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The trade war’s unlikely victim: Hollywood

President Trump and Chinese President Xi Jinping meet business leaders at the Great Hall of the People in Beijing on Nov. 9, 2017. With the two nations engaged in a trade war, China appears to be punishing Hollywood imports. (Damir Sagolj/Reuters)

Last month, “Avengers: Endgame” became the highest-grossing American film in the history of China. It was a seminal moment, suggesting the partnership between China and Hollywood, which over the years has moved in fits and starts, was finally firing on all cylinders. But the $614 million that Disney-Marvel booked may turn out to be an outlier.

As the United States ups the stakes in a trade war, there are growing signs that China is quietly retaliating against the U.S. entertainment business.

Beijing is now constricting Hollywood’s ability to peddle its product in the country, say four people who conduct business in China or closely monitor its relations with Hollywood.

“I don’t want to use the words ‘total freeze,’ but it’s real,” said John Penotti, the producer of “Crazy Rich Asians” and head of SK Global who specializes in Asian productions. “They’re not saying it officially, but the industry is operating as if it’s close to a total shutdown.”

In contrast to many countries, distribution in China requires government approval, and according to these sources, the Chinese government is unlikely to offer distribution slots to more than a small handful of movies. The latest Spider-Man, Secret Life of Pets and Toy Story movies appear likely to get the nod, but most other summer and even fall hopefuls face being locked out of the world’s second-largest film market.

Hollywood relies on China to power its foreign box office, which in turn powers its film revenue, and the standoff reflects how much of a conundrum China represents for Hollywood.

The availability of so many overseas ticket-buyers at a time of intense entertainment competition at home has been a boon for U.S. studios. But at the same time, the mercurial ways of Chinese regulators and the ways that market penetration is subject to geopolitical crosswinds also make the nation a vexing place for studios to do business.

If the trade war wears on and the market remains cut off, it could result in a reduction of the budgets of studio movies, since it’s Chinese yuan that make them possible.

“I think this poses a dire situation for Hollywood,” said Aynne Kokas, a professor at the University of Virginia and author of “Hollywood Made In China,” about the complicated relationship between the two entities. “There definitely will be a trickle-back effect. It’s a very dangerous financial position to be reliant on Chinese box office to recoup profits.”

The Chinese market has become a place of increasing importance to the American movie business. As the country has rapidly built theaters — it now has more than 65,000 screens, a dozenfold increase compared to a decade ago — it has become a cash cow for American studios. Three of Hollywood’s top five movies at the worldwide box office last year — “Avengers: Infinity War,” “Jurassic World: Fallen Kingdom” and “Aquaman” — each collected more than a quarter of their overseas dollars in China.

Other movies owe the country even more of their success. The underwater adventure “The Meg” notched 40 percent of its foreign total in China, while Steven Spielberg’s gamer-themed hit “Ready Player One” approached 50 percent. China could become the biggest film market as soon as 2020, according to PricewaterhouseCoopers.

But to keep the dollars flowing, studios need those distribution slots. And that’s where matters get dicey.

China officially has a quota allowing in several dozen Hollywood movies per year — 38 in 2019, 35 the year before. Those numbers are up by more than 20 percent in the past five years.

The Film Bureau and its China Film Group division determine what movies are given a distribution slot. But with blackout periods, 11th-hour allowances and other unpredictable factors, even those who study the market say it can be impossible to parse what makes the cut. And lately, with the trade war raging, few movies are.

The Chinese slots are overseen by a mysterious network of regulators, which studios court with teams on the ground in Beijing who are in regular contact with bosses back in Los Angeles. Those regulators have been implacable in the wake of the trade war this spring.

One high-ranking U.S. studio executive, speaking on the condition of anonymity so as not to further undermine the chances of doing business in China, said the Film Bureau’s recalcitrance is as high as he can ever recall. “Let’s just say they’re not rushing to do you any favors,” the executive said.

Marc Ganis, an entertainment entrepreneur and consultant who does extensive business in China via his company Jiaflix, said he believes the de facto freeze is the result of signals bureaucrats are taking from their managers.

“Chinese regulators tend to follow unofficial cues from their bosses, and the cue right now appears to be: ‘Don’t help Hollywood,’ ” Ganis said.

Last month, the “Game of Thrones” finale did not air on tech platform Tencent as it was supposed to. Ganis and others suspect Chinese regulators pulled it as part of the trade war as well, though the show’s edgy political content probably did not help.

The effects could be greater than just a Westeros blackout. There has been no word of China slots for Paramount Pictures’s “Rocketman,” the Elton John biopic that opened two weeks ago in the U.S., or Sony Pictures’ “Once Upon a Time … in Hollywood,” the Quentin Tarantino film about the Manson family that earned rave reviews at the Cannes Film Festival and is poised for a big rollout around the world.

Both films would benefit greatly from a Chinese release but already could face an uphill climb because of edgy content, which Chinese censors frown upon. That would provide an added reason — or cover — to block them in the instance of a trade war.

“It’s not a transparent system where there are a set number of slots,” said Glen Basner, chief executive of the international sales and production company FilmNation and one of Hollywood’s most prominent overseas figures. “It’s a complicated process that depends on the content, on whether Chinese films are doing well, on a whole bunch of factors.” The trade war, he said, appears to be exacerbating them.

Two emails to the China Film Group seeking comment were not returned.

Trump has escalated long-standing economic tensions with China via a string of tariffs on Chinese products. The president is demanding Beijing do more to protect U.S. intellectual property and to open its markets to U.S.-made goods. China has responded with tariffs on U.S. products, and both sides are threatening further barriers to trade.

The standoff is also creating other effects. One prominent U.S. film producer, who asked not to be identified so as not to jeopardize relations with the country, said that when a Chinese-language movie they produced was released in China recently, they were asked to reduce their credit — that is, take a publicly lower role on the film — so they wouldn’t need to appear in marketing for the films. The Chinese distributor was worried how a prominent American name would play both to the public and to the government. “I think protectionism can take different forms,” the producer said.

The only exception to the freeze appears to be Disney. The studio has long managed the Chinese relationship well, in part because the two are business partners: The Shanghai government is the majority owner of Shanghai Disney.

That’s why, according to Ganis and others, Disney seems to be among the few companies granted release dates (“Endgame” as well as “Spider-Man: Far From Home” and “Toy Story 4″). Universal, behind “The Secret Life of Pets 2,” also appears at least partly unscathed for the moment.

The Film Bureau also works in concert with the National Radio and Television Administration (formerly the State Administration of Press, Publication, Radio, Film and Television, or SAPPRFT) to determine whether material is deemed appropriate. Censors are believed to dislike revolutionary and political stories, which may have played a role in the disappearance of “Thrones” from Tencent.

Still, some remain optimistic. Penotti, the “Crazy Rich Asians” producer, said he thought this all could turn out to be “a temporary setback” regardless of what happens in Washington.

He cites reasons for the Chinese government to prop up the U.S. film business. Typically, Chinese government officials want to make sure sales for domestic films are strong and are not overshadowed by Hollywood imports. So they adjust slots so more than half of box office comes from homegrown product.

But these officials also want to avoid scrutiny and charges of protectionism, particularly from domestic theater owners. And they want to make sure the movie economy does well in the country generally. So they will often work to make sure the foreign box office doesn’t dip below 40 percent. That could mean a flood of slots granted for December even if the trade war continues.

And with domestic movies doing well — China saw its second-highest-grossing domestic movie ever, the sci-fi epic “The Wandering Earth,” open over the Lunar New Year period several months ago — they would be incentivized to act on behalf of Hollywood imports.

China could also need American content as its own productions have slowed in the wake of the so-called Fan Bingbing tax-evasion scandal.

The actress, a huge box-office draw, has fallen out of favor after admitting to dodging tens of millions of dollars in taxes. That has knocked out one of the country’s biggest stars and slowed down its production. (One expert compared it to Tom Cruise, Will Smith and Brad Pitt suddenly becoming unhireable at the peak of their powers.) This could cause China to ignore trade-war pressures in the name of preserving its movie industry.

However, Kokas, the U-Va. professor, notes that given the dynamics of the trade war she wouldn’t be surprised to see the lockout last months or more. Securing access for tech and other exports is far more important to Chinese President Xi Jinping, she said, than propping up domestic box office. “They could keep this going indefinitely if they want to,” she said. China, she noted, could also allow in more films from India and other countries, as they recently did.

The White House has remained silent so far on the trade war’s Hollywood dimension. But Trump has repeatedly battled with some of the industry’s most prominent names, tweeting insults at the likes of Meryl Streep and Robert De Niro after they assailed him at award shows. As much as the “Apprentice” star came to prominence because of Hollywood, Trump has cemented his political brand by speaking out against it.

Could that actually cause China to back off the movie business? Experts say that’s unlikely.

“I think China is going to do what it thinks will protect its economy,” Ganis said. “What this just means is the president won’t shed any tears over it.”