WTO Rules Against Chinese Trade Restrictions on Books, DVDs, Music, and Films

In a report dated August 12, 2009, a World Trade Organization (WTO) expert panel (Panel) found that certain Chinese regulations restricting the ability of foreign companies and Chinese-foreign joint ventures to import or distribute (1) reading materials, (2) audiovisual home entertainment (AVHE) products, and (3) sound recordings, as well as to import films for theatrical release, were in violation of WTO rules. According to the Panel's report, reading materials include books, newspapers, periodicals, and electronic publications; AVHE products include videocassettes, VCDs, and DVDs; and sound recordings include recorded audio tapes and CDs as well as "ringtones" and "ringback tones." The Panel's report stems from a Request for Consultations filed by the United States in April 2007, according to the WTO Web site.

A summary of the Panel's findings can be found on pages 461-469 of the report. Specifically, the Panel found the following measures to violate China's WTO obligations:

• Chinese regulations that expressly prohibit foreign investment in businesses that import reading materials, AVHE products, or sound recordings, as well as regulations that give the Chinese government discretion to determine who may import reading materials, AVHE products, sound recordings, and films into China. For example, Articles X(2) and X(3) of the Catalogue of Prohibited Foreign Investment Industries in the Catalogue for the Guidance of Foreign Investment Industries prohibit foreign investment in the "business of… importing of books, newspaper and periodical" and the "business of… importing of audio and visual products and electronic publications." The Panel found that these provisions violate commitments in the Chinese government's Protocol of Accession to the WTO (Protocol) and the Report of the Working Party on the Accession of China (Working Party Report) that require China to permit all enterprises in China and foreign enterprises and individuals to import and export all goods (with some limited exceptions) to and from China by December 2004. In addition, the Panel found other regulations that violate commitments in the Protocol and the Working Party Report. Examples include Articles 41 and 42 of the Regulation on the Administration of Publishing, which require companies that import publications into China to be Chinese wholly state-owned enterprises, and Article 30 of the Regulations Regarding Management of Films, which gives the State Administration of Radio, Film, and Television discretionary authority to decide who can import films.

• Chinese regulations that restrict the ability of wholly foreign-owned enterprises and Chinese-foreign joint ventures to distribute reading materials, AVHE products, and sound recordings within China. For example, the Panel found that Article 8(4) of the Rules for the Management of Chinese-Foreign Contractual Joint Ventures for the Distribution of Audiovisual Products, which stipulates that the Chinese partner in a Chinese-foreign joint venture distributor of audiovisual products must be the majority shareholder, violates national treatment provisions in the General Agreement on Trade in Services (GATS). Article XVI:2(f) of the GATS prohibits parties to the GATS from putting ceilings on the percentage or total value of foreign investment. The Panel also cited other regulations expressly prohibiting foreign investors from engaging in the distribution of the products in question, such as Article 4 of the Several Opinions on the Introduction of Foreign Capital Into the Cultural Sector, which prohibits foreign investors from distributing publications or audiovisual products within China.

China argued that its requirement that importers of reading materials and audiovisual products be wholly state-owned enterprises is "necessary to protect public morals," a claim that the Panel rejected. According to Article XX(a) of the General Agreement on Tariffs and Trade 1994 (GATT 1994), a country may adopt trade measures that are "necessary to protect public morals." According to the Panel's report, China argued that reading materials and audiovisual products are "cultural products" which are "of a unique kind with a potentially serious negative impact on public morals," and noted that "in the case of products to be imported it is critical that the content review be carried out at the border." Furthermore, China argued that relying solely on administrative authorities to carry out this review would create "undue delays" because of those authorities' "limited resources," and therefore it is appropriate for Chinese authorities to select "import entities" that would help conduct a content review. China contended that the "contribution of the import entities to the content review is a substantial and essential condition for an effective and efficient content review." Finally, China argued that these import entities must be wholly state-owned enterprises, because "…the Government cannot require privately owned enterprises in China to bear the substantial cost [of conducting content review.]" In response, the United States argued that "content review can be conducted before, during, or after importation by any number of entities, with no need to give China's state-owned enterprises a monopoly on importing." The Panel found that the monopoly of Chinese state-owned enterprises on the content review and importation of reading materials, AVHE products, sound recordings and films for theatrical release was not a measure "necessary" to protect public morals as allowed under Article XX(a) of the GATT 1994.

Reactions to the Ruling

The United States Government and representatives of the American film industry cast the Panel's ruling as a victory, while the Chinese government expressed dissatisfaction with the ruling. In an August 12 press release, United States Trade Representative (USTR) Ron Kirk said that "[t]oday, a WTO panel handed a significant victory to America's creative industries," and that the decision will "level the playing field for American companies…so that legitimate American products get to market and beat out the pirates." In addition, according to an August 17 Reuters article, a U.S. official has said that because the ruling means that the state-run China Film can no longer be a monopoly importer of films into China, other channels for importing films would open up. In an August 12 press release, the Motion Picture Association of America (MPAA) quoted Chairman and CEO Dan Glickman as commenting on the WTO's findings that China's "film import monopoly as well as the barriers that keep U.S. firms from importing and distributing DVDs in China" violated China's international trade obligations. Glickman said, "The Chinese system for distributing U.S. films to Chinese audiences is amongst the most restrictive and burdensome in the world. This decision, coupled with the recent announcement from the State Council that the Chinese government intends to lower market access thresholds for the cultural industry, may be an opening we have been seeking." He also noted that the Panel's conclusions will aid in the film industry's fight against piracy in China. An August 14 Variety article quoted Independent Film and Television Alliance President and CEO Jean Prewitt as saying that "China will benefit from increased investment in its distribution infrastructure and enjoy a wider range of entertainment programming resulting from a more competitive and open marketplace." The Reuters article noted, however, that the ruling does not change the cap on the number of blockbuster foreign films allowed into China per year. China's Schedule of Specific Commitments to the GATS (available via the WTO Services Database) stipulates that 20 foreign films shall be imported annually on a revenue-sharing basis, and this measure was not at issue in the dispute. Chinese Ministry of Commerce spokesman Yao Jian said at a press conference on August 17 that it was "inappropriate" for the Panel not to reject the U.S. complaint and that China had "not eliminated the possibility of appealing," according to a Xinhua article (in Chinese) of the same date. China filed a notification of an appeal on September 23, 2009. The United States filed a notification of an appeal on October 6, 2009. Both China and the United States appealed aspects of the Panel's findings, and the WTO Appellate Body circulated its report to the public on December 21, 2009. As reported in China Trade Extra (subscription required), the Appellate Body upheld the Panel's conclusions in most respects, concluding that China's import and censorship system is not consistent with China's WTO commitments. Further, the Appellate Body did find that China had the right to use the exception for protection of public morals provided in Article XX(a) of the GATT, but that the measures at issue in this case did not qualify. The Dispute Settlement Body adopted the report of the Appellate Body on January 19, 2010. Although there are few details as to how China will comply with the WTO decision, according to an article in the December 22, 2009, Reuters, "China is expected to set up a more formal import approval system for cultural products...."

Neither the Panel's ruling nor the report of the Appellate Body dealt with other barriers to market access, including intellectual property rights (IPR) violations. Non-Chinese producers of cultural products, including those which are able to export their products to China, face rampant IPR violations in China. This was the subject of a separate WTO challenge against China, on which the United States prevailed earlier this year. For more information on IPR in China, see Section III―Commercial Rule of Law―Intellectual Property in the Commission's 2008 and 2009 Annual Reports. Similarly, neither the Panel ruling nor the report of the Appellate Body affect the Chinese government's restrictions on political and religious content in publications and other media, nor do they affect the requirement that anyone wishing to publish a book, newspaper, or magazine in China obtain a license from the government, each of which violates international human rights standards for free expression.

For more information, see Section II―Freedom of Expression―Regulation and Censorship of the News Media and Publishing, in the Commission's 2009 Annual Report.