What just happened?

US President Donald Trump posted Sunday on his Truth Social network that he would begin initiating a 100% tariff on "any and all movies coming into our country that are produced in foreign lands", claiming that Hollywood was dying thanks to foreign markets drawing production away from the US with tax incentives. Trump said the shift in production represented a national security threat. The surprise plan followed delivery of an action plan by actor Jon Voight after he led an industry consultation aimed at 'saving Hollywood'. The action plan is believed to focus on offering tax incentives and tax code (rate) changes for film makers; subsidies for production and post-production companies; and tariffs in 'limited' circumstances which Trump appears to have interpreted as an immediate 100% tariff on all foreign produced movies. 

What does it mean?

Sudden extreme statements from Trump via his social media network are nothing unusual, especially in recent weeks where tariffs have been concerned, with a pattern emerging of a threat of 100% tariffs that is then quickly rolled back. There is still much that is unclear about the proposed tariffs and, even with a clear, fully mapped out plan, implementation in an industry so reliant on global markets and partnerships would be complex in the extreme. It is also not clear if tariffs apply only to movies or if TV production would also be included. Any change that pulls production out of international markets would be devastating for the production, studio and post-production businesses which are anyway in the process of rescaling following the end of peak TV and a 25% drop in volume demand for first-run TV shows. But such a shift would also hit US companies at a time when they are trying hard to rationalise spend on content and grow their international footprints. While the US clearly holds the 'trump' card because of the universal popularity of its film and TV output, Europe and other international markets would not be completely powerless to take retaliatory measures that would hurt a US industry increasingly dependent on international markets for its growth.

What broader issues does this proposal raise?

Even regulators and trade bodies struggle to determine what constitutes a local movie, so one of the biggest issues in implementing any tariff plan will be simply determining when and if it should apply. With the aim of 'making Hollywood great again' by encouraging US production, the tariff would surely need to be applied even when the company making the film - and all of the finance - comes from the US. The killer, though, is that the US company is also the one making the profit from the production so is then left between a rock and a hard place: Does it absorb either a significant increase in costs to make the movie in the US in the first place, or a loss of profit thanks to a tariff applied to its productions made overseas? There is also the competitive dynamic, particularly for US-based global streamers that need international markets and audiences to fuel their ongoing growth (and profitability). They need content that resonates with local audiences and while you can do a lot with a sound stage and a talented below-the-line-crew, it's typically a lot easier and cheaper to film foreign-set stories in the lower-cost locations where they are set.

Then there is the question of co-productions. If a movie is minority financed by a non-US entity or has a minority of its scenes filmed outside the US, is that a foreign movie? Where would the threshold be set in an international partnership or for a partially international production? Could a loophole be created that would actually boost international co-production because part-financed and produced films fell outside of the definition?

The inclusion, or not, of TV production is also critical. Volume-wise, TV accounts for 70% of all Scripted commissioning activity globally, with 85% of that by volume being made outside the USA. While US production still accounts for 40% of all movie making by volume, that market represents a smaller volume of activity (by title) overall. If a new tariff apply only to movies, not only is it missing a big segment of the global production market, but it leaves the door open for investment to shift further into TV, a wider trend that is arguably a greater threat to the movie sector.

What is the likely impact? And what might the global reaction be?

The immediate impact is an increase in uncertainty (the last thing the industry needs right now) and while executives at international production companies surely have a few sleepless nights ahead of them, this isn't all a one- way train. The US is heavily reliant on international markets for its income from entertainment. For movies made in the USA, 54% of their box office comes from international markets, opening one mechanism for foreign governments to retaliate with a charge on box office receipts for US films. For TV content, international markets are even more important with rights and licensing deals generating hundreds of millions in income for US companies, meaning licensing deals offer another mechanism for retaliatory measures. A third mechanism could draw on measures already in place in the form of levies on the revenue of US streamers, or content investment quotas. These mechanisms are already active in 17 European countries, with increases in local investment requirements or higher levies offering a quick way to partially offset the impact of any new tariffs from the US. 

The importance of growth to US streamer (and by extension major studio) profitability, also presents an interesting conundrum. Forcing more US content into key international growth markets is not the best strategy for growth, and would negatively impact the dynamic between US streamers and studios and the local players they compete with. If the tariff is not equally applied to both film and TV, the door is left open to a shuffling of production investment between film and TV, potentially benefiting international TV productions while damaging international movie production. 

Clearly, competitive incentives are a far better mechanism for stimulating growth than complex, and probably unworkable, protectionist measures. California has been slow to match tax incentives offered by other US states and international markets with production moving not only overseas but also to New York and Georgia. Most recently, Nevada has set its sights on becoming the next 'Hollywood' with a new incentive scheme and studio building programme. Federal as well as State tax schemes would therefore offer a double opportunity to re-stimulate the local market. Given that the report produced by Voight and his team stressed the importance of a range of measures, it seems the most likely outcome will be a retrenchment on the tariff plan (with perhaps a token tariff on some large scale international productions) and the rollout of a better-thought-out incentive scheme to make Hollywood more attractive at least than neighbouring states.

Fundamentally, the protectionist approach ignores the fact that the move to international markets is not all about cost but about fundamental changes in the entertainment business. For one, declines in production volume over the past 18 months is not a US-only phenomenon, but a global one. The globalisation of audience and opportunity that presents thanks to convergence on streaming as the primary distribution technology has also been a key driver for US companies making more content outside the USA. The growing importance of premium TV Drama as a top-tier entertainment format is another shift that seems not to have been fully accounted for in the rescue plan that has, after all, been put together by ageing movie actors. The world of entertainment has evolved since the days when Hollywood was the be-all and end-all of film and premium TV entertainment, and while the US remains by far the biggest single market, international is now fundamental to its health and survival..