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The following story is from the August 20 issue of International Trade Reporter
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Kirk Claims Victory for United States
Over China in WTO Case on Film, Music

A World Trade Organization panel decision on Chinese restrictions on the sale and distribution of audiovisual works, films, and music download services is a “clear win” for the United States that ensures market access for U.S. products and exporters, U.S. Trade Representative Ron Kirk said Aug. 12 in a written statement.

The WTO dispute settlement ruling, made public Aug. 12, found China in violation of WTO requirements because of Chinese prohibitions on the rights of foreign companies to import products into China. USTR said that the panel decision found major Chinese restrictions on the importation and distribution of copyright-intensive products such as theatrical films, DVDs, music, books and journals are inconsistent with China's WTO obligations.

A spokesman for the Chinese Ministry of Commerce said Aug. 17 that China is preparing its appeal of the WTO ruling.

USTR officials told reporters that the panel struck at a huge swath of Chinese restrictions on the import and distribution of audiovisual imports. While there were ancillary provisions where the panel did not make a ruling, the panel ruled for the United States on key layers of restrictions, USTR officials said.

“Where having gotten at the head of the problem, the fact that there were a couple of fingers and toes that we didn't, isn't much of an issue for us,” a USTR official said.

“The WTO panel report found that China's key importation restrictions on foreign reading materials, films, DVDs and sound recordings are inconsistent with its obligations under its [WTO] Accession Protocol,” USTR said in a press release.

Kirk called it a “significant victory.”

The panel report also found Chinese prohibitions on the rights of foreign-invested companies to distribute products, and discriminatory treatment of imports into China violated Chinese WTO obligations.

According to USTR, the report said discriminatory operating requirements on foreign-invested distributors of reading materials, DVDs and sound recordings are inconsistent with China's obligations under the General Agreement on Trade in Services.

In addition to addressing discriminatory Chinese measures, USTR also said the findings called on China to allow U.S. companies to partner with Chinese enterprises in joint ventures to distribute sound recordings over the Internet.

No Findings on Some Issues

On the other side of the coin, the dispute panel also said it was not within its scope to address certain Chinese restrictions such as a burdensome approval process for foreign distributors and restrictions on imported electronic publications and subscribers of imported reading materials. The panel made no finding on those issues.

The panel also said there was not enough evidence to demonstrate that China's censorship regime for music transmitted over the Internet discriminates against imported hard-copy CDs, or that China offered fewer distribution opportunities for imported films than for domestic films.

The United States instituted the WTO case in April 2007, seeking to address aspects of China's legal regime that govern the importation and distribution of copyright-intensive products, USTR said in the release. The panel issued a final ruling to the parties June 23 favoring the United States and a preliminary ruling in April (26 ITR 543, 4/23/09), (26 ITR 853, 6/25/09).

Making the Case

“This decision promises to level the playing field for American companies working to distribute high-quality entertainment products in China, so that legitimate American products can get to market and beat out the pirates. To me, that is a clear win,” Kirk said.

USTR said it was seeking to address three market access concerns:

• China's maintaining of measures that restrict the import of movies, DVDs, music, books, journals, and other publications to specially authorized state-run companies,

• China's prohibiting foreign firms from engaging in distribution activities for these goods, and

•China's discriminating between foreign and domestic distributors.

Kirk said the panel handed a significant win to America's creative industries, saying it was an important step to ensuring market and distribution access for U.S. exporters and distributors of creative products.

The global demand for the audiovisual products in the case is estimated in the billions of dollars, USTR officials said.

China to Appeal

Both the United States and China can appeal the panel's decision.

USTR officials said they would be looking at some of the sub-layers where the panel did not rule to determine whether they would be appealing on those provisions.

“Obviously, we are going to be very keenly watching and observing China's adherence to the commitments they made to the panel, that the panel relied upon, as part of our monitoring efforts” USTR officials said on background.

In a news conference in Beijing, Ministry of Commerce spokesman Yao Jian said Aug. 17 the Chinese government has decided to appeal the trade body's ruling, but he gave no details of exactly what China felt the flaws were in the case

“We think it was improper the WTO did not reject the U.S. request for the right to trade and distribution channels,” Yao said. “Based on the WTO schedule, we are preparing the documents necessary to lodge an appeal.”

China had between 20 and 60 days of the issuance of the report to make a decision on whether to appeal the case.

Yao said China's fledgling film market was still weak and the government deserved to keep some controls “in line with the country's economic development and cultural and historical tradition.”

Thriving Black Market

China maintains strict content and censorship controls on films, music, and books sold and viewed here legally. The country's publications and film content watchdogs filter foreign entertainment offerings, allowing small, set quotas to be shown, broadcast or sold here each year. But while the legal offerings are strictly limited to around a dozen foreign movies shown each year in theaters, the piracy market thrives.

Through a massive, low-cost market of pirated DVDs, CDs and books, international entertainment offerings are widely and easily available to most consumers. But the owners of the intellectual property get cut out of the financial mix, which was the heart of the WTO case brought by the United States.

“China expresses regret that the panel did not reject the U.S. complaint about the import and distribution of printed material, films and music,” said a written statement posted Aug. 12 on the website of the Chinese Ministry of Commerce. “The channels for foreign publications, films and audiovisual products entering the Chinese market are extremely open.”

More Legitimate Distributors, Less Piracy

USTR officials told reporters that it was a victory that the panel affirmed Chinese statements that the distribution of foreign films is not limited to two Chinese distributors.

Currently, foreign films distributed in China have only been distributed through two state-owned enterprises in China and the United States challenged the discriminatory treatment in the case. Chinese films being distributed in China have had a whole array of distribution channels, USTR officials said.

“China actually stated in the context of this case that they don't impose such a limitation, and we are optimistic that China will, on the basis of that, further open up their market to the distribution of foreign films,” USTR officials said.

The case opens up the channels for legitimate products, decreasing the need for Chinese consumers to accept products from the pirate market, USTR said.

USTR said that what they had achieved in the case was the opportunity for film studios and companies to investigate other distribution channels than the two “on offer” distributors.

“If a U.S. company goes to seek such a distribution opportunity in China, they will not face a government barrier and be told, ‘nope, you can't go beyond to the two you've always gone to,” the USTR official said.

USTR also said that China had attempted to assert that the import restrictions were necessary to accomplish censorship goals. USTR officials said that they were pleased that the panel had rejected that argument.

20 Film Quota Remains, But MPAA Pleased

While noting the continuation of a seven-year-old Chinese policy that caps the number of foreign films allowed to screen in China each year at 20, the Motion Picture Association of America hailed the WTO decision.

“The WTO decided in the U.S. government's favor on virtually every count, declaring some of China's most difficult barriers to its entertainment market to be clear violations of international trade rules,” the MPAA said.

USTR officials said the case did not directly challenge China Film's 20 film import quota. China Film, however, will no longer be the monopoly importer, and foreign film makers should be able to use other distributors besides China Film, USTR officials said.

“Increased film imports could result from this ruling,” USTR officials said.

MPAA also said the decision was potentially promising in that the Chinese government had indicated that a pathway exists to ensure that U.S. films are treated in a more evenhanded manner and more in line with accepted commercial practices.

Censorship Implications

MPAA also said that by fostering legitimate film imports into China, the decision should help combat pirated versions of the same products.

USTR officials said that the panel findings could have broad implications for how China handles audiovisual imports and their censorship process. The officials said they did not know how China would implement the panel findings, but that they hoped China would not implement the findings in a way to slow imports from entering the Chinese market.

USTR said more trade was in China's interest as well as the United States, and they hoped that China would implement the decision with that in mind.

The Emergency Committee for American Trade said the ruling showed the importance of a strong rules-based system for international trade that is respected by all the parties to the system. ECAT urged China to come into compliance with the decision.

“While the United States may not agree with all WTO panel decisions, the WTO dispute settlement system has been an effective mechanism in enforcing U.S. rights,” ECAT President Calman Cohen said. He said the United States had made aggressive use of the dispute-settlement process, bringing more complaints than any other WTO member and had prevailed in the majority of the cases that it had filed.

The American Chamber of Commerce in China had a somewhat subdued response to the ruling, saying in a written statement that the two countries have a “complex relationship.”

“Though the immediate impact of the latest WTO ruling is difficult to gauge, it should contribute to freer, more open markets over time,” the business group said.

By Amy Tsui and Kathleen E. McLaughlin

The WTO report is available at: http://www.wto.org/english/news_e/news09_e/363r_e.htm .

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