Obama, entertainment industry win China WTO case

The Obama administration is touting a trade court ruling as a major victory in the battle to increase the distribution of U.S. films, music and books in China.

A World Trade Organization report made public Wednesday ruled that Chinese restrictions on the import and distribution of movies, DVDs, music, books and journals are inconsistent with China’s obligations as a member of the trade body. It called on China to come into compliance with those obligations.

China could appeal the decision, but if it stands, it could eventually make it easier for the U.S. entertainment industry to make further gains in one of the most important markets on Earth.

U.S. Trade Representative Ron Kirk called the ruling “a significant victory” to U.S. creative industries. Dan Glickman, president of the Motion Pictures Association of America, called it a “major victory” and said it could lead to a more even playing field in China.

The potential of the Chinese market for U.S. studios has been reflected this summer in the success of the second "Transformers" movie, which broke box office records in China. "G.I. Joe" and the second "Night at the Museum" film have also been popular with summer audiences in China.

The case was brought by the Bush administration and has been slowly moving through the WTO process for about two years. The parties were informed of the decision earlier this summer, but the full, nearly 500-page report was released only on Wednesday.

It represents an early victory on trade for the Obama administration, which like the preceding White House has come under pressure from Congress to close the trade deficit with China.

The decision could have implications for a host of U.S. businesses, as it could make it easier for U.S. film studios to distribute movies and to export DVDs to China, while also easing barriers to the distribution of published material.

The ruling could also impact companies such as Apple, the owner of iTunes, by striking down prohibitions on the rights of foreign suppliers to distribute sound recordings in China.

“These findings are an important step toward ensuring market access for legitimate U.S. products in the Chinese market, as well as ensuring market access for U.S. exporters and distributors of those products,” Kirk said.

At the same time, major barriers remain for the U.S. entertainment industry in China, particularly piracy of DVDs that costs film studios and record companies billions in lost revenue.

The WTO decision also did not strike down every barrier the U.S. mentioned in its complaint. For example, it offered no ruling on certain approval process requirements for foreign firms to distribute in China that the U.S. charges go against China’s obligations.

It also did not even consider a quota that limits the number of foreign films that can be shown in China to 20. China has the right to that limit as part of its agreement to enter the WTO.

Still, an official with the MPAA said key parts of the decision could eventually make it easier for the U.S. to export and distribute DVDs in China.

For example, the WTO ruled it is against China’s obligations to require companies wanting to import movies to China to go through the China Film Corporation to do so.

The decision could also introduce competition in the distribution of films in China, which could profit U.S. studios.

Only one state-owned company in China has distributed films in that country, and foreign firms doing business with that distributor generally enter into contracts in which they take only 13 percent of box office receipts in China. In the U.S., distributors generally get about 50 percent of the receipts, with the remainder going to the cinemas that exhibit films.

As part of the WTO case, China said it has no domestic laws that would prevent other companies from distributing films within China.

Glickman said this was a significant development.

“After years of pressing the Chinese to ease these barriers it is potentially promising that the Chinese government has now, in its own words, indicated that a pathway does exist to ensure that U.S. films are treated in a more even-handed manner and more in line with accepted commercial practices,” he said.

“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.”