The New Supply Management: How the Provinces Are Ruining A Major Export Opportunity

With cannabis legalization mere weeks away, the provinces are already blowing it. All but Saskatchewan have established monopolies on the distribution of recreational cannabis, and just four will have private retail outlets in time for October 17th. Ontario won’t have any outlets at all.

The rest plan to implement monopolies for both the distribution and sale of marijuana, with many operating under the umbrella of already-established liquor boards. The premiers were successful in pushing the government to delay its initial legalization date, but many still won’t have the infrastructure in place to meet demand come October. Nova Scotia, with the highest per-capita consumption rate in the country, will open just 12 stores, including only 4 in the city of Halifax – one for every 100 000 residents.

This is a $5.6 billion industry. Canada is just the second country, and the first major producer, to legalize recreational cannabis. Legalization is an enormous opportunity to develop a dominant international market position before any other country has the chance. The provinces are doing everything they can to keep that dream from becoming a reality.

Without wholesale monopolies and the provincial trade barriers they create, cannabis producers could grow, merge and expand their sales across the country. A national supply chain would emerge, jobs would be created and production costs would fall. Smaller, local producers could develop niche products and sell them to out-of-province customers. Economics 101 would prevail.

Instead, cannabis will go the way of alcohol – expensive and inconvenient. Simultaneously impossible for local producers to expand and for customers to buy from out-of-province suppliers. Eventually dominated by American brands.

Canada won’t be the last country to legalize recreation marijuana. But when our trading partners follow suit, we won’t be ready. There will be no national wholesalers waiting to flood international markets with cheap, high-quality, Canadian-grown cannabis. Instead, Canadian markets will be flooded with products from countries whose distribution models have moved past the 1920s. Consider that in the 8 US states that allow recreational marijuana sales, not a single one has a distribution monopoly.

Statistics Canada estimates Canadian cannabis exports total $1 billion. That’s more than four times the value of beer exports in 2014. Canadians import almost three times as much beer as we sell abroad. This should come as no surprise, given a story in April about the New Brunswick liquor board ordering a specialty beer store to stop selling Nova Scotian craft beers.

Speaking of New Brunswick, reasonable people many Canadians were disappointed when the Supreme Court upheld the right of the provinces to restrict cross-border alcohol earlier this spring. Such a decision will no doubt be used to protect provincial cannabis producers from external competition, to the detriment of consumers and the benefit of the still-thriving black market.

On October 17th the first legal sales of recreational marijuana will occur in Canada. It will be expensive, inconvenient and full of supply gaps criminal organizations will be ready to fill. As other countries relax their marijuana laws, there will be no dominant Canadian exporters ready to do business. The provinces were given the opportunity to do this properly, and they blew it.

 

William O’Connell is an PhD student at the Norman Paterson School of International Affairs. His research interests include financial markets and regulation, exchange rate regimes and the political economy of high-income countries. You can contact him at william.oconnell3@carleton.ca

Featured image from Wikimedia

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