Last week, Amazon.com ( AMZN) announced that it would try to enhance its service in Canada through Amazon.ca by expanding its distribution centers within the country. Chapters Indigo, the No. 1 bricks-and-mortar bookseller chain in Canada, has cried foul to the Canadian government, appealing to an obscure law that any distribution center in Canada needs to owned by a majority of Canadians. Chapters Indigo is the top online competitor against Amazon in Canada. The same products sold on Amazon.ca are up to 40% more than the ones sold on Amazon.com. An increased cost of doing business in Canada for Amazon from a less efficient distribution means that Chapters Indigo can keep its margins up at the expense of consumers. But there is a much longer back story to this relationship than just this latest scuffle about distribution centers. It goes to the heart of how governmental regulation -- whether in Canada or elsewhere -- can be capricious and work against the interest of consumers and in favor of those with the money and access to power to shape it for its own ends. Chapters Indigo, a national bookseller chain, is no different from Barnes & Noble ( BKS), Borders ( BGP), or Books-A-Million ( BAM). It's the result of a merger of two old chains -- Chapters and Indigo -- that struggled with profitability. The old head of Indigo, Heather Reisman, became the new head of Chapters Indigo. Why aren't any of the big American booksellers in Canada? They have never been allowed to enter the market. Back in the late 1990s, when the super-store bookseller chain idea emerged and Chapters and Indigo both were founded, the two Canadian chains appealed to the Liberal federal government to block American companies like Barnes & Noble and Borders from entering the market. Their argument went that Canadian literature, opinion, and news coverage was culturally unique and deserved to be protected by the Canadian government. The large American chains had much more capital. In a true free market system, they would have been allowed to enter the market and sell their wares. With more capital, presumably they would have undercut the Canadian booksellers until the big ones had suffered enormous losses and been forced to withdraw from the market, leaving the American firms with a stranglehold on the Canadian bookselling market.
Many Canadians and lobbyists from Chapters and Indigo then argued that this would have been a terrible situation because these American firms wouldn't have understood the cultural importance of Canadian literature. Only Canadians could promote up-and-coming Canadian authors to allow future Margaret Atwoods to develop. The government agreed. They said only Canadian big box chains could sell books in the country. Yet, for some inexplicable reason, Amazon was allowed to enter the Canadian market five years ago. I suppose that some bureaucrat in Ottawa studied the case and determined that this was a Website and therefore wasn't as "culturally important" as a bricks-and-mortar store. Time has gone on and the secular shift to Web shopping vs. physical retail shopping has continued and will continue. Amazon continues to grow. Barnes & Noble, Borders, Books-a-Million, and Chapters Indigo keep struggling. Which brings us to Amazon's reasonable request to start a distribution center within the borders of Canada. Seemingly, this appears to be a good thing for Canadians. There will be real ongoing jobs created along with tax revenues and construction work. Amazon will also be able to lower its costs and hopefully pass these savings on to consumers. The truth is that the original policy to keep out other market players never served Canadian consumers. As time has gone on, more government regulation continued on top of prior poor decisions to compound the problems. I don't know what is unique about Canadian (at least English Canada) versus American culture. There are subtle differences, but those differences aren't because a bureaucrat says so. This was a decision which has led to higher prices for Canadian consumers for over a decade. If the government wanted to ensure that there was equal floor space for Canadian authors, poets, or magazines, they could have simply asked the American retailers to comply with a minimum requirement. Quite frankly, that's all they get from the Canadian retailers today. This decision was made because Canadian capitalists, who saw an opportunity to own this niche (which in hindsight has been a questionable investment), used their money and access to power to argue a plausible enough line of thought that politicians could live with. Canadian entrepreneurs wrapped themselves in the flag to get a revenue stream, while the American wolves were kept at the door.
Canadian politicians scored populist points with voters by saying no to the American companies and by understanding that everyone -- the world over -- thinks they're different anyway from everyone else and use this to justify keeping this industry in Canadian hands. This case is an example of how crony capitalism, using governmental forces, gets in the way of free market forces. A decade later, we see the folly of these policies, which is why this latest request to deny Amazon's ability to build a distribution center seems even more inane. This same kind of perversion happens in America every day, whether in agriculture subsidies or automotive grants. There are times when strong governmental regulation helps set the "rules of the game" whereby market participants know how to compete. But governments do a terrible job at picking winners and determining what is "special" about a company's culture that needs protection. Hopefully, this time around, the federal government will decide for lower prices, more jobs, and more tax revenue by giving Amazon permission to better compete with its Canadian rivals. -- Written by Eric Jackson in Naples. Fla.