The WTO ruling: a half victory at best

In August 2009, a World Trade Organization panel ruled against China’s system of monopoly control over entertainment products.

Was this the victory supporters hailed as the dawn of a new day for American and global entertainment companies in the China market? Will China ultimately comply with the ruling, or will it circumvent it? Is China’s regulatory system the biggest problem the global entertainment industry faces in China, or does it simply mask even greater challenges that lie in wait?

The following excerpt is from a new report from David Wolf and CMM Intelligence. The WTO Ruling on China’s Regime for Distributing and Importing Entertainment Products – What Does it Mean to You?

For more information, visit the CMM Intelligence website or contact Christine Baker at christineb@cmmintelligence.com.

Fed up with years of what it perceived as unfair restrictions on access to Chinese consumers and convinced that the lack of access was a major driver of piracy, a loose alliance of US-based media interests led by the Motion Picture Association of America (MPAA) lobbied an otherwise China-friendly Bush administration to file the action. (The move was half of the USTR’s two-pronged China effort on behalf of the US media industry. The other action was a complaint on deficiencies in China’s IPR protection regime.) Attaching their countries to the US complaint were Argentina, the European Union, Japan, Korea, and Chinese Taipei.

On August 12, 2009, the WTO panel issued its ruling, ordering China to stop compelling US owners of copyrighted material to distribute exclusively through government-controlled monopoly distribution companies. The panel ruled that Chinese laws limit the ability of foreign copyright owners to distribute and sell DVDs, music, books, and software in China, and that this constitutes “discriminatory” treatment of foreign firms (and thus violates the WTO rules China is subject to). The panel “urged” China’s leaders to bring its laws and policies in line with its WTO obligations.

The ruling was hailed by many in the US as a major victory. “Hollywood upstages Beijing” read the front-page headline in the normally-sedate Wall Street Journal. “WTO hands China its biggest defeat in trade battle over movies, music, books.”

Meanwhile Ron Kirk, the Obama administration USTR who succeeded Susan Schwab, called the ruling “a significant victory”.

“I know it’s going to be better,” MPAA executive vice-president Greg Frazier said at the time. “This is a landmark. I can’t tell you it’s going to take place in the fourth, first, or third quarter. But it’s a positive development in one of the fastest growing theatrical markets.”

James Bacchus, an attorney at Greenberg Traurig and counsel for the China Copyright Alliance (CCA), a US entertainment industry consortium made up of the MPAA, plus music and publishing industry groups, told The Wall Street Journal, “American companies now have the right to trade without going through a Chinese intermediary at the border.”

Despite how the ruling might benefit their business in China, representatives of other media – most notably the rarely-publicity-shy music and publishing industries – were strangely silent. The American Chamber of Commerce in China, made up of US executives living and working in China, was also much more restrained than the organizations and people quoted above, issuing a written statement saying that China and the US have a “complex relationship”.

So was it a major victory?

Three months after it was issued, there is a growing recognition that the effect of the ruling will not be as significant as the USTR and the MPAA originally seemed to think, and concerns about whether the ruling will significantly improve access to China’s markets for films, music, books or videogames.

On the one hand are China’s actions to delay the ruling, including its almost immediate appeal a week after the release of the final report, plus serious questions about whether China will comply, and the weakness of any enforcement mechanism available to the USTR or the WTO. An even more troubling question exists: will China seek to build barriers even as they comply with the letter of the ruling, thus negating its value (or worse?)

On the other hand, is the US industry’s realization that by focusing on the regulatory restrictions to market access, the ruling may not address the more fundamental problems plaguing the film, music, game, and publishing industries in China. Even if the laws were changed tomorrow, would prospects really improve?

Indeed, in the way it pursued this case, has the USTR – and by extension the industries it represented in this action – foregone other opportunities to improve the performance of US media companies in China?

A Ruling Reality Check

In the wake of the ruling the media industries must assess what they have failed to accomplish in their nearly 3 year-long effort with the WTO. Whatever the merits of the current victory, the industries involved face considerable challenges in the areas that the rulings did not address.

The music industry is left with a half victory at best, with the prospects of joint ventures on legal download sites but without recourse against an increasingly draconian censorship regime that would leave little for those sites to sell. The music business is now back to the more conventional IPR protection approach – or some thoughtful commercial approaches – to redress its grievances.

The film industry will need to assess whether it can take further action over China’s annual quota for films imported on a profit-sharing basis. Hollywood would like to see the quota lifted to allow more films to be imported on a profit-sharing basis, but the panel did not address this issue. The question now is whether there is even a possibility of discussing a change in the limit, or whether the studios have forgone that opportunity in an effort to limit China Film Goup’s power over their current business.

The ruling also leaves intact China’s right to censor foreign media products. Censorship remains the most arbitrary and non-transparent aspect of China’s media trade regime. Any film, book, CD, videogame, or magazine can be restricted or banned outright. Worse, the process of reviewing the product for objectionable content is so time-consuming that it often restricts or eliminates the product’s commercial worth. Holding a film for review for months after its release virtually ensures that pirated DVDs will destroy much or all of a potential theatrical audience. J.K. Rowlings’ Harry Potter novels were restricted so long that not only did bootleg translations find their way into the market, entirely bogus novels of the series did as well. The same happened with The Bourne Ultimatum and Die Hard 4 in 2007. Die Hard was released as early as June 2007 in other territories but not released until 22 November in China. The Bourne Ultimatum premiered in California in July 2007 and opened in August in most territories, but was not released in China until 15 November.

Even more alarming is the potential for China to make even greater use of this tool in the event that the current ruling is implemented. At some point, regulators seeking to limit foreign media access to China’s market will recognize that content-based restrictions are China’s best non-tariff barrier, and will give the green light to strengthen the nation’s censorship regime beyond the minimums it needs for political and cultural purposes. This casts censorship in the role all have tried to avoid: a trade weapon.

Similarly, in the past, SARFT has taken to imposing informal “black-out periods” in which only domestic films may be shown in Chinese theaters. Often scheduled around national holidays but sometimes imposed with little warning during politically sensitive anniversaries or events, these blackouts appear to fall outside the purview of the WTO. If experience offers any indication of what we can expect, it is that these sorts of non-tariff, extra-WTO tools will rise in importance for the government.