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China-U.S. Tariff Battle Spells Long-Term Pain for Entertainment

The entertainment industry may be feeling relieved that the latest $200 billion in U.S. tariffs against Chinese imports and China’s retaliatory levies do little direct damage. But the pain may come in the longer term if relations between the world’s two largest economies continue to worsen.

The 194-page list of U.S. tariffs published Monday by the Trump administration includes products ranging from editing equipment to exposed 35mm film and sound recordings on motion-picture film. Some of these measures are carried over from the first round of U.S. tariffs imposed in July. China has hit back with duties on $60 billion of U.S. imports.

Across most of the entertainment sector, the U.S. has a trade surplus with China, not a deficit. But Beijing is now reconsidering whether to send a trade delegation to Washington, saying that the U.S. has “poisoned” the atmosphere, while U.S. officials reportedly have become frustrated by China’s “lack of action.” That could have unfortunate repercussions for the talks, stalled since February, to revise a 2012 bilateral deal covering film imports, revenue-sharing and distribution conditions. China has little incentive to make new concessions to Hollywood – it had been expected to increase the number of imports and pay out a larger proportion of box office receipts – when the two countries are at loggerheads.

The status quo favors China’s local players. Behind a protectionist wall, Chinese movies are soaring. Through the end of August, Chinese movies have grossed a collective RMB30.4 billion ($4.43 billion at current exchange rates) at the domestic box office this year, while imported films – including Hollywood product – have slipped to $2.74 billion (RMB1.81 billion).

Numerous economists have pointed out that, in the near term, China is likely to suffer far more from tit-for-tat tariffs than the U.S. Indeed, it will soon run out of U.S. goods to tax. But instead of stinging China into opening its industries, the U.S. tariffs may have the effect of making China ultimately stronger.

This is particularly true in the tech sector. Chinese tech industries have been directly targeted by the tariffs because of what the U.S. Trade Representative calls “unfair trade practices and industrial policies, like ‘Made in China 2025.’” But Chinese firms are responding by increasing investment in local R&D.

Alibaba co-founder Jack Ma, who was the first Chinese businessman to welcome Donald Trump’s election, now says that his company is no longer planning to create a million jobs in the U.S. “The promise was made based on the premise of friendly U.S.-China partnership and rational trade relations,” Ma told China’s state news agency Xinhua on Wednesday. “That premise no longer exists today, so our promise cannot be fulfilled.”

The government in Beijing can also make it harder for U.S. multinationals to operate in China. It has growing sway in international trade disputes, and can insist on getting involved in high-profile mergers and acquisitions. The Chinese Ministry of Commerce requires notification of all deals where the companies have combined global turnover exceeding $1.45 billion (RMB10 billion) or their combined China income exceeds $290 million (RMB2 billion).

China previously examined Comcast’s takeover of Dreamworks and Uber’s sale of its China business to Didi Chuxing in 2016. This year, the ministry scuttled Qualcomm’s proposed takeover of Dutch semiconductor firm NXP. And it remains an outside possibility that Disney’s planned takeover of Fox’s entertainment assets could yet be affected.

“I don’t think it’s over,” said Robert Azevedo, the head of the World Trade Organization. “They have lots of ammunition, and it can expand to other areas beyond just tariffs…and trade.”

Azevedo said he has committed the WTO to getting the two sides talking. The New York Times warned that “Trump has put the U.S. and China on the cusp of a new Cold War.”

Still, stock markets in Asia have largely taken the new tariffs in stride. And though the headline value of the new U.S. tariffs is a significant step up from the first $50 billion in levies announced in July, the rate at which the affected goods are taxed is set at only 10% until the end of the year, instead of the 25% duty on the goods in the first round of tariffs. (After the end of the year, the 10% rises to 25%.) In a more hostile scenario, a higher rate could have been imposed immediately. China also chose not to go as far as imposing duties on all incoming American goods.

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