This may be one of my most important posts. For years I’ve written about the harm caused by subsidies for visual effects and how many good companies have been put out of business and how many good people in the industry have been forced into a cycle of displacement.
At some point between the start of this blog and now, I contacted government officials and various law firms about what options are available to try to help fix the problems the VFX industry faces because of market-distorting subsidies. One law firm stood out and in December I asked many readers to donate funding for a feasibility study in which the firm would recommend a path to mitigate the effect of these subsidies in the visual effects industry.
First I want to thank those of you who patiently and passionately supported this study. Your support is crucial. I also want to thank those who came forward to speak with the lawyers so they could better understand the issues we face. Finally, I want to thank and introduce you all to Washington D.C. based Picard Kentz & Rowe (PKR).
Their team of international trade law experts Andrew W. Kentz, David A. Yocis, Kevin M. O’Connor, and Nathaniel M. Rickard have worked on this study over the last few months. I’ll have another post on why I chose them, but for now let’s get to their recommendations which are in the link below:
I originally approached law firms with the intention of challenging subsidies on the basis that they are banned by the World Trade Organization. The study recommends against this route for the same reasons the 2007 effort failed. While these subsidies probably do violate international trade agreements, it is the sole discretion of the US Trade Representative to pursue a WTO case. To this day, we still do not know the exact reason for the rejection of the 2007 effort even though that petition was solid. Many suspect it was because of backdoor lobbying by the US studios who benefit from these subsidies.
Instead of going through the WTO and trying to get each country to stop subsidizing the US studio productions, many of you have mentioned the possibility of some mechanism that would coerce producers to repay the amount of subsidies they receive to offset the market distorting effect. UK-based VFX artist David Stripinis mentioned this in a post.
While his premise is correct, his conclusion that such a mechanism would require a law passed by Congress is incorrect. The law, which is called the countervailing duty (CVD) law, already exists, and PKR specializes in CVD issues. While using the CVD law would have its challenges, it is important to note that the application of CVDs are mandatory, meaning if the conditions are met, the US government cannot just decline to apply it.
In 2001, the Film & Television Action Committee tried this route but withdrew their petition after they failed to get film industry support. However, they admit that the counsel used for this process didn’t specialize in CVD laws. The application of countervailing duties are very technical and our team at PKR have specialized in applying CVDs and similar trade remedies for several industries, including lumber and shrimping.
The study goes into detail on what we would need to do technically to apply the CVD law, and it also goes through some of the challenges we would face and some precedents that would support our effort. The main takeaway from its findings is that there are some novel and challenging issues to overcome – but that there is a path forward. The strategy isn’t guaranteed to succeed, and even if successful might not completely capture all possible subsidies. But it does present a tangible path, something solid we can consider and perhaps organize towards.
The way countervailing duties usually work is that US Customs collects cash deposits on imported merchandise that has been deemed subsidized and, thus, subject to a CVD order, when it enters the United States. Then, once a year, the Commerce Department calculates how much subsidy was actually given and sets the final amount to be repaid as an import duty. Obviously, our biggest challenge is that subsidized visual effects imports for feature films are transmitted digitally and essentially bypass traditional methods used by US Customs to assess import duties.
Nonetheless, the study concludes that while it has yet to be tested, the CVD law should apply even to digital imports. Even if producers bypass customs by digital methods such as the internet or cloud computing, the CVD law would set up a mechanism where duties can be assessed retrospectively on an annual basis. So a US producer for a film who chooses Vancouver as the location to execute VFX work for a significant rebate could find itself at risk of having to pay the whole rebate back to the U.S. government a year later after an annual review by Commerce. That alone could be a powerful deterrent for locating VFX production somewhere based simply off of a rebate.
The study goes into other details as to what the next steps should be. For example a formal organization should be formed to give counsel direction on how to proceed, and a petition would need to be filed with the Department of Commerce to initiate a CVD investigation.
There will be many opinions about today’s findings and many questions too. I’ll try my best to answer them and I am in the process of scheduling interviews and Q&A sessions with the law firm and VFX professionals. I think one of the obvious issues that people will have questions about is state-side subsidies given that the CVD law does not apply to interstate commerce. We’re against subsidies for VFX in the US also but, frankly, most state-side subsidies are for physical productions, not VFX.
The only significant state subsidies for VFX are for entities that no longer exist: Digital Domain Florida and Sony Pictures Imageworks New Mexico have all been shut down. That’s not to say that if the CVD route is successful that studios will not try to push work to states that will subsidize VFX work. I will let you know that I am also prepared for that situation and have a plan in the works.
In the meantime, email me or comment below on your thoughts. We’ll assess what the next stage will be.
Update 7/11/13 8:00 am update:
The Wrap weighs in on today’s event: Salvation for VFX?: U.S. Could Tax Foreign Film Subsidies, Study Finds
Jeff Heusser will be conducting an interview with the legal team behind today’s study: