China Film Quota Talks Could Be a Casualty in Trump’s Trade War

President Donald Trump’s looming trade war with China could leave Hollywood’s wallets lighter.

U.S. trade representatives have been trying to hammer out a new deal with China that could increase the number of foreign films allowed to screen in the Middle Kingdom, as well as sweeten the financial terms for major studios that are able to show films in the country.

But those talks risk being scuttled by larger geopolitical forces. The U.S. government sees its trade deficit with China as unfair and has begun imposing sanctions designed to pressure Beijing into making concessions. So far, Trump has approved some $60 billion of penalties against China that he believes will level the playing field for U.S. manufacturers. The Chinese, however, may look for leverage and find it in their ongoing talks with Hollywood.

“Film quotas are exactly the kind of target the Chinese would threaten in response to these tariffs,” said Derek Scissors, a resident scholar at the American Enterprise Institute who focuses on U.S. economic relations with Asia. “The tariffs will not especially harm China, but they will want to deter further action. While attention focuses on soybeans and the like, China prefers smaller but high-profile targets.”

Retaliation from the Chinese side has so far been modest, at just $3 billion of tariffs against U.S. goods, mostly in the agricultural sector. But if things drag on, or China chooses to grab some headlines of its own, movies could easily be among the next set of targets. In a recent move freighted with symbolism, China recently declined to accept containers full of U.S. recyclables that it was supposed to process, said Aynne Kokas, assistant professor of media studies at the University of Virginia.

“That’s a profound message of literally ‘keep your own trash,'” Kokas said. “In this climate, my thought is it will likely delay an announcement of a new film quota deal.”

The movie industry negotiations have been underway since February of last year and were initially slated to be concluded by the end of 2017. That didn’t happen. The Chinese official who was supposed to be in charge of the negotiations got another post, delaying a resolution, and the Chinese New Year holidays caused the talks to take longer than anticipated.

The current agreement works on several levels. Some 34 films per year are allowed to be imported into China, to be distributed on a revenue-sharing basis. A further 30 to 40 films per year can be imported on a flat-fee basis, in which Chinese companies license them for foreign distribution but do not give studios a cut of box office. Distribution of the revenue-sharing titles is almost entirely handled by state-owned company China Film Co. or a smaller state company called Huaxia Distribution. The films’ foreign backers earn 25% of gross revenues, with the Chinese firms paying all the print and advertising costs, and all local taxes. Further clauses allow the Hollywood companies to audit the distributors’ accounts, and to impose punitive levels of interest on Chinese firms that fall behind on their payments.

Before the specter of a trade war loomed, Hollywood was optimistic that a new deal with China would strengthen its position. The situation is fluid, but those briefed on the talks were increasingly confident that the U.S. Trade Representative would ultimately secure an increase in the number of revenue-sharing foreign film imports, from 34 to as many as 50. There was also a sense that the new agreement would widen the range of companies in China that could work as local distributors, as well as an abolition of so-called blackout periods, times of the year in which foreign movies are shut out in order to bolster grosses for Chinese-made films. These periods usually occur during Chinese New Year, the May Day holiday, from mid-July to mid-August, and the second half of December. Discussions of the blackout periods during the negotiations have included their own “fake news” moments. For some time, Chinese negotiators did not acknowledge their existence, though Chinese media often described them as film-promotion periods.

Negotiators were closing in on a deal that would also give studios advance notice of when their films would get into China. Currently, most studios don’t know if major movies have secured a berth in the country until between four to six weeks before they are released. As an additional concession, it is possible that Hollywood studios will be able to set their own Chinese release dates.

What has not changed are a handful of elements that continue to give Chinese regulators ultimate control over their internal film market. For instance, all imported films are subject to censorship. Oscar-winner “The Shape of Water,” currently on release in China, had clothing digitally added in one of the nude scenes and shots cropped from a bathtub scene. Moreover, China has no plans to institute a ratings or classification system, and will continue to require that all film releases be suitable for audiences of all ages.

Not yet decided is how long any new bilateral agreement would last. The most recent pact was for five years, but the new one could be opened for review after less time.

If the talks fail, or are halted as part of the escalating trade war, business could still continue; the current deal would remain in place. The problem is that the U.S. movie industry would suffer, denied expanded access to a cinema market that has grown exponentially in the six years since the current deal went into effect.

In 2011, China ranked as the third biggest box office, behind Japan and North America. A 29% hike that year lifted gross theatrical revenues to RMB13 billion (or $2.07 billion at the prevailing exchange rates). By the end of 2017, box office in China had quadrupled again to RMB55.9 billion ($8.6 billion at end-of-year conversion rates). On its current trajectory, the Chinese theatrical market is poised to be as large as North America’s by 2019.

China’s relationship with Hollywood extends beyond just box office returns. Chinese companies have also been an important source of investment, providing slate financing to studios such as Universal and STX, and buying U.S.-based entertainment companies such as Legendary Entertainment and AMC Theatres. Despite the economic saber-rattling, experts say that deals are still being hammered out by entertainment players in both countries.

Lindsay Conner, co-chair of Manatt’s entertainment and media practice, advised Beijing’s Perfect World Pictures in its five-year, 50-film financing deal with Universal. He said that so far China has been slow to hit back at the U.S., which bodes well for the entertainment business.

“There will inevitably be ups and downs in the broad relationship of the two nations,” he said. “But the mutual stake that Hollywood and China have in the entertainment industry will continue for a long time to come.”

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