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U.S.-China WTO Case: Restriction of Trading Rights and Market Access in Audiovisual Products

U.S.-China WTO Case: Restriction of Trading Rights and Market Access in Audiovisual Products. Sean Stratmoen Calvin Shabb. Outline. History and Context Main Issues Timeline US Position Chinese Position Panel Decision Appellate Panel Decision. Booming Box Office Receipts in China.

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U.S.-China WTO Case: Restriction of Trading Rights and Market Access in Audiovisual Products

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  1. U.S.-China WTO Case: Restriction of Trading Rights and Market Access in Audiovisual Products Sean Stratmoen Calvin Shabb

  2. Outline • History and Context • Main Issues • Timeline • US Position • Chinese Position • Panel Decision • Appellate Panel Decision

  3. Booming Box Office Receipts in China • Estimated box office receipts were $1.6 billion in 2010 • Number of Cinemas in China were 6000 in 2010 • Global share of box office revenues increased from 0.7% - 1999 3.1% - 2009 • March 2010:  Top grossing movies in China of all time:1.  Avatar (2010) US2.  2012 (2009) US3.  Transformers (2009) US4.  Founding of the Republic (2009) Chinese5.  Titanic (1998) US

  4. Number of Theaters in China 2004-2010 Year

  5. Chinese Box Office Totals Year

  6. Barriers to Free Trade Culture Distribution In 2009 imported films could only be distribute by CFGC and Huaxia Film Distribution two state-owned enterprises • China is concerned about the fragility of its own movie industry which as an art is considered part of its unique culture. • Imported films are only allowed 1/3 time on screen compared with domestic films, which equals about 20-30 imported films a year

  7. Timeline 10 April 2007 – U.S. requested consultations with China 25 April 2007 – European Communities request to join the consultations 10 July 2007 – U.S. requested supplemental consultations. European Communities submitted request soon thereafter. 10 October 2007 – U.S. requests establishment of a panel 27 November 2007 – DSB established a panel. The European Communities, Australia, Korea, Chinese Taipei and Japan reserved their third-party rights. 17 March 2008 - U.S. requested Director-General to determine the composition of the Panel. 27 March 2008 - Director-General composed the panel 12 August 2009 - Panel report was circulated to Members 22 September 2009 – China appeals to Appellate Body certain issues 5 October 2009 – U.S. notified its decision to appeal to the Appellate Body certain issues 21 December 2009 - Appellate Body report was circulated to Members 19 January 2010 - DSB adopted the Appellate Body report and the panel report, as modified by the Appellate Body report. 18 February 2010 - China informed the DSB of its intention to implement the DSB recommendations and rulings 12 July 2010 - China and the United States informed the DSB that they had agreed that the reasonable period of time for China to implement the recommendations and rulings of the DSB shall be 14 months, which expires 19 March 2011.

  8. Contentious Issues • (1) certain measures that restrict trading rights • 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) • (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

  9. U.S. Position: Right to Import • Current measures do not allow all Chinese enterprises and all foreign enterprises and individuals have the right to import the products into the customs territory of China. • Foreign individuals and enterprises, including those not invested or registered in China, are accorded treatment less favourable than that accorded to enterprises in China with respect to the right to trade. • Impose prohibitions or restrictions other than duties, taxes or other charges, on the importation into China of the Products. Trading Rights

  10. U.S. Position Continued: • Accord less favorable treatment to foreign suppliers of distribution services for publications than that accorded to Chinese suppliers. • Accord less favorabletreatment to foreign suppliers of audiovisual distribution services than that accorded to Chinese suppliers • Impose restrictions on market access on foreign suppliers of audiovisual distribution services for audiovisual home entertainment products. Distribution

  11. Chinese Position • There is not a duopoly in imported film distribution. • China tried to establish that films for theatrical release were services, rather than goods, and should not be subject to dispute settlement under Paragraphs 5.1, 5.2, 83 and 84, as these deal with trading rights concerning goods. • China attempted to use GATT Article XX (a) to say that inconsistencies were necessary to protect public morals. • China argued on procedural grounds that the US did not go through the proper methods for notifying China of certain issues. Services not Goods

  12. Panel Decision • The US claims can be divided into 5 different areas: • Trading Rights Under the Accession Protocol • Claims Under Article XVI GATS: Market Access Obligations concerning trade in services • Claims Under Article XVII GATS: National Treatment Obligations concerning services and service suppliers • Claims Under Article III:4 GATT: National Treatment Principle on Goods • National Treatment of Goods Under the Accession Protocol

  13. 1. Trading Rights Under the Accession Protocol • Can be divided into three categories • Discretionary: the lack of objective criteria for approval of businesses to operate • Exclusionary: the exclusion of foreign-invested enterprises from the right to trade (national treatment) • Criteria: criteria for the right to trade that are inconsistent with the Accession Protocol • The panel sided with the US on 16 points, China on 24 points.

  14. 2. GATS Article XVI • GATS Article XVI 2. (f): Member countries cannot place “limitations on the participation of foreign capital in terms of maximum percentage limit on foreign shareholding” • US showed that in two instances Chinese regulations were inconsistent by requiring majority holding of an entity to be domestic. • US 2 China 1

  15. 3. GATS Article XVII • Chinese measures prohibiting foreign-invested enterprises from engaging in • (i) the wholesale of imported reading materials • (ii) the master distribution (exclusive sale) of books, periodicals and newspapers and • (iii) the master wholesale and wholesale of electronic publications are inconsistent with China's national treatment commitments under Article XVII of the GATS. • US 12 China 2

  16. 4. GATT Article III:4 and 5. National Treatment in Accession Protocol • Reading materials: discrepancies between how domestic materials and imports could be distributed were found inconsistent with GATT Article III:4 • Hard-copy sound recordings intended for electronic distribution (e.g., through the Internet): the US did not demonstrate that that the measures were inconsistent with Article III:4.  • Films for theatrical release: the US did not demonstrate that China's regulations and rules establish a duopoly that would prevent other enterprises from obtaining a licence to distribute imported films. • All items found inconsistent with GATT Article III:4 are inconsistent with the Accession Protocol • US 4 China 10

  17. Summary • US 34 China 39 • In areas where the US lost, the main reasons were • The US did not established a claim • Procedural: China not being informed properly (6) • China’s Article XX (a) defense did not work • China’s defense that theatrical films were services and not good was rejected. • The U.S. did not prove that a duopoly existed in film distribution.

  18. Appellate Report • Upheld: Article 30 of the Film Regulation and Article 16 of the Film Enterprise Rule are inconsistent with the Accession Protocol and the Working Party Report regarding trading rights. • Upheld: Article 5 of the 2001 Audiovisual Products Regulation and Article 7 of the Audiovisual Products Importation Rule are inconsistent with China's Accession Protocol 1.2 and the Working Party Report 84(b) on discretionary grounds.

  19. Film Regulation Article 30: The business of importing movies shall be operated by the movie import entities designated by the administrative department for radio, movie and television under the State Council; without being designated, no entity or individual shall operate the business of importing movies. • Film Enterprise Article 16 Film import operations business will be only carried out by film import operation enterprises approved by SARFT. The business of nationally distributing imported films will be carried out by distribution companies approved by SARFT, having national film distribution rights.

  20. Audiovisual Products Importation Rule Article 7 The State shall apply a license system to the import of audio and video products. • 2001 Audiovisual Products Regulation Article 5: The State implements a license system for the publication, production, reproduction, importation, wholesale, retail, and rental of audiovisual products. Any entity or individual, without a license, shall not be engaged in the publication, production, reproduction, importation, wholesale, retail or rental of audiovisual products. Any license or approval documents issued according to these Regulations shall not be assigned by means of rental, lending, sale or any other means.

  21. Appellate Report • China may use Article XX (a) of GATT 1994 to justify inconsistencies. However, the Appellate Report upheld the decision that China did not show that its regulations were necessary to protect public morals. • Upheld that Article 2 of the Rules for Management of Foreign-Invested Enterprises Sub-Distributing Books, Newspapers, and Periodicals and Article 16 of the Administrative Rules for the Publication Market prohibiting foreign-invested entities from engaging in the distribution of sound recordings in electronic form were inconsistent with GATS Article XVII.

  22. Rules for the Management of Foreign‐Invested Enterprises Sub‐Distributing Books, Newspapers and Periodicals Article 2: This Rule is applicable to foreign invested enterprises inside China engaged in the distribution of books, newspapers and periodicals. Books, newspapers and periodicals as mentioned in this Rule refer to books, newspapers and periodicals published by a publishing entity approved by the publishing administration under the State Council. Distribution as mentioned in this Rule refers to the wholesale and retail of books, newspapers and periodicals. • Administrative Rules for the Publications Market Article 16: To set up a book, newspaper and periodical distribution enterprise, a Chinese foreign equity joint venture, contractual joint venture, or a foreign capital enterprise shall follow the Publication (Sub) Distribution Rule jointly drawn up by the GAPP and the Ministry of Foreign Trade and Economic Cooperation.

  23. Conclusions/Recommendations • Due to the large number of claims the United States made, there may have been not enough focus on particulars, leading to a large number of rulings that the US did not establish a claim or did not properly notify China. • The case focused on distribution and as a result, China is not required to raise the number of foreign movies it lets in theaters. • China is allowed to continue to censor content.

  24. Sources • http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds363_e.htm • http://www.ustr.gov/webfm_send/1894 • http://www.ustr.gov/trade-topics/enforcement/dispute-settlement-proceedings/wto-dispute-settlement/china-%E2%80%94-measures-affe • http://indus.chinafilm.com/201010/1555879.html • http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1458022 • http://www.worldtradelaw.net/articles/malawerchinalitigation.pdf • ec.europa.eu/culture/media/programme/docs/pa/links/asia/china.pdf • http://www.cbc.ca/arts/film/story/2010/01/08/china-box-office.html • http://news.xinhuanet.com/english2010/entertainment/2010-06/03/c_13331870.htm • http://www.nytimes.com/2007/12/12/business/smallbusiness/12film.html?_r=1 • http://online.wsj.com/article/SB126147827654101401.html • http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a6p1JeX8raf0 • http://www.hollywoodreporter.com/hr/content_display/film/news/e3i9b1395cce9be0a2e41fb96653bbdeeaf • http://www.washingtonpost.com/wp-dyn/content/article/2009/08/12/AR2009081202971.html?hpid=topnews

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