Sunday, March 31, 2013

VFX, The World Trade Organization and Actionable Subsidies

[in progress]

[Ok Kids, Global Wahrman will now try to dig into the reality of the subsidies and see what the real numbers are, at least up to a point... so take whatever numbers you read here with a grain of salt...]

In a previous post, I itemized the many factors that have lead to the disaster that is computer animation and visual effects in this country.

Some of the issues that have caused this situation are fundamental and are unlikely to change in any significant way. For example, to change the business model of the visual effects facility is a noble goal, and has in a certain sense occurred from time to time, but it is very difficult and usually quite temporary. Nor are we likely to see our government do anything about globalization: our govenment gets off on and profits by impoverishing Americans by sending their work overseas. That isnt going to change.

On the other hand, our government belongs to trade organizations designed to see that such things as subsidies from a government to its local industry do not occur. Of course the reality is that they occur all the time, and as an example of this, see the section below about subsidies in Japan. (1)

For those of you who are not up to date on this, here is a fast review of how the subsidies supposedly works.  If you, the filmmaker spends $1.00 in Canada on making your movie, the Canadian government will write you a check at the beginning of production for $0.60. So if you spend $10,000,000, the government will write you a check for $6,000,000. (3)  And in return you actually have to spend that $10,000,000 on certain things in Canada, and there are some restrictions on these things. But in particular, you can use it to buy visual effects as long as most of the people working on those visual effects are either Canadian citizens, or are residents in Canada eligible to work (easy to arrange), and of course the FX company must be in Canada.

Thats a 60% discount. What producer could resist that? The answer is: none. So they take the work to Canada, which in this case usually means Vancouver. There is a similar deal in England, and the work goes to London. In both cases, Vancouver and London, there is a robust and experienced community of companies and workers who are happy and ready to do the work.

There are a few other wrinkles on this situation. There are special specific case subsidies in New Zealand involving WETA and Peter Jackson. And there are other deals in various parts of the world.

The end result has been for American company after company to be unable to compete and go out of business. From the Orphanage, to Asylum, to Digital Domain, to Rhythm and Hues (2), they have gone out of business and when they did, they cited subsidies as a primary cause.

So what is a subsidy? What exactly defines a subsidy?

According to the World Trade Organization, a subsidy is:

Definition of Subsidy

Unlike the Tokyo Round Subsidies Code, the WTO SCM Agreement contains a definition of the term “subsidy”. The definition contains three basic elements: (i) a financial contribution (ii) by a government or any public body within the territory of a Member (iii) which confers a benefit. All three of these elements must be satisfied in order for a subsidy to exist.
The concept of “financial contribution” was included in the SCM Agreement only after a protracted negotiation. Some Members argued that there could be no subsidy unless there was a charge on the public account. Other Members considered that forms of government intervention that did not involve an expense to the government nevertheless distorted competition and should thus be considered to be subsidies. The SCM Agreement basically adopted the former approach. The Agreement requires a financial contribution and contains a list of the types of measures that represent a financial contribution, e.g., grants, loans, equity infusions, loan guarantees, fiscal incentives, the provision of goods or services, the purchase of goods.

There is a concept known as an "actionable subsidy", and an "actionable subsidy" has what are known as "adverse effects".

Article 5
Adverse Effects

No member should cause, through the use of any subsidy referred to in paragraphs 1 and 2 of Article 1, adverse effects to the interests of other members, i.e.
(a) injury to the domestic industry of another member,
(b) (...)(c) serious prejudice to the industry of another member.

So now we know what is a subsidy, and furthermore what is an actionable subsidy. And I think that the argument could be made that the subsidies that are described above are actionable. So what happens next? Well, next, you have to convince your government that they wish to discuss this matter with the WTO and work through the dispute process. You as an individual, and a trade group or any non-government organization can not do this. Only governments can do this. And all parties must be signatories of the WTO. Well it turns out that Canada, the UK and the USA are signatories of the WTO.

So next, one contacts the State Department. Perhaps. Or perhaps, one contacts one's elected representative, and they contact the State Department. But what if your elected representative is in the pocket of the Studios, and they like the subsidies? That would be sticky, now wouldn't it?

WTO on Subsidies

The dispute process


1. The following is from an introduction of an article in Foreign Affairs about subsidies in Japan. The entire essay can be found at the following link (subscription required).

Here is the introduction to the article:

GOVERNMENT subsidies have been a consistent feature of Japanese practice since the country emerged from the feudal system in the eighteen-sixties. Japan's industrial history is singularly unlike that of other countries in that it is not marked by a policy of "laissez faire." Immediately following the restoration of 1867-8, the government set itself the task of industrializing the country, realizing that for this purpose it would have to convert into capitalists and factory workers a nation of knights and retainers. From the first, therefore, the government has exercised a paternal rĂ´le in Japan's economic development. The result has been to make the Japanese people dependent upon the government to a degree unparalleled in other capitalist countries. "Almost any new industry," says a recent writer,[i] "so long as its promoters had some political friends, could secure exemption from taxation, even if no more direct form of subsidy could be obtained."

In starting modern industries it was the government's intention to turn them over to private management and ownership as soon as possible, retaining only a measure of control. In some cases this was done, but not in all. Not only has the government continued to manufacture steel, woolen cloth, and other articles, but it has reserved as state monopolies the trade in salt, tobacco, camphor and ginseng. For the rest, the "westernization" policy has created mammoth corporations, which -- despite their size -- still look to the government for sustenance. Indeed, the list of interests receiving aid in one form or another covers almost the entire field of Japanese economic life. Banking, industry, agriculture, labor, shipping, and shipbuilding, foreign trade, construction, and domestic commerce, all are in receipt of help; hardly any activity of importance or promise is not clamoring for it.

2.  When a production company goes out of business, it is usually due to a number of factors, not just one.  However, in all the cases listed here, foreign subsidies were recognized and publicly stated to be one of the causes, if not a primary cause, of their demise.

3. Its hard to believe that the subsidy is so high, I admit it.  And I have never verified the numbers, but I am trying to now.   It must be less than the reported 60%, that is just too good, I admit it.

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