If we follow Australia down the road of trade protectionism for movies, then we all lose out. What do I mean?
Well the incentives for trade protectionism is a prisoner’s dilemma.
As Peter Jackson says, if Australia starts subsidising movies we need to do the same or we will miss out on productions – as a result our best response to their protectionism is more protectionism. Furthermore, if we start subsidising and Australia doesn’t then we get a relatively larger share of the movie industry – assume that this occurs to the point where the tax revenue from the movies exceeds the cost of the subsidies. In this case our best response is to ALWAYS subsidise.
However, there are two issues. Firstly it is in Australia’s interest to subsidise (it is also their “dominant strategy”). And secondly, the decision to subsidise pays off because it hurts Australia. In the end both countries end up subsidising movies, and both sets of taxpayers end up worse off than in the case when neither country subsidises.
This is the issue, not only with the subsidies on movies, but on all trade protectionism. That is why we need international co-operation to avoid this type of beggar thy neighbour behaviour.