It is not often that there’s a genuinely new idea around in trade policy, but lo and behold, here’s one: a tariff on a service.  US President Trump is considering a 100% charge on films made abroad. Spielberg would call it a close encounter of the third kind.

Although the charge would apply in principle to any foreign-made film, it could hit the UK film sector, part of its successful creative industries, particularly hard, turning it into the English Patient if the idea gained traction. But how could it even work?

Since services are intangible and non-storable, suppliers and consumers of services somehow need to come together for a service to ‘change hands.’  Internationally, this can happen in a variety of ways. For instance, the service may be delivered digitally via the Internet, as indeed it would be the case for a movie or an architectural blueprint.  The consumer could travel abroad to enjoy a service (e.g. tourism), or firms could set up affiliates abroad to sell their services to local consumers (anyone who hasn’t done their groceries at Lidl or Aldi?).  Lastly, a service supplier who is a natural person, such as a movie director, could travel to another country and carry out their services abroad.

Services don’t pass through customs, and it is generally difficult, across all these ways of trading services, to get hold of the transaction for the purposes of levying a charge, especially when the service travels via the Internet. That’s presumably why the idea of tariffs on services has thus far not caught on.  Regarding films, the sector’s market structure with (co-)production companies, actors, freelancers, and subcontractors is complex, not to mention new delivery formats such as streaming competing with cinema theatres. And a cobweb of investment flows links film-making companies internationally.

Against that backdrop, the US authorities would need to work out what constitutes a “foreign” film in the first place, what its price is—which likely differs across distribution formats—and then know whether any such film, or the rights to it, were purchased from abroad or from a US studio, and how a charge could be applied if a foreign movie was streamed directly into a US household rather than shown in a cinema. The legal basis and the practicality of doing so are unclear at best.

Even if it worked (somehow) to identify, track, and charge foreign films or other services supplied cross-border, it would presumably be straightforward to switch to another mode of supply, namely setting up a suitably structured affiliate entity within the US, rendering the service tariff in vain.

At a first pass, therefore, a tariff on foreign films would appear to be highly distortionary for a delicate cooperative and creative ecosystem (inducing the industry to opt for ways it would not otherwise have chosen).  It would also be costly to US consumers in terms of welfare losses that usually go unmeasured but nonetheless are for real.  Ways of eschewing the charge through reconfiguring the film value chain could render the charge ineffective and diminish the revenue raised from it in the US.  And as operations of US studios are closely intertwined with foreign countries, including substantial investment of US film studios in the UK, the charge could eventually backfire on the US film industry in terms of costs and/or jobs.  Thus whether charging or banning foreign films in the US would “Make Hollywood Great Again” (according to White House spokesman Kush Desai) is anyone’s guess.

None of this is to suggest that trade in services could not, and should not, be regulated. Indeed, a whole slew of services from financial to health and transportation services is subject to policy measures, including local content requirements in the audiovisual services sector. But these are all behind-the-border regulatory measures, rather than tariff charges.

In terms of disciplines on trade policy, it also matters that digitalisation has profoundly transformed audiovisual services, both its production and scope for trade.  Digital goods and services fall under the purview of the WTO’s “Moratorium on Customs Duties on Electronic Transmissions”, which in essence implies that countries are forbidden from imposing import taxes on business-to-consumer or business-to-business transactions that take place across borders over the Internet.  Digital movies are evidently covered by the moratorium.  Yet given the extent of multilateral rule-breaking that we’ve seen over the recent past with so-called ‘reciprocal’ tariffs by the US administration, let’s not sweat the details of WTO rules in this area.

The suggested 100% charge on foreign films is likely intended to be a bargaining chip in ongoing trade talks.  In that case, the idea of a tariff on services might disappear once the US gets what it wants, rather than turn into a blockbuster. Whatever the next episode is in this storyline, viewer discretion is advised.

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