Could U.S. Trade War Could Jeopardise Hollywood's Film Deal With China?

For anyone who’s been closely following the news, it comes as no surprise that President Trump’s determination to drastically reduce America’s trade deficit has led him to turn his attention to China. In a bid to restore the balance between the two economic superpowers, President Trump recently approved $60 billion worth of trade sanctions against the Middle Kingdom. It’s believed that imposing such tough sanctions will help to level the playing field for U.S. manufacturing companies who have been struggling to compete with their international rivals. The Chinese response has so far has been relatively most with just $3 billion of tariffs imposed on U.S. goods, most of which come from the agricultural sector. However, should the trade war intensify then one unexpected casualty could be Hollywood.

China is the most heavily regulated and controlled film market in the world. Currently only 34 foreign films are permitted to be imported into China each year and are distributed on a revenue-sharing basis. In most cases the films are distributed by either China Film Co. or Huaxia Distribution, both state-owned companies. Each film is entitled to 25% of the gross revenues, with the Chinese firms covering all P&A costs plus local taxes. An additional 30 to 40 films are permitted under a flat-fee basis, in which Chinese companies provide a license fee but the studios do not receive a cut of the box office. Understandably competition is fierce for each of these slots as they present a significant windfall of cash and crucially allows Hollywood access to what is fast becoming the world’s largest film territory. Since 2011, China’s box office has grown from just over $2 billion to a staggering $8.6 billion at the end of last year. The explosive growth has been fuelled by the urbanisation of China and growing middle class who are keen to pursue their newfound wealth with an array of leisure activities. This growth shows little sign of abating in the near future and could pivotally help Hollywood offset a declining domestic box office.

So, the question remains, how does President Trump’s trade sanctions affect Hollywood?

Negotiations between U.S. and Chinese trade officials have been taking place since early 2017 in an attempt to increase both the number of foreign films permitted under the revenue-sharing basis and the share of gross revenue available. Hollywood was initially optimistic that a new deal would bolster the number of revenue-sharing films jump from 34 to almost 50 titles. There is also talk that such a deal may lead to the abolition of “blackout” periods in China. A practice where only Chinese-made films may be screened in cinemas during set periods of the year. Most notably around key holiday and festive periods. In turn, this could lead to the Hollywood studios having a greater involvement in when their films are released in China. Currently, they only receive four to six weeks’ notice before their films are given a release slot and little say in when that slot is dated.

The negotiations are now at risk of becoming a high-profile casualty of the looming trade war. If the Chinese regulators decide to delay the negotiations, or even cancel them, then it would represent a major setback for Hollywood. Whilst Hollywood would be able to continue releasing films through the current agreement, it would deny the studios a much-needed source of new revenue and access to an increasingly significant market at a time where Chinese companies are heavily investing in entertainment companies across the globe. Such a situation could ultimately jeopardise Hollywood’s claim as the entertainment capital of the world.