WTO A/V Products Case: Suspicions Confirmed?

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I wasn’t planning on a follow-up post to what I thought was my final missive on this long, complex WTO case between the U.S. and China over audiovisual products, but I am admittedly easily sucked back into these things. The reason for it this time is some new information, courtesy of Don Clarke at the Chinese Law Prof Blog, on the deal that the U.S. and China struck to end this dispute.

If you recall, the origins of all this are shrouded in the mists of time 2007, when the U.S., unhappy that China had failed to live up to its WTO commitments regarding the film industry, filed for dispute resolution. The U.S. claim involved the following issues:

On 10 April 2007, the United States requested consultations with China concerning:  (1) certain measures that restrict trading rights with respect to imported films for theatrical release, audiovisual home entertainment products (e.g. video cassettes and DVDs), sound recordings and publications (e.g. books, magazines, newspapers and electronic publications); and (2) certain measures that restrict market access for, or discriminate against, foreign suppliers of distribution services for publications and foreign suppliers of audiovisual services (including distribution services) for audiovisual home entertainment products.

  • Regarding trading rights, the United States seeks consultations on various Chinese measures that reserve, to certain Chinese state-designated and wholly or partially state-owned enterprises, the right to import films for theatrical release, audiovisual home entertainment products, sound recordings and publications;
  • Regarding distribution services, the United States seeks consultations on various Chinese measures that impose market access restrictions or discriminatory limitations on foreign service providers seeking to engage in the distribution of publications and certain audiovisual home entertainment products.

The case was mostly about the ability of foreign enterprises to get involved in the importation and distribution of certain audiovisual products in China. According to the U.S., which won the case, China had promised when it joined the WTO to open up this sector to foreign investment. After the U.S. victory, we had a “What the heck is going on?” period where the two sides were struggling to find a way to settle.

Looking back on this, I now have to admit to being a bit naive. I figured that the U.S. would hold China’s feet to the fire and persist in demanding implementation of the promises made when China joined the WTO; this would include opening up the import and distribution markets to foreign firms. I further assumed that the reason for the delay was that China needed to figure out how they would handle the implementation while maintaining the legal processes surrounding content review, quotas, etc.

Silly me. I forgot Rule #1 of international trade policy: it’s not about law, it’s about trade. No one really cares about film distribution and importation per se. The Chinese care about controlling the sector, and the Americans (i.e. the big film studios) just want the best deal they can get.

To my credit, when the deal was announced back in February, I did note my suspicions:

I find it interesting, though, that no one seems to be questioning whether the settlement actually fixed the defects identified by the WTO. Seems to me like it doesn’t. As to imports and distribution, will foreign firms now be able to get into that business? The USTR language is far from clear, saying that the deal:

[S]trengthens the opportunities to distribute films through private enterprises rather than the state film monopoly[.]

[E]nsures fairer compensation levels for U.S. blockbuster films distributed by Chinese state-owned enterprises[.]

Seriously, what does this mean? Which private enterprises? How will they be approved and who can qualify? Why do I feel like this issue is being swept under the carpet now that the major film studios got a few concessions?

Thanks to Don Clarke, I can now say that it appears as though my suspicions were well founded. While we still do not have the formal language in the bilateral Memorandum of Understanding, the Joint Communication filed with WTO tells us plenty. It essentially is a description of the deal between the U.S. and China, consisting of five points:

1. China will continue with the 20-film import quota but will allow in additional “enhanced format” films.

2. and 3. These points concerned commercial terms for film distribution agreements, including revenue sharing issues.

I’m going to quote points four and five verbatim since these concern the actual legal issues from the WTO dispute:

4. China confirmed that any Chinese enterprise is eligible to apply for and be granted a license to distribute imported films and that nothing in China’s laws, regulations or government rules prevents any eligible Chinese enterprise from applying for and receiving a license to distribute, and operating as a distributor of, these films.  China further agreed that it will promote reform in the distribution of imported films and will actively encourage more Chinese enterprises, including private enterprises, to obtain licenses and to participate in the distribution of these films.

5. China agreed that the licensing of distributors would be conducted in a non-discretionary and non-discriminatory manner, that contracts for the distribution of imported films would reflect standard industry practices, and that other Chinese government policies or practices would not undermine the provisions of the Memorandum of Understanding.

Point six said that the two sides would revisit all this in five years’ time, which is laughable on its face.

OK, do you see anything interesting in that list of key elements concerning the ability of foreign firms to engage in film importation? Take a close look now.

Having trouble? Well, no surprise, because that issue was dropped entirely from the discussion, even though the WTO said that China was in violation of its Accession Protocol in keeping that sector closed. Apparently the U.S. entertainment industry, happy with the deal they got, agreed to drop that demand.

What about the other major issue, that of foreign firms engaging in film distribution? Take a close look at points four and five above. Are you laughing? I agree with you, that language surely is hilarious. Have the Chinese agreed to allow foreign companies to distribute films? Not even a little bit.

Will China be forced to approve requests from private Chinese companies for distribution licenses? Ha ha. According to that language, all China has to do is “promote reform,” “encourage” companies, and license firms in a “non-discriminatory manner.” Oh my, you could drive a very large truck through those loopholes. Why did they even bother with points four and five? It’s almost as if that language was just stuck in there for cosmetic (political?) reasons, even though the negotiators on both sides knew it was complete dreck. Nah, they wouldn’t do that, would they?

Look, I’m not an executive at a big film studio, so I’m not going to say which side “won” this dispute. Maybe with the relaxation of the import quota and the new revenue sharing deal, the studios figured they would make so much money that it was worth it to essentially give up on the legal issues that began this whole thing five years ago. Perhaps they’re right.

But I have to say, after writing about this case for so many years, learning the underlying law and reading countless pages of legalese gibberish, I am more than a little disappointed that the core issues everyone was fighting about were so easily thrown under the bus by American industry.

I need to stop being so naive. This was never about the law. It was about entertainment companies making money. They found an issue to win on, and they successfully used it to wring market access concessions out of China. Problem solved. Both sides can live with the results.

I so need to get a life.

2 responses on “WTO A/V Products Case: Suspicions Confirmed?

  1. Chris Lanterman

    We just went over this case in Intl Trade Law last week, so it’s interesting that you and Professor Clarke both provided detailed analysis right after the bilateral deal was struck. Very interesting. As you said, Trade is the driving issue, not law. As long as Us companies get their money, they don’t seem to care much for control (which is what the Chinese government wants).

    1. Stan Post author

      It’s too bad that when I took WTO Law in grad school (class didn’t exist when I was in law school), there weren’t really any US-China cases to study. Bummer.