps prices high.
Progress on these fronts wouldn’t only advantage consumers, but it could also help to boost Canada’s woeful productivity. Policymakers have experimented with various policy interventions to support higher productivity—including tax credits, direct subsidies, and regulatory policy—and the results have been underwhelming. Yet there’s a considerable body of evidence that shows that enhanced competition can have positive effects on productivity—particularly over the long run.
As part of the government’s Future of Competition Policy in Canada exercise, we’re starting to see progress. It has enacted three sets of legislative reforms to the Competition Act in recent years which represent crucial steps towards greater competition in Canada’s economy. However, the Competition Act extends across the entire economy and doesn’t address sectoral constraints rooted in outdated regulations. Without addressing these sector-specific barriers, will likely fall short of delivering the desired outcomes of lower prices and increased innovation.
Ultimately, to improve Canada’s economic performance and address long-standing productivity issues, the country must consider a path toward greater competition by encouraging more foreign direct investment. This involves reducing the regulatory barriers that prevent foreign companies from entering the telecom and airline markets. A focus on opening these sectors to trusted foreign competitors can lead to more competitive pricing, improved service quality, and enhanced innovation—all critical for the long-run prosperity of Canadian consumers and businesses.
