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Latest Tariff List Raises Worries That Hollywood Will Be Drawn Into U.S.-China Trade Battle

The Trump administration’s latest proposed round of tariffs on $200 billion worth of Chinese goods includes hundreds of products, and one of interest to the entertainment industry: motion picture film “of a width of 35 mm or more, exposed and developed, whether or not incorporating sound track.”

What that sounds like is slapping tariffs on imports of Chinese movies to the U.S. The U.S. Trade Representative will now enter a period of public comment on its proposals.

Chinese films are only a fraction of the overall imports of goods into the U.S., but the proposed tariff only adds to industry worries that Hollywood will get swept up in the trade war, and that Beijing will respond with its own retaliatory measures on U.S. studio product.

The new tariff comes at a time when Hollywood had actually been hopeful that China would ease some of the restrictions and even increase its quota on non-Chinese productions. Were China to retaliate, it would hit one of the rare business sectors where the U.S. has a trade surplus.

Foreign films (predominantly Hollywood studio titles) earned some $4 billion of gross revenue in China in 2017, a figure which dwarfs the stateside box office of Chinese films. The nature of those earnings equates to close to $1 billion of profits remitted to the Hollywood majors, with Disney being by far the biggest earner from the Middle Kingdom.

China last expanded its quota and eased other restrictions in an agreement reached in 2012. Negotiations on a new agreement, which started in February of last year, have raised hopes that China will further open up its market for movies. But a new pact has been delayed, in part because of a change in the Chinese authority responsible for the film sector and in charge of negotiations.

Chris Dodd, the former MPAA chairman who was at the helm at the time of the 2012 pact, said that he “always felt we operated under the radar screen at a time when we didn’t have so much acrimony as we have today.”

Dodd noted that China has had its own vested interest in allowing for a greater number of U.S. movies to be distributed in the country. Chinese firms are major distributors of Hollywood content in China, and make profits from doing so. Moreover, billions of dollars have been invested by Chinese companies in the film industry, including the construction of some 50,000 movie theaters.

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.

Dodd notes that joint U.S.-Chinese productions have been growing, and that China has been “dealing with piracy issues for the first time in a very meaningful way.” It is unclear whether China would be so enthusiastic if the new tariff round goes ahead. “There is a danger of all that stuff being rolled back a bit,” he said.

Even though Hollywood may not be important in the context of the overall trade dispute, there is the worry that the Chinese government will see the U.S. film industry as a high-profile target.

“China has become a fairly meaningful contributor to Hollywood box office numbers, but in terms of the overall commerce between the U.S. and China, it is a rounding error,” said John Thaler, the founder of JAT Capital Management.

“China has begrudgingly allowed U.S. studios access to the Chinese box office, and they would gladly take this to zero if they could. The trade war with America gives them an excuse to do it,” says Thaler.

It is not clear whether such an aggressive, retaliatory approach is likely to be adopted by the Chinese. A more optimistic scenario would see renewal talks run into the sand, and the current quota regime simply left in place.

The Chinese government would like to see as many of its homegrown movies to score with audiences as possible, but it also recognizes consumer demand for major Hollywood product.

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