Hollywood Avoids Tariff Retribution as China’s Box Office Begins to Lag

As studios held their breath waiting for some payback economic conditions have changed the game.

Many industries have been worried their products would bear the brunt of economic reprisals in the Mainland following Donald Trump’s tariffs program levied on Chinese products. While a legitimate concern one sector some may not immediately expect to be affected is the entertainment industry, but Hollywood studios have managed to sidestep the economic revenge — for now.

In China the movie industry takes on a deeply curious characteristic, one that is already gauzy and curious here in the US. The ChiCom government wields control over the movie industry not too dissimilar from the way OPEC influences the crude oil commodities markets. The ChiComs operate the theater chains, lord over the production studios, and approve of the content that is permitted onscreen inside theaters. They also keep a very tight reign on the involvement of Hollywood in its marketplace.

Each year only a few dozen Hollywood produced films are allowed into the Chinese film market. And of those permitted the authorities can, and frequently do dictate when particular content has to be removed. Hollywood has shown a willingness to censor its own product in order to gain entry into the lucrative Chinese market. To this extent the ChiComs have floated its explosive film industry as a signifier of the overall health of the nation.

That is why the news that 2019 has shown a significant struggle for the Chinese movie business becomes a source of many questions. At the halfway point of the year the Chinese box office is down a significant -2.6% over 2018 returns. A number of factors have been considered, but the reality is it could have been significantly worse — except for Hollywood. Movies originating from Burbank have seen a sharp increase of nearly 15% over last year. That means the domestically produced films — which the ChiComs deeply favor — have performed even worse than the initial metrics indicate.

The communist government officials keep a very tight clamp on Hollywood productions. While many foreign markets grant Hollywood in the range of 40%- 45% of the box office returns, in China the rate is only 25%. (Chinese co-productions with Hollywood
will see a title returning closer to 40% for US studios.) The government also manipulates the film release schedule to favor home-grown movies. The peak weekends on the calendar are usually denied to Hollywood titles, in order to ensure Chines movies dominate the box office figures.

But now the ChiComs are in a position where they may need to rely on Hollywood films to bail out a flagging marketplace. So far this year two of the top-5 films in China were US-produced — “Avengers: Endgame” ($614b US), and “Bumblebee” ($170b US). In years past when this type of market drop took place the ChiCom movie authorities have relaxed the hard quotas, allowing for more Hollywood titles than normal. Also this year they have encouraged far more non-US titles to be exhibited, with a stark increase of nearly 40% of non-Hollywood foreign films to be shown.

The irony in this is that in order for the flagship marketplace to appear vibrant the Chinese film authorities have had to flood its marketplace with outside content. In order for the Chinese film industry to appear vibrant they are relying on Hollywood, and foreign productions, to make it seem far more successful; the foreign imports used to boost the appearance of a strong local economy.

The unintended result here is that this reliance on Hollywood blockbusters to invigorate the Chinese film business means US studios may be avoiding economic punishment as a result of Donald Trump’s tariffs.