Censorship and U.S. Content Exports to China: Why We Need Better Market Access, Not Cultural Decoupling

Nigel Cory June 29, 2020
June 29, 2020

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There is a vibrant debate underway in Washington about how to respond to China, particularly its “innovation mercantilist” policies. Most ideological camps favor tougher action than the U.S. government has taken in the past, but there is little consensus on what that action should look like. Among those on the hawkish, “get tough on China” end of the spectrum, there are some who favor significant decoupling of imports, exports, and investment, while others favor selective limits on Chinese investment and trade, greater attention and support for U.S. innovation, and moving some production out of China. For this latter camp, not exporting to China is a strategic mistake of the first order, because it not only cedes market share to Chinese firms, but also cuts off needed revenue for U.S. firms.

On balance, we see many more proposals for the former approach today—the drive to decouple. President Trump wants to cut off U.S. exports of computer chips and some other high-tech products to China. Many human rights advocates argue that U.S. Internet firms should not be in China, and certainly, as in the case of Google for example, not re-enter the Chinese market after they’ve left. The latest person to press for this approach is Sen. Ted Cruz (R-TX) with his legislation that creates a seemingly simple, but misguided and nearly impossible to implement, quid pro quo: U.S. firms can get U.S. military and other government assistance if they promise not to alter content for Chinese censors. Before discussing the problems with this bill—the Stopping Censorship, Restoring Integrity, Protecting Talkies Act (the SCRIPT Act)—the key point in many of these proposals (even if well-intentioned in how they seek to counter legitimate concerns about China’s economic, military, and political power), is that they do so in ways that “shoot ourselves in the foot” by limiting U.S. sales in China. Anger towards China is understandable; but the U.S. policy response should be guided by cold hearted self-interest.

The SCRIPT Act Is Unrealistic and Unworkable

Senator Cruz is trying to target a legitimate concern—China’s extraterritorial application of censorship—but it misses the target in hitting American moviemakers rather than Chinese censors.

Senator Cruz cites as an example the fact that the Japanese and Taiwanese flags were not on lead actor Maverick’s jacket for Top Gun: Maverick (where they’d been in the original Top Gun). It’s hard to know whether the move was innocuous or directed, and if the latter, then directed by whom (the film’s co-producers, Tencent, or government reviewers). Regardless, Sen. Cruz’s bill essentially severs the cultural and economic connection whenever the U.S. and Chinese governments intersect in their respective roles in developing and distributing movies. Any firm wanting U.S. government assistance would have to provide a decades-long retrospective list of films they’ve produced or funded that has been submitted to Chinese government authorities for review. It also prohibits assistance to films co-produced with a Chinese firm (like Top Gun: Maverick). It also sets up an annual hearing and report (from the Department of Commerce) on Chinese censorship.

This bill tries to act as an export ban in trying to force U.S. firms to decide between U.S. government assistance and the large and growing Chinese movie market. As movie studios engage in the financial calculations about the potential costs and benefits of screenwriting, various actors and shooting locations, production, editing, and marketing options, the bill wants the role of U.S. government assistance to outweigh all other variables. But it’s impact would be limited. The number of films that require major U.S. military assistance (like Top Gun and Lone Survivor) are few, meaning the vast majority of movies operate off creative and market factors—as it should be. Moreover, to the extent it means fewer movies like Top Gun, which highlight all the best about America and its military men and women, it would only serve Chinese interests.

It’s a de facto call to cut off U.S. content exports given every movie or TV show needs to be reviewed in China. Such cultural decoupling would only hurt U.S. workers and firms in a sector that already faces unfair competition from Chinese firms (via quotas and other restrictions, often under the guise of censorship). If the United States wants a stronger U.S. cultural content sector at home and abroad (beyond China), it should push for better access to the Chinese film, TV, and digital content markets, as every dollar U.S. firms earn is one that goes back into the U.S. economy instead of to Chinese content firms that want to export their content around the world.

The bill is unrealistic as much as it is unworkable. It puts U.S. firms in the impossible position of standing up to China, which is largely immune from this type of pressure, as censorship is central to the Chinese Communist Party’s efforts to maintain its power. This should be the role of the U.S. government and other likeminded governments in supporting human rights, like free speech.

It’s unworkable as firms involved in co-production, whether from China or other countries, are going to be deeply involved in their films in order to ensure the content suits local tastes and regulations. Tailoring films for local markets, in cooperation with local investors, is not unusual. This happens from the early script phase onward, where constant changes are made for all sorts of reasons. This closed-door process is nearly impossible to regulate. In 2018, films with Chinese investors accounted for 20 percent of U.S. box office ticket sales, versus 3.8 percent in 2013. Jointly produced films tend to do better at the box office than non-Chinese produced films, often as a byproduct of creative decisions made to secure the coproduction agreement. Just as Hollywood is adapting movies to the Chinese market and authorities, it is investing and producing movies in India in local languages and with content suited for that market. Meanwhile, Indian media firms are investing in Hollywood productions and co-producing films.

Using Movies to Push National Goals Is One Thing; Censoring the World Is the Real Problem

No doubt, China’s Communist Party has centralized, strengthened, and expanded the censorship mechanisms it uses in an attempt to protect itself at home and abroad. Senator Cruz rightly opposes the values China’s Communist Party seeks to extol as part of this, but ultimately the content development and review process involved is not new, nor is it dissimilar from that of many other countries. Many movie studios tailor content for local markets in order to avoid offending key audiences and demographics with inappropriate religious, political, or cultural references. But not all changes are about politics. A lot of the more mundane censorship concerns violence and nudity and other issues.

Nor is using movies to support national narratives and other goals new or unique to China. China was involved in Wolf Warrior for many of the same reasons the Pentagon was involved in Top Gun and Top Gun 2. The relationship is mutually beneficial in that the U.S. military gets to influence the public, which as a byproduct may help recruiting and retaining personnel. The U.S. Defense Department already reviews scripts of movies that require military assistance. For example, the Department of Defense initially denied military support to Superman: Man of Steel, as it found the script’s portrayal of the military “cartoony.” Films are denied support if they show the military in a negative light, such as scenes that include drug use, murder, or torture without subsequent punishment. For those reasons, Platoon, Apocalypse Now, Zero Dark Thirty, and Argo were all denied support. This shows that U.S. government involvement is not necessarily a requirement for success.

Obviously, U.S. government involvement in movies is not comparable to China and its propaganda and censorship apparatus. China’s film studios are developing a steady pipeline of films to instill ideology and patriotism, such as those released in advance of the 70th anniversary celebrations for the Chinese Communist Party in October 2019. This is part of China’s policy environment around cultural content. In 2017, an official at the then-State Administration of Press, Publication, Radio, Film and Television (SAPPRFT, which is responsible for review and censorship of content) told industry representatives that movies should serve the purpose of “promoting the prosperity of socialist culture and realizing the Chinese dream.”

Senator Cruz’s concerns regarding the international spillover of China’s censorship are fair, given that China is being more assertive about punishing firms and organizations about what they say and do outside of China, but again, it’s not unique to China or to movies. Privacy regulators in Europe have tried to dictate what information U.S. firms make available to people in Europe, but also the rest of the world, through their “right to be forgotten” requirement that gives European Union citizens the power to demand that data and information about them be deleted. The same can be said of different countries’ content removal policies. Germany requires social networks to remove Nazi symbols. In 2017, the Supreme Court of Canada upheld orders for Google to “de-index” a website, and asserted the jurisdiction of Canada’s courts over Internet intermediaries in other countries. The United States should focus on ensuring that U.S. firms only apply these rules in local jurisdictions and come up with other tools to counteract its spillover into the United States.

The Large and Growing Trade Impact of Chinese Censorship

Senator Cruz notes the growing importance of China’s market to U.S. movies, but disregards the fact that the explicit censorship review process is just the tip of the iceberg in terms of market restrictions U.S. content creators face in China. It also downplays the critical role that China’s market access plays in supporting Hollywood and the broader content creation sector in the United States.

If U.S. industries lose market share to unfairly competing firms supported by their innovation mercantilist governments, it means two things. First, sales fall. This is true because global sales are largely fixed, and if a mercantilist-supported competitor (unfairly) gains market share, then the market-based competitor loses share. Second, because profits decline more than sales, it becomes more difficult for the market-based innovator to reinvest revenues in the next generation of products or services, meaning that the mercantilist-supported entrant has an advantage in creating the next generation of products.

This trade impact of China’s censorship and market restrictions has grown over time. Before COVID-19 hit, China was on track to overtake the United States as the world’s largest movie market in 2020. While U.S. movie-ticket sales (pre-COVID) are relatively flat, China’s have more than tripled since 2011. China has become an important market delivering profits that support Hollywood’s blockbuster franchise offerings. Overseas box office revenue is what often turns somewhat new and ambitious films (like Interstellar or Life of Pi) into blockbusters. The Hollywood releases that break out in China are generally the same ones that succeed globally. While China cannot be counted upon to bail out big-budget movies that bomb in the United States, Hollywood wants to (at least) be able to count on potential revenue to justify the budgets that keeps the industry growing.

The problem is that as China’s own filmmakers get better (due in part to Chinese government support and protection), then U.S. content creators will have an even harder time competing for the limited attention and ticket spending that they’re allowed. In 2019, China’s box office was dominated by local films—eight of the 10 top-grossing films were domestic movies—which is a worrying sign for Hollywood. Let there be no doubt: China sees the movie industry as a strategic industry of the future, not only for the export revenues it will bring in, but for the opportunity to export the Chinese Communist Party worldview. Limiting U.S. move exports through the kinds of steps Senator Cruz proposes would only speed the process by which China gains global market share at America’s expense.

Censorship Is One of Many Barriers to Trade in Cultural Content in China

China deliberately restricts U.S. access to its movie market through quotas, revenue sharing limits, an overly broad, arbitrary, and opaque censorship apparatus, and other measures.

China’s Use of Censorship as a Non-Tariff Barrier to Trade

Censorship is a major non-tariff barrier for U.S. studios. Beyond the Great Firewall, censorship in China is often part of a complicated and often opaque legal, political, and bureaucratic process. While state agencies obviously play a key role, the implementation of censorship is increasingly decentralized to private firms who guess what censors will or won’t like. At its heart, the formal content review process that every movie and television show goes through in China is based on vague and non-transparent criteria, which are applied inconsistently, which together create an unpredictable and burdensome market access restriction. Reviewers may require various changes, such as edits in the script, obfuscated translation, and title changes. Sometimes the censors simply don’t respond, thus denying access.

China Use of Quotas and Revenue Sharing Limits to Restrict U.S. Market Access and Profitability

Since 1994, China has placed a quota (at that time it was 10) on the number of foreign films that can be shown in Chinese theatres. In 2002, the quota increased to 20. In 2009, the United States won a trade dispute challenging China’s restrictions on foreign films (that they only be imported through a few government-designated intermediaries) at the WTO. In 2012, the United States and China negotiated an increase in the quota from 20 to 34. The 2012 agreement also allows foreign movie makers to keep a bigger share of the box office takings, increasing from 13 percent to 25 percent. A rate that is significantly lower than in market-based economies. This quota mainly affects the major U.S. studios. A few dozen foreign independent films also get approved for release each year. Both sides agreed to re-negotiate the quota five years after this 2012 revision, but there hasn’t been any further progress as the issue got rolled into the broader U.S.-China trade war. The formal quota comes on top of an unofficial policy of manipulating the market to ensure Chinese movies account for a 60 percent box office share. On top of all of this, studios have had problems getting paid for what they are allowed to distribute in China. For example, a Motion Pictures Association-requested audit of the Chinese box office in 2016 showed that Chinese cinemas underreported box office numbers by 9 percent, which given the revenue sharing arrangement, meant U.S. studios were underpaid by about $40 million.

China’s Use of Distribution Restrictions

Quotas and censorship are far from the only issues facing Hollywood. The International Intellectual Property Alliance reported that the ability of U.S. producers to compete in the Chinese marketplace was drastically curtailed during 2019, with licensing opportunities on all distribution platforms significantly hampered, through opaque regulations, obscure content review processes, and a “soft ban” on new U.S. imports. U.S. content creators have to submit full seasons of television shows (rather than as episodes are developed), which delays distribution, instead of allowing advance registration and rolling approval. SAPPRFT prohibits the cross-border supply of online video services, foreign suppliers from qualifying for a license to distribute content domestically (theatrical distribution is dominated by two state-owned firms), and the foreign majority ownership of firms engaged in the production and publication of audiovisual content. China also has ‘black out’ periods when foreign films aren’t allowed to be shown, even if they’ve been approved, such as Chinese New Year.

Conclusion

Senator Cruz’s bill would exacerbate the impact China’s restrictions have on U.S. content creators. It essentially pushes for U.S. firms to leave or stay out of China by saying that they should not adjust their content in response to Chinese government dictates. While telling Hollywood to stay out China might allow him and human rights advocates to assert moral authority, it would have no actual beneficial effect on free speech and human rights: Chinese people would still face a censored movie and TV market. Yet it would give Chinese companies the vast local market, and they would use those revenues to continue innovating and expanding into markets around the world, ultimately taking market share and jobs from American firms and reducing Hollywood’s global reach and all the benefits that brings to the United States.

Obviously, U.S. firms have the right to decide whether to enter or stay out of China for whatever reason. However, there should be no doubt that it is in America’s long-term economic and security interests that U.S. firms sell as many goods and services to China as possible. Every dollar’s worth of digital and physical exports from the United States to China is a dollar that Chinese firms do not make—and it is a dollar American firms can use to reinvest in R&D and support employment in the United States. America’s policy vis-à-vis U.S. cultural content and information services exports to China be based on national interest, not national moralizing.

The United States needs to develop a new and better targeted strategy to address the unfair playing field in China for U.S. content creators. Limiting the trade impact of these protectionist tools would also go some way to mitigating the broader impact of Chinese censorship (as per a 2015 Economic and Security Review Commission report). While success is far from assured in trying to change China’s use of censorship, and mercantilism, the onus should be on the U.S. government to lead such an effort.