A bookish revolt has erupted in the home of Margaret Atwood, Yann Martel and Michael Ondaatje. A seemingly innocuous plan by Amazon to open a warehouse in Canada has tapped into political anxiety over protection of the country's literary identity from its more powerful neighbour.

Booksellers in Canada are urging the Ottawa government to use sweeping cultural protectionist powers to block a proposal by the world's biggest online bookshop to create its first physical presence north of the 49th parallel. The issue has sparked a vigorous debate over cultural "insecurity" in Canadian media and legal circles. And it poses a test for prime minister Stephen Harper's avowed desire for free trade.

For the last eight years, Canadians have been able to buy books on a Canadian-focused Amazon website, Amazon.ca. But the Seattle-based internet empire has been doing business through a loophole – by not employing anybody in Canada and using a contractor to ship orders across the border, it has avoided oversight under the 1985 Investment Canada Act, which allows ministerial scrutiny of foreign companies' presence in the country.

This month, Amazon declared that it wanted to implant a footprint by creating a distribution centre in Canada. The department of Canadian heritage stepped in, exercising its discretionary power for a formal review, "to determine if the investment by Amazon.com will be of net benefit to Canada".

Nurturing talent

Inevitably, Canadian booksellers are vehemently opposed to Amazon, wary of a multinational competitor with deep pockets. Stephen Cribar, president of the Canadian Booksellers Association, said independent bookshops did a great deal to nurture authors by holding literary readings and by giving prominence to local writers.

"The things independent booksellers are good at – supporting our communities, supporting local cultures – could be jeopardised," said Cribar.

Under strict rules safeguarding Canadian content in radio, television and on bookshelves, there are no leading foreign book chains on Canadian high streets. Only one locally owned retailer, Indigo, has anything approaching a national spread. Cribar said that if the government caved in to Amazon, the landscape would change: "If they're allowed to do this, it could open the doors to others. We could see Barnes & Noble and Borders in Canada."

Canadian literature has more than its fair share of talent. The Ontario writer Alice Munro, 77, won last year's Man Booker International prize for her short stories of small-town life. And Yann Martel won the 2002 Booker for his parable about a boy and a tiger on a lifeboat, Life of Pi. The Oscar-winning movie The English Patient was based on a book by Canada's Michael Ondaatje. Even the leader of the opposition, Michael Ignatieff, is an acclaimed writer.

Amazon argues that by selling Canadian books in 170 countries it is doing more than anyone to promote local work. The company's vice-president of global policy, Paul Misener, told Toronto's Globe and Mail: "I don't think anybody is doing anything near this to help disseminate Canadian cultural products generally." He added: "To claim that somehow a US-based company can't help Canadian culture is just proved wrong by the facts."

It may seem a familiar spat of small retailers against a global behemoth. But Canada's desire to assert a distinct identity can be more acute than elsewhere. Nearly nine out of 10 Canadians live within 100 miles of the US border, putting them a short drive away from the world's dominant superpower. There are 100 million crossings annually of the longest non-militarised frontier in the world. In a newspaper column, one Canadian novelist, Roy MacSkimming, lamented that the encroachment of Amazon amounted to "Wal-Martization, the law of lowest-cost, lowest-common denominator."

Andrew Cohen, president of a think-tank dedicated to Canadian identity, the Historica-Dominion Institute, says the issue goes to the heart of a long-standing disquiet in Canada over US influence that dates back long before a free trade pact signed between the two countries by the former prime minister Brian Mulroney in 1988.

"Canada is insecure and it has been for years. It's easily explicable when you're 33 million people sitting next to the world's greatest cultural machine," said Cohen, who says his compatriots tend explicitly to stress anything that sets them apart form the US. "We look for the narcissism of small difference. We've made a whole industry of pointing out ways in which we're different from the US."

Borders blocked

Canada's government has intervened before to block cross-border cultural deals. In 1996, an effort by Heather Reisman, founder of the book chain Indigo, to strike a deal with the US firm Borders was blocked. And strict rules limit foreign ownership of Canadian newspapers and television stations, complicating efforts to restructure the country's biggest news publisher, Canwest, which is in bankruptcy.

But the country's conservative administration has a free-trade instinct. In this month's throne speech, which outlines the government's legislative programme, the Harper administration announced it wanted to allow foreign ownership of telecoms and satellite companies. And Ottawa kicked up a huge stink against protectionism last year when the Obama administration inserted "Buy America" provisions decreeing that public works funded by its $787bn (£528bn) economic stimulus package should favour US contractors over foreigners.

The fact that Amazon has been doing business in Canada for eight years without a physical presence raises questions of whether protectionism between neighbouring nations is even practical in the digital era. Jeffrey Brown, a competition expert at the Ottawa law firm Stikeman Elliott, said: "The government's policy in the past has been fairly restrictive when it comes to cultural industries. Is this going to be precedential in nature? It could be, although it's a bit of a special case."

If Amazon gets the green light, Brown suggests, there could be "undertakings" attached to ensure the bookseller does its part in promoting Canadian talent. He said: "I know it looks a bit mysterious to the rest of the world but Canada has a population of about 33 million and probably about three quarters of us are English speaking. Most of us share a common language with the US, which is a cultural superpower in the world, and when you're right on the doorstep, there can be a perception that your culture is under threat".