Arnold Schwarzenegger may find using his lobbying muscle to protect the Hollywood film industry is a good political move.

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LOS ANGELES - The Canadian film industry dodged a bullet three weeks ago, though few seemed to notice.

The California Legislature, hacking through hundreds of last-minute bills to finish a budget that was already a record two months late and a boggling US$24-billion short, quietly killed a ballyhooed proposal that would have handed Hollywood $650-million in taxpayer bribes to resist the midnight urge of "runaway production."

The measure, had it passed, would have given U.S. producers of movies with budgets under US$10-million a 15% tax credit on the first US$25,000 of each employee's salary, as long as half the film was made in California. The Canadian menace, at last, was going to be faced down.

"Hollywood is under siege and we have to come to their rescue," Gray Davis, the Governor of California, bragged to a film-union audience back in January, when he noisily unveiled the "Davis Plan" for movie production subsidies. "We will enact this bill," he assured The Hollywood Reporter as recently as July 12. "I will sign it.... Our bill will become law."

That it did not shouldn't come as any kind of surprise. Whenever U.S. politicians mix it up with the state's US$30-billion motion-picture industry -- especially during an election campaign, such as the high-profile contest Davis faces this fall -- the ratio of rhetorical hot air to tangible legislation borders on the infinite.

But the politics of runaway production have not yet run their course. Hollywood has too much political influence; it's a large source of campaign finance in California, and real worries persist among rank-and-file workers about blockbusters and movies-of-the-week being shot in Toronto, Sydney and Prague. There are two film-industry tax-credit bills sitting in Washington, D.C., committees, and some local unions are trying to petition the World Trade Organization to crack down on the various incentives Canada and its provinces have been dangling on top of its favourable exchange rate.

For most non-Americans, the idea of Hollywood suffering from globalization may rightly sound insane. Many countries, Canada especially, are worried their domestic film industry and culture will soon be swallowed whole by the crude California juggernaut.

Jack Kyser, chief economist of the non-profit Los Angeles Economic Development Corporation, spells out the L.A. perspective: "Everybody tends to view it through the eyes of Entertainment Tonight or Access Hollywood, and so they think everybody makes $20-million a year. The reality is this is an industry where you have a lot of people who are not employed full-time; their work is very, very sporadic, and so this issue of runaway production just sort of hits their hot buttons."

Southern California, especially the commercial strips on either side of the Hollywood Hills, is overrun with freelancers who work on movies, television shows and commercials. They toil long hours in concentrated bursts, then are idle for weeks at a time. Once they gather the thousands of dollars necessary to join their relevant union, they make a handsome amount of money; until then, they chase after a shrinking pool of poorly paid non-union jobs, and make up the difference waiting tables or tending bar. It is a peculiar system, but it has worked fairly well for nearly a century.

However, that system has become expensive to maintain. Between union rates, production expenses and star salaries, the cost of making a big-budget film in California has doubled every four years or so since the mid-1980s. Meanwhile, new location markets have opened in places such as Central Europe and Mexico, while the other English-speaking countries were busy falling over each other to offer tax incentives for shooting on their turf. All along, the U.S. dollar has continued to reach historical highs, driving up the price for staying at home.

The combined effect of these developments is under serious dispute. Estimates among the blame-Canada crowd run as astronomical as 25,000 lost jobs and US$10-billion a year, while partisan skeptics such as Elizabeth McDonald, president and CEO of the Canadian Film and Television Production Association, believe that, as she told The New York Times, "It is not even clear that 'runaway production' actually exists."

The most noticeable loss locally has been that of television productions, especially "movies of the week." As the rather robotic Gov. Davis told The Hollywood Reporter in July, "From 1993-99, movies-of-the-week declined by 33%, while foreign production increased by 55%. In 1999 and 2000 alone, Canada increased its share of films in the $5-million-$50-million range from 15-35%."

The movie-of-the-week defection spurred Hollywood's unions into action, dominating their internal politics for the past few years. With few exceptions, Hollywood's famous lobbying muscle has responded to the Canadian and Australian tax incentives not by calling for punitive tariffs, but by pushing for some matching regulatory sweeteners.

After the Sept. 11 massacre, rather than ease up on the campaign, Hollywood just wrapped up its new protectionism in the flag and held news conferences on Capitol Hill.

"America is under attack. Not from Osama bin Laden, but from our peaceful neighbours to the north," said Joel Joseph, chairman of an outfit called Made in the USA Foundation, in a statement delivered to the U.S. Commerce Department in early December, 2001. "There is no such thing as Canadian culture," added Brent Swift, a production designer.

The foolishness was not limited to union grunts. Harvey Weinstein, the famous co-chairman of Miramax Films, has been, in the words of The New York Post, "working with Mayor Bloomberg and Governor Pataki to stem 'runaway production,' ideally with tax breaks and incentives for studios willing to shoot here." Weinstein, for all his post-9/11 New York boosterism, is notorious for pressing reluctant directors to shoot their films in Canada.

The Chicago Tribune reported last May that Stolen Summer, Pete Jones' new movie, "was shot entirely here despite Miramax's attempts to have the movie shot in Canada." Kevin Smith, director of a new film called Jersey Girl, told the Philadelphia Inquirer last month that "Miramax was pushing 'Toronto, Toronto, Toronto, where you can get 50¢ on the U.S. dollar.' " How did he choose the City of Brotherly Love? "The [Philadelphia] film office, which sweetened the deal with incentives."

If it isn't clear by now, everyone in Hollywood -- from the suits to the hard hats, from the righty L.A. Chamber of Commerce to the lefty L.A. Weekly -- is quite fond of "incentives." Who doesn't like a tax break, after all? Film offices in other states -- Arizona, Georgia, New Mexico, Oklahoma and more -- have leaped at the chance to introduce incentives, in a desperate effort to keep what little slice of the Hollywood pie they have enjoyed. Why shouldn't California, the cradle of the industry, follow suit?

Because "that's lunacy," argued the Sacramento Bee newspaper late last month, "particularly in a state facing a $24-billion deficit. At a moment when the Legislature is looking at raising taxes on all Californians and cutting aid for the most vulnerable poor and elderly, the idea of giving hundreds of millions in subsidies to Hollywood producers and giant media companies is obscene."

You will not hear many California politicians echo that sentiment. A federal bill nearly identical to the failed California measure is being co-sponsored by a liberal Democrat, Howard Berman, and a conservative Republican, David Dreier, who both represent Los Angeles County, which just this month has shut down nine health clinics for lack of funds.

Meanwhile, scandal has erupted around another government reaction to runaway production: A film-shoot permit agency set up by Los Angeles city and county to promote production in L.A. was raided and placed under investigation this month after the local district attorney found evidence indicating political corruption and possible fraud.

So Hollywood must be reeling, right? Wrong. The Los Angeles Business Journal last month reported on a "surge in feature filmmaking in the L.A. area," in which "no less than 15 feature-length movies either have started or are preparing to begin principal shooting in the region, the most at one time all year."

Among the local studios and production companies, Jack Kyser says, "You're seeing a lot of aggressive outreach now.... It's like they'd almost been resting on their laurels ... and now they have to get lean, mean and hungry."

For all the uncertainties of globalization, L.A. still has two advantages no city has been able to compete with since around 1915: An enormous cluster of talent, and perfect weather. "This is a very unique culture," Kyser says. "Southern California understands and lives with it, but if you tried to transplant it someplace else, it would not take."

The key production in Hollywood's re-revitalization has been Arnold Schwarzenegger's US$170-million Terminator 3, which was yanked from Canada back to Los Angeles early this year, according to The Calgary Sun, because the Austrian-born actor feared a "runaway production would hurt his chances at becoming governor of California."

Such reasoning seemed terribly silly until Wednesday of this week, when the L.A. Weekly newspaper revealed Schwarze-negger representatives have been quietly conducting telephone polls to gauge the viability of Arnold as a write-in candidate this November.

The gubernatorial campaign -- between the money-grubbing Democrat Gray Davis and the inexperienced Republican Bill Simon -- has been as desultory as any in recent memory, with voters clamouring for a half-way decent third choice. Who knows? Maybe runaway production will have an impact on this election after all.