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An industrial dispute between the makers of The Hobbit and an actors' union is causing palpitations in the local film industry.

There are dire predictions about what will happen if the prequels to the Lord of the Rings trilogy end up being shot, as executive producer Sir Peter Jackson has warned, in Eastern Europe.

"We could be not just losing these films but also our ability to attract international film productions into the future," said Film New Zealand chief executive Gisella Carr.

The production of the two movies, in themselves, would be worth millions of dollars to the economy, not to speak of offering hundreds of jobs to New Zealanders.

Much also rides on the film industry in terms of the image New Zealand projects, a fact recognised by the input of taxpayer dollars.

But this means the industry should be based on a solid foundation. If its viability depends on offering the lowest costs to film-makers from around the world, there are questions to be asked.

Operating on such a basis means there is always the danger of being undercut by a competitor, as evidenced by the fate of some countries that offered attractive subsidies to lure multinational companies to their shores.

Sir Peter's reference to Eastern Europe suggests the local film industry shares that feature.

He implies that companies such as Warner Brothers, which is financing The Hobbit, are attracted here not by New Zealanders' film-making skills or even the spectacular scenery but by the low cost of production.

Other countries, having seen what the Lord of the Rings achieved for New Zealand, are only too ready to participate in what Film NZ describes as an "intensely competitive" environment.

A significant part of those costs, especially when shoots extend over years, rather than months, is the payment of actors and crew.

In this dispute, an Australian union, the Media, Entertainment and Arts Alliance, which is allied to New Zealand Actors' Equity, is claiming the makers of The Hobbit have refused to enter into a union-negotiated agreement that would provide minimum guarantees of wages, working conditions and suchlike.

It has advised its members not to accept work on the films.

As with all such industrial disputes, the battle-lines have been quickly drawn.

Stars such as Sir Ian McKellen and Cate Blanchett, who are reportedly taking part in The Hobbit, are supporting a boycott, while the industry has thrown its support behind Sir Peter.

There is an element of predictability in all this. The Lord of the Rings trilogy earned $4.2 billion worldwide at the box office.

Many local performers probably feel they did not see their fair share of that. They are now seeking wages and conditions that are applicable elsewhere, except perhaps in Eastern Europe.

In a blatant piece of grandstanding, Sir Peter has tried to damn their demands by seizing on the presence of the Australian union. It was, he said, a "bully boy". But it would not have become involved unless requested by local actors.

It can be argued that New Zealand, because of its geographical isolation, must provide a low-cost environment to attract big-budget film-makers.

This means actors and crew must settle for less than they would earn in Hollywood for the greater good of the country and to preserve work opportunities for themselves.

But if the industry relies on this, it will always have an uphill struggle. There will always be other countries ready to offer better deals and more generous subsidies.

The industry must, at some stage, come to rely on the talent and skills in its ranks to attract film-makers. If it cannot, it will, inevitably, lose out more and more to Eastern Europe or some other johnny-come-lately.