Toning down his recent blustery stance on China, President Donald Trump on Monday nevertheless signed a memorandum to direct the U.S. Trade Representative, Robert Lighthizer, to determine whether an investigation into the Middle Kingdom’s trade practices is merited. While just about anything China-related pricks up the ears of folks in Hollywood, the impact of this latest maneuver by POTUS on the entertainment industry is murky. The PROC’s mouthpiece media, for its part, warned “the whole world stands to lose” in an all-out trade war.
The order Trump signed yesterday falls under Section 301 of the Trade Act of 1974, a tool used by Washington in the pre-WTO days and allowed the U.S. President to unilaterally impose tariffs and other limits when it was deemed partners had unfair advantages. Monday’s document is focused on intellectual property, but not necessarily the kind entertainment folk mean when they say “IP.”
So where does Hollywood fit into all of this? The USTR is currently negotiating with the Chinese on behalf of the U.S. film industry, and looking for improvements to the current agreement that’s been in place since 2012. On the wish-list is an increase in the 25% share of box office that flows back to the studios, and more control over release dates — or at least longer lead time to enable more comprehensive marketing.
A film industry source points out that Trump’s decree was about “jobs and manufacturing” and, this person feels, the current USTR situation in China is “steady as we go. People are working on it on both sides… We took a lot of comfort in the fact that it was really focused on a set of problems that don’t touch us.”
Indeed, the crux is largely about technology and counterfeit goods, and refers to China’s “opaque administrative processes, and other practices aimed at the transfer of United States technology to Chinese companies.” Read the full document here.
Other sources we’ve spoken with don’t believe that Trump’s latest move will affect the film biz discussions. But one says the current situation creates “a terrible backdrop for any sort of constructive conversations the USTR can have on behalf of Hollywood.” Another agrees, to a degree, “It’s not the greatest background… but it’s good this is targeted and not a declaration of a broad based trade war.”
The Middle Kingdom today warned in general that it will do what it takes to protect its legal interests if trading ties are jeopardized. “China will not sit on its hands and will take all appropriate measures to protect its own legitimate rights,” said a spokesperson for the Ministry of Commerce.
The moves by Trump still put Hollywood on potentially tenuous footing. “The last thing Hollywood wants to do is to offend China, particularly at this time,” says USC professor Stanley Rosen, who specializes in China. “They know they can’t rely on a volatile Donald Trump to help them.” The film industry talks were already expected to drag into next year before anything concrete is advanced.
While China is cracking down on companies at home whose voracious appetites left them debt-laden, and now handcuffed by the ruling party, the country still needs Hollywood whose movies remain a big draw. “They need the films to make the Chinese film market the largest in the world,” continues Rosen.
And although the local box office is currently enjoying a phenomenon in actioner Wolf Warrior 2 which crossed $700 million gross today, a once-a-year mega-smash alone will not push the PROC’s turnstiles to spinning ahead of North America.
Rosen explains further that “Under Xi Jinping, China… is trying to compel multinationals that want the China market, to hand over technology to their Chinese partners, with the goal of course being to have the Chinese companies eventually replacing the foreigners. This has long been a problem with the China market. American companies (and CEOs of course), in part because of the nature of American capitalism, the stock market, corporate boards, etc, have always had to look at the short-term bottom line while China can play a long game.” That’s a thought we’ve heard echoed from other sources.
Rosen notes, “In terms of Hollywood, this has also been true, as in DreamWorks helping China develop its animation industry through Oriental DreamWorks, even though they recognized that China was inviting them in so they could get strong enough in animation to replace them.” Raman Hui, who directed 2015’s hit Monster Hunt, cut his teeth on the Shrek franchise.
Should an investigation go ahead, Rosen says, “I don’t think there’s a lot the U.S. can do without hurting American companies.” China has said it will retaliate, and has options open to it. Rosen doesn’t think it would turn against Hollywood as a first target — despite the high-profile nature of the business. Still, “Given Trump’s relations with Hollywood he would probably be happy to see that happen.” says Rosen.
Granted, film is a very small part of the WTO, but it’s also the most public. And yet, most people we’ve spoken with think attacking film would be tantamount to shooting one’s self in the foot. “If (China tries) to retaliate against the movies, they’re going to screw themselves because the cinemas in China can’t survive with just local films,” a watcher told us earlier this year when POTUS was calling out the Middle Kingdom.
There was a 2011 instance in Indonesia, for example, when the tax on imports was raised and studios decided not to release any films there. The government expected its own movies to do well enough, but the business turned upside down and Hollywood was asked to return to the market.
Last fall, Chinese companies were already raising red flags for some in the beltway who wanted to clarify their intentions in the U.S. and their access to soft power assets. For now, that issue seems to have calmed given the PROC government clampdown on capital outflows.
Regardless of political maneuverings, China is a market that cannot be ignored because it is seen as the next frontier, with more than 1.3 billion potential consumers. Certainly if tensions escalate, China could make it more difficult for Hollywood movies to pass the censors and could easily hand out unfavorable release dates.
But the film industry there is seen to have been playing ball to a degree in the past year with a crackdown on box office fraud. At the same time, the Hollywood majors recently availed themselves of a clause in the longform agreement with China which gives them the ability to take their own close look at the books.
In perhaps a positive sign, as the New York Times points out, in signing the memorandum on Monday, Trump “used uncharacteristically restrained language and a multistep bureaucratic process that will likely put off punitive steps against Beijing for months, if not forever.”
Per China Daily, at a news briefing Monday, Chinese Foreign Ministry spokesperson Hua Chunying said, “With the increasingly interwoven interests between China and the United States, a trade war will lead nowhere and neither side will win.”
“We urge the two governments to work together to resolve these concerns,” Myron Brilliant, EVP of the U.S. Chamber of Commerce, said in a statement, noting that “the U.S.-China relationship is a critical one for the United States, China and the world.”
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