This morning brought reports that the French are prepared to torpedo EU-US trade talks to defend the l’exception culturelle. Almost all economists think the French insistence on protection in this domain is neanderthal mercantilism. The distinguished John Van Reenen of the LSE is one; he tweeted (@johnvanreenen) this morning: “EU must not capitulate to #French demands to block US trade talks if audio-visual not removed on.ft.com/11Fy01B Yoghurt will be next”

I humbly disagree. This is an issue I wrote about in my 2002 book [amazon_link id=”1587991470″ target=”_blank” ]Sex, Drugs and Economics[/amazon_link] – the whole book is available as a download from my website or still available on Amazon and Abe. But the relevant chapter is pasted below.

[amazon_image id=”1587991470″ link=”true” target=”_blank” size=”medium” ]Sex, Drugs And Economics[/amazon_image]

Movies: Why subtitles need subsidies

The 2001 hit film Bridget Jones’s Diary was co-produced by three movie companies, Canal Plus of France, the independent UK-based Working Title and, representing Hollywood, Miramax. It was not typical of many commercial successes. The heroine was a then relatively unknown actress, nor were the two male leads the biggest stars around. Based on a book which was in turn based on an English newspaper column, there was almost nothing of the conventional Hollywood recipe about it. Oh, except for one thing. With a plot spanning two Christmases, it showed a wintry England blanketed in fluffy white snow. Reader, despite what the Christmas cards portray, it almost never snows in England at Christmas. The dominance of Hollywood values and American culture in the global film industry, even in a two-thirds European movie like Bridget Jones, helps explain why nothing delights a wannabe intellectual as much as art house movies. It’s a mark of free thinking and sophistication. Beautiful French actresses taking their clothes off – fantastic! Subtitles – even better!
The chasm between commercial Hollywood films and arty European ones is all too often
exaggerated, as the two traditions feed each other. Even so, successive French governments have time after time aggressively defended their right to protect French films, through measures such as minimum local content on television channels, on occasion even holding up all EU-US trade negotiations specifically to safeguard the one industry against the titans of Hollywood. The French call it the ‘cultural exception’. Can there possibly be an economic justification for a cultural exception to free trade, though? After all, the case for the mutual benefits of free trade is so fundamental in economics.
Audience preferences certainly seem to suggest this fundamental argument applies in the
movie industry, like any other. For the sad truth is that, despite the angst of the intellectuals, most French film-goers are almost as likely as those of any other nationality to prefer the popular Hollywood blockbusters to the obscure and arty home-grown alternatives. Likewise in Britain, the gritty social realism favoured by British directors does not do too well at the box office compared with the American hits. Drug addicts dying in stairwells on desolate northern British estates versus feel-good, glossy romance or big budget action? It’s no contest. Some local films do very well of course, but the people’s choice is definitely Hollywood.
In which case, you might well ask how European politicians justify special trade protection for their own cultural industries. Surely in culture too free trade will deliver the best outcomes in this as in any other industry, the widest choice for consumers at the lowest pricesFan as I am of free trade, I do however think there is something to the cultural exception. It is partly to do with culture, which is really just a non-economist’s description of a certain type of externality, and partly to do with economies of scale.
In classical trade theory the mutually beneficial effect of increased exchange depends on there not being any significant returns to production at a large scale and there not being high startup costs in industry. In the usual terminology, there are assumed to be diminishing returns to scale, meaning that extra units of output cost more, not less, to produce. In these circumstances market mechanisms mean that small is competitive, that small producers can produce more efficiently than large ones. There will be an equilibrium outcome – only one – in which the lowest-cost producers produce and nations specialize in particular industries. This was pretty realistic two centuries ago. Agriculture and basic commodities formed a high proportion of international trade. Farmers clearly used the best land first, so diminishing returns would set in as they put less fertile land to use, and similarly mines emptied the richest veins of ore before moving on to poorer ones. England could specialize in wool, Ireland in potatoes and France in wine. The same conditions also applied in many traditional manufacturing industries such as textiles and footwear.
However, the classical trade theorists like David Ricardo did not give much thought to Hollywood, or even the possibility of mass production and the assembly line in manufacturing. In the case of many manufactured goods there are substantial start-up costs and hence economies of scale. The research and development, design and set up costs for a new type of car or aircraft or a new medicine are extremely high. In such industries there are increasing returns to scale. They exist, too, in new industries where the marginal cost of producing additional units is tiny, such as the software business.
For the most part international trade now involves the exchange of manufactured goods
like cars or washing machines or pharmaceuticals between the developed countries. However, there is a fair degree of specialisation. Different countries lead in different sectors, especially in high-tech or advanced industries where you might expect large economies of scale, and tend to hang on to their lead. It is clear that historical accident has played a part in the specialisations that do exist, and that countries can develop industries despite lacking the obvious natural resources. For example, Japan is a significant producer of automobiles and steel, despite being naturally short on iron and energy, while the only reason the UK still makes any cars is because some of the key innovators in the early development of vehicles powered by the internal combustion engine were British.
Under conditions of increasing returns to scale, market forces can take the world economy to many possible combinations of output, depending on such happenstance, because it is hard to dislodge a particular country from an early lead. And it cannot be confidently predicted that any particular outcome will be the most efficient possible. Increasing returns introduce the conclusion that it all depends – on which countries’ industries get to what size and when. In such a world – the real world – the conventional conclusions of trade theory will still usually apply. It will not be efficient for an industrialized country to produce almost everything it consumes itself, splitting the workforce between many different industries. What’s more, any country will benefit from its trading partners being equally successful in a wide range of industries because that will generate the prosperity necessary to create a big market for its own products. Poor, isolated countries do not make good trading partners; rich, integrated ones do. So there will continue to be gains from trade. In fact, there may be more potential for gains globally from trade precisely because there are increasing returns in many industries.
The hitch pointed out by theorists recently, as increasing returns to scale have become more characteristic in the advanced economies, is that in some cases trade need not be mutually beneficial. For if increasing returns benefit big producers, those producers will be located in particular countries. There might well be zones of conflict in which the success of one industry from one country actually damages other countries. It is likely that such conflicts arise between very similar developed countries or regions, like the EU and US. An obvious example is aircraft production, essentially a two-horse race between Boeing and Airbus.
Another is the movie industry. The economies of scale are slightly different. They do not arise in production; after all, there are plenty of low-budget movies around. The costs of moviemaking are still plummeting thanks to continuing technological innovation like Apple’s fantastic iMovie software or small and low-cost professional-quality HD cameras now available for the consumer market. Instead, the returns to scale occur in buying in superstar talent, and in marketing and distribution, as discussed earlier in the case of sport and music. Anybody can make a high-quality film at low cost, but few can translate their creative skill into box office success.
Now, I am highly sceptical of most industry lobby groups’ claims that theirs is a special case and they deserve protection from overseas competition. Even though there is a potential theoretical justification, I’m certain it does not operate in practice as often as special interest  groups would like us to believe. While exploiting economies of scale might sometimes offer greater efficiency and higher output in theory, the benefits from competition point the other way.
Figuring out whether a given industry is in a zone of conflict with trading partners is an empirical question, and one highly vulnerable to political manipulation by rich and powerful corporations and lobbyists. Some economists in the late 1980s started out enthusiastic about the idea of ‘managed trade’, based on figuring out which particular national industries needed government help to exploit economies of scale or protection against competitors able to exploit them, but retreated from their enthusiasm when it became obvious the argument had given the usual suspects fresh ammunition to operate against the public interest.
In the case of the movies, I’d nevertheless be inclined to give the European film industry the benefit of the doubt. It might just be an exception to the rule that freer trade is always better. It seems very likely that the big Hollywood studios have an important advantage over European competitors even in European markets because of extensive increasing returns to scale. Hollywood has got into this position because the US itself is the biggest single English language market in the world, whereas language fragments the European market even though moviemaking had a head-start there historically. Scale means Hollywood can always thrash British or French or Italian movies commercially. Yet the dominance of American films is not necessarily the most efficient and desirable outcome for the British or French or Italian economies – or cultures.
It is not as if movies account for a huge portion of international trade and GDP. However, the social benefits of having a domestic film industry probably outweigh the private benefits. The contribution to national culture exceeds the private return to moviegoers of watching pneumatic French starlets or scrawny Scottish junkies (especially the latter). In other words, there is a cultural externality, a gain unlikely to be realized by the operation of market forces.
It is with trepidation that an economist brings in a consideration as fuzzy and controversial as culture, even in the loosest sense, into the argument. Some economists would disagree altogether. However, I have put forward here the kind of argument you need to make to persuade other economists of the merits of special protection from completely free trade for European movies. In other words, it’s not enough to say the film industry is part of the nation’s cultural heritage, full stop. Defenders of subtitled films need to make a stronger case than that.
After all, in the advanced economies, culture, however defined, is an economic resource.
If an increasing share of GDP is generated by services like the creative industries, creativity and new ideas are important. It is impossible to say for sure where ideas come from, but a vibrant and distinctive culture is bound to play a part.
Personally, I feel that an afternoon spent watching something subtitled is as much hard
work as a few hours running regressions sitting at the computer. One thing’s for sure: Hollywood has the best special effects but it’s really not the place to look for the intellectual cutting edge.