Once you get started on tariffs, it’s hard to know where to stop. Cars, food, shoes, steel, aluminum, pharmaceuticals and myriad other products are already included on the Trump administration’s list. Why not add movies?
President Trump did just that on May 4, proposing to start taxing foreign-made movies 100 percent. He said movie tariffs were needed to stop Hollywood from dying a “very fast death.”
How exactly the government would collect a tariff on movies wasn’t clear. Nor was it obvious that movie tariffs would help bolster film production in California, or receive much support from consumers. Frankly, as a movie watcher, do you really want to have to pay more to see films made abroad? These problems alone made the idea unpopular, with Hollywood industry and labor groups saying they favored tax breaks, not tariffs.
But there’s another problem with the idea, an even bigger one. It hasn’t gotten much attention, yet it’s profound. Movies are a service, not a physical product, and services are an area where the United States is an exceptional country.
Giant tech firms that dominate the stock market like Alphabet (Google), Meta (Facebook), Microsoft and Netflix are service businesses, to one extent or another, and Apple, Amazon, Nvidia and even Tesla all have large service components. So do banks, asset management companies, law firms, universities, health care, the entertainment industry, tourism, the news business and loads of other areas where the United States is an outstanding performer.
If the Trump administration were to start putting taxes on U.S. purchases of international services, other countries would be tempted to go tit-for-tat. The core of the modern U.S. economy — and of the stock market — would be vulnerable.
No wonder the European Union has added to its diplomatic arsenal an “anti-coercion instrument” that it informally calls its “big bazooka.” It’s a dry legalistic formulation with immense hidden power: The bazooka enables Europe to respond to economic bullying by cutting off or heavily taxing social media platforms and other advanced computer services, restricting intellectual property rights, as well as making it easier to move against traditional targets like imported goods and direct foreign investment. It’s been held in reserve as an ultimate weapon that is too dangerous to use casually because it would invite further retaliation and deprive Europeans of access to services they need themselves.
Oddly, the big bazooka originated in a European Union dispute with China, but it could be turned against the United States, which would be a tempting target. That’s because service industries, not manufacturing, tend to dominate advanced economies, and in this regard, the United States is a world leader. Nearly 80 percent of the domestic U.S. economy is devoted to services. In China, by contrast, services still constitute only a little over 50 percent of the economy, according to the International Monetary Fund.
The United States exports plenty of its services, too. In fact, the United States runs a big trade surplus in services. The enormous U.S. trade deficit in goods is the unfortunate focus of the Trump administration — unfortunate because most economists have no problem with the trade deficit, while they have do have major issues with the Trump tariffs.
But services, including artificial intelligence, are widely viewed as critically important growth areas in themselves, and, increasingly, services are dominant parts of businesses that were once primarily manufacturing concerns. Take newspapers, for example. They were tangible manufactured products when I started out in the business. Now, while the physical newspaper continues, this is primarily a digital information business. Business classification systems have evolved to take such transformations into account.
“We recognize that the emergence of the service era and the availability of global communications have changed the market focus from producers to consumers,” said S&P Global Indices and MSCI, the financial information services that together classify publicly traded companies. They added that “drawing the line between goods and services is increasingly difficult and arbitrary, as almost all goods are sold with a service.”
The U.S. Bureau of Economic Analysis relies on a variety of surveys to determine how much of a business is devoted to services and how much on production of goods, said Thomas Dail, a bureau spokesman. “The intent is to capture the entire universe of services and to account for them,” he said.
The on-again-off-again Trump tariffs on goods have already caused an abundance of mayhem around the world. Impose tariffs on services, too, and the world would enter a new and dismal stage of economic conflict. In services as in goods, Mr. Trump would be reversing decades of history.
After all, liberalizing trade in services was a goal of the Uruguay Round, an important series of international negotiations in the 1980s and 1990s. Those talks led to a comprehensive global agreement on free trade still embodied in the rules of the World Trade Organization, though not always followed by the U.S. president. Restricting trade in services is the opposite of what most economists and trade negotiators have desired. But the Trump administration has been shredding agreements left and right, and threatens to set the world on a new course.
Still, there’s little evidence that opening a second front in the trade wars was the intention of President Trump, who said he merely wanted to help Hollywood. His advisers in this matter, including the actor Jon Voight, have focused mainly on tax cuts and subsidies as tools of choice, not tariffs.
If the world is lucky, the idea of putting tariffs on movies will be forgotten in the stream of new, suspended and canceled trade initiatives that are being announced every week. Otherwise, it might not only be Europe that could be tempted to use a big bazooka against U.S. service companies.
The stock market has been remarkably resilient this year. But imagine what would happen if the big U.S. tech companies were imperiled. That could be a disaster movie the world doesn’t need.
Jeff Sommer writes Strategies, a weekly column on markets, finance and the economy.
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