As New Zealand awaits Warner Bros.’ decision on where it will film “The Hobbit,” the political turmoil sparked by the recent actors’ boycott highlights the country’s fragile relationship with Hollywood.Warner execs were due to arrive in the country on Sunday, while thousands were once again expected to take to the streets in a “rally of hope” to convince the studio to keep the production from moving elsewhere. Speaking to TVNZ over the weekend, Council of Trade Unions topper Helen Kelly said the key issue in the flareup involves basic conditions. “At the moment, there’s a set of guidelines in the industry that performers are very unhappy with, because they aren’t honored, and many, many films pick and choose from it,” she said. But the confrontational path taken to voice those concerns may have blown up in the union’s face. Allowing the Media Entertainment and Arts Alliance from across the Tasman to take such an aggressive stance has prompted nervous execs to take a closer look at whether Middle-earth is a good place to film this high-profile production. Like its Aussie neighbor, New Zealand has a small, barely viable film industry based on arthouse movies and fueled by government subsidies. When it comes to luring runaways, New Zealand has to deal with the tyranny of distance, and one main way to do it is with attractive incentives. The actors boycott may be the trigger for Warners to rethink the practicality of such a farflung shoot — particularly when the subsidy is a modest 15%. Across the pond in Australia, a government-wide review is seeking to raise its 15% Location Offset. “Hobbit” exec producer and director Peter Jackson is on record in support of larger subsidies. In his review of the New Zealand Film Commission, he concluded that they’re crucial to films being made there. He has personal experience to back that up. His own film “The Lovely Bones” lost part of its shoot to the U.S. The country also lost its exclusive claim on Narnia when large parts of “Prince Caspian” decamped for Eastern Europe. At the time, Jackson said that people thought New Zealand had “some magical quality” that attracted movies, “but it’s going to come down to the dollars.” This realization has added to the emotion surrounding the debate. “Outrageous Fortune” actress Robyn Malcolm has been roundly criticized for supporting the actors union. The issue of higher subsidies is sure to come up in talks with Warner execs after the government appeared to soften its stance on the question. “I don’t think we should write off our chances of retaining the movies,” New Zealand Prime Minister John Key said. “My concern is that if Warner Bros. deems New Zealand is not a good place to make movies, then there is a real risk other major film production companies will also believe that to be the case.” Jackson himself has said the industry will be “stuffed” if it loses “The Hobbit.” But even if New Zealand loses the location shoot in this production, Jackson’s Weta will likely retain the post-production and the pre-production money. South Pacific Pictures producer John Barnett (“Whale Rider”) believes the loss of “The Hobbit” would cause the film community to lose confidence and that, in turn, would impact other local productions. He said the large productions have helped to grow the industry infrastructure, which is used by local filmmakers. “If Peter Jackson can’t bring ‘The Hobbit’ here, then he won’t be able to bring anything else either,” he said.