Q & A: New Zealand’s big subsidies for the newest Hobbit film

From UHERO, December 13, 2012

1. It’s a big weekend coming for the film business, with the newest film in the Hobbit trilogy opening worldwide today and tomorrow.

Yes, the film is called The Hobbit: An Unexpected Journey and once again the esteemed New Zealand film director, Peter Jackson, is the creative genius behind this film. I watched the film’s trailer and thought that it looked really great. The film uses pioneering technology that doubles the number of frames per second. And, like the three Lord of the Rings films, this film was made in New Zealand. And just seeing New Zealand’s stunning landscapes once again in a fantasy film about hobbits is a good enough reason for me to go see it! .

2. Why did the film's producers choose New Zealand?

Over the course of two sets of negotiation in 2009 and 2010, the New Zealand government agreed to three key demands made by Warner Brothers, the Hobbit trilogy’s producers. First, it agreed to limit collective bargaining rights of workers on film projects. Second, it agreed to tighten its copyright laws related to downloading material from the internet. And third, it agreed to provide subsidies to the film’s producers (Warner Brother) estimated by some observers at up to $120 million. The subsidies go far beyond those that were offered to any other film being made in New Zealand.

3. So why is New Zealand offering such large subsidies? Wouldn’t New Zealand have been a natural place to film another film about hobbits?

New Zealand is offering the subsidies partly because it expects new waves of tourists to visit to see the locations featured in the film. The subsidies were also partly a response to demonstrations by workers on the film project who wanted the government to do something to keep the films’ production in New Zealand. And, very importantly, big movie studios have become very skilled in extracting such concessions from governments.
Were the subsidies to the Hobbit film necessary to keep its production in New Zealand? That’s unclear. New Zealand would have had to reject Warner’s Brothers demand for us to know. But what is clear is that much of the gain from making the film in New Zealand was transferred to the film’s producers.

4. So is there anything wrong with individual countries offering subsidies to attract film projects?

Yes, two things in particular.
First, it reduces taxation of the film industry to levels lower than those in other industries. There’s no particular reason for this. Other industries also generate jobs and spending.
Second, these tax-payer-provided subsidies are beggar-thy-neighbor policies. At the end of the day, they just tend to cancel each other out and essentially transfer taxpayer money to corporations and industries skilled in extracting such concessions.

5. Are they consistent with World Trade Organization rules?

Probably not. The new Hobbit film is a New Zealand export; almost all of its revenues will be earned outside New Zealand. And WTO rules on export subsidies are clear: They are illegal, whether directed at a particular firm or a whole industry.
Other countries whose film production businesses are hurt by the subsidy could bring a complaint to the WTO and ask that it be resolved by the WTO’s dispute resolution process. To date, however, there have been no complaints to the WTO regarding film subsidies by a national, regional, or local government.
Film subsidies may appear to benefit the countries that win the battle to attract the film, but this type of competition between countries often just serves to transfer most of the benefits from the project to film studios. Countries would be much better off if they used the money spent on tax credits to improve their business environments, their infrastructure, and their public education systems.

6. Can subsidies to particular industries and projects ever be justified?

Yes, if they generate substantial “spillover” benefits that are captured by other industries and projects. And under certain circumstances, subsidies can also be justified for start-up firms and industries.