WTO Rules against Chinese Restrictions on Foreign Books, Movies, Music

9 September 2009

Newspapers are billing it as Hollywood versus China. A WTO dispute panel in August sided with a complaint by the US, ruling against Beijing's restrictions on the importation and distribution of foreign books, music, and movies.

China requires copyrighted publications and audiovisual products - books, journals, video games, music, DVDs and the like - to be imported and distributed via a handful of state-approved or state-run middlemen. US producers of such products have complained that these restrictions - along with rampant piracy - severely hamper their ability to make money in the world's fastest-growing major market.

The panel ruling, which was made available public on 12 August, concluded that the restrictions violated commitments China had made when it joined the WTO in 2001. The restrictions also violated ‘national treatment' requirements in WTO rules under which countries cannot privilege domestic goods and services over imported ones, it found.

Ron Kirk, the US trade representative, called the decision "a significant victory" for America's creative industries. "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," he said. "To me, that is a clear win."

China's commerce ministry expressed regret about the decision, according to the China Daily newspaper. The state-owned paper suggested that Beijing might appeal, although it quoted a trade lawyer as saying that such a move would have little chance of success.

Notably, the panel ruling met with a favourable response in some quarters in China. The president of Huayi Brothers, the country's biggest privately owned media company, welcomed the ruling, calling it "good news for private companies."

Unsurprisingly, Hollywood, too, was happy with the ruling. Dan Glickman, president of the Motion Picture Association of America, called it "a major victory in [the MPAA's] years-long battle to open the Chinese movie market."

Richard Gelfond, chief executive of IMAX Corporation, told The Wall Street Journal that the decision would enhance the ability of Hollywood studios to distribute their films more freely in China.

The MPAA noted that the ruling did not affect a quota that allows no more than 20 foreign films to be released in Chinese cinemas every year, one of a handful of issues on which the panel either declined to rule or disagreed with a US claim.

‘Trading rights' at centre of case

So-called ‘trading ‘rights' were at the heart of the dispute. Although not part of the original WTO agreements, China and other countries that joined the WTO after its founding in 1995 had to accept disciplines on the right to import and export as part of the price of accession - existing Members didn't want the market access concessions they had won to be watered down by restrictions on who could import.

The panel found that China's accession commitments required it to ensure that "all enterprises in China," including partially or wholly foreign-owned companies, would have the right to import and export "all goods" throughout China (subject to reservations outlined in its accession protocol).

China had countered the US allegations by pointing out that its accession commitments subjugated trading rights obligations to its "right to regulate trade in a manner consistent with the WTO agreement." Invoking a provision in WTO rules that allows countries to deviate from normal trade obligations if doing so is "necessary to protect public morals" (GATT Article XX(a)), Beijing argued that it regulated trade in "imported cultural goods, because they are vectors of different cultural values, [and] may collide with standards of right and wrong which are specific to China."

Panel sidesteps censorship issue

Under China's existing practices, ‘content review' -- in other words, censorship - is tied to the importation and distribution of publications and audiovisual products. The state-approved companies can review the material they import, and decide what to reject.

But the panel did not delve into whether China's policy was justifiable on the grounds of protecting public morals, focusing solely on whether the measures met the necessity test that is part of the GATT Article XX exception, noted Simon Lester, founder of WorldTradeLaw.net, a website devoted to WTO law. "Do the measures fall within the policy purpose of protecting public morals? The panel sidesteps this," he explained. The panel assumed for the sake of argument that they fell within the purpose of protecting public morals, and then evaluated the measures on the basis of their trade-restrictiveness and their contribution to their purported goals. Less restrictive measures could have achieved the same goal, such as simply applying the domestic censorship regime to imported cultural products - a point the US made in its arguments before the panel.

According to an analysis by Brendan McGivern, a partner at White & Case LLP in Geneva, the panel also found in favour of US claims that several Chinese policies violated ‘national treatment' obligations under WTO rules for goods (GATT) and services (GATS), thus "adversely modifying the conditions of competition." These included a Chinese law "that had the ‘effect of prohibiting foreign service suppliers from wholesaling imported reading materials, while like Chinese suppliers are permitted to do so'." Also at fault were policies requiring imported reading material to be distributed through a subscription regime, while domestically produced reading material faces no similar strictures.

Although China's censorship laws were only a subtext in the current case, the panel's findings about national treatment could have ramifications for Beijing's internet censorship policies, said Gilbert Kaplan, a partner at King & Spalding in Washington. Kaplan represents the California First Amendment Coalition, a freedom of expression advocacy group that has petitioned the US trade representative's office to initiate WTO dispute proceedings with China over Beijing's attempts to restrict Chinese residents' access to information on the internet. The so-called ‘great firewall', Kaplan said, makes it "almost impossible" for foreign internet companies like the online auction site eBay to do business in China, to the benefit of their Chinese competitors. "The censorship rules are a market access barrier," Kaplan said.

Kaplan told Bridges that the US trade representative's office is currently considering the California First Amendment Coalition's petition.

The panel called for China to bring its policies into conformity with its WTO obligations. If Beijing fails to do so, the US could ultimately be allowed to impose trade sanctions on Chinese goods and services to offset its resulting commercial losses.

This case marks the second of two challenges to China's treatment of copyrighted books, music, and films that the US launched in 2007. White & Case's McGivern said that the verdict in the first, which challenged the adequacy of China's intellectual property laws, "fell far short of US expectations" (see BRIDGES Weekly, 25 March 2009, http://www.ictsd.org/bridges-news/bridges/news/china-us-accept-mixed-verdict-in-piracy-dispute).

ICTSD reporting; "Long shackled in China's market, Hollywood now sees opening, CHRISTIAN SCIENCE MONITOR, 14 August 2009; "Hollywood Upstages Beijing," WALL STREET JOURNAL, 13 August 2009; "WTO Rules Against China's Limits on Imports," NEW YORK TIMES, 13 August 2009; "Mixed reaction to WTO ruling," CHINA DAILY, 14 August 2009; "China expresses regret over WTO ruling," CCTV.com, 14 August 2009.

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