Yesterday, I wrote how it was too early to proclaim repurcussions from the WTO ruling on foreign media in China. It is still too early and I still know too little, but I have seen a few things which shed a bit of light.

The first is Businesweek's Eye on Asia post on the ruling, entitled, "Hollywood's Small WTO Victory Over China," in which Bruce Eichorn questions whether the ruling is as big a deal as Hollywood is making it out to be:

The top lobbyist for the major Hollywood studios is hailing yesterday’s news that the World Trade Organization has ruled in favor of the U.S. government’s complaint against China’s restrictions on foreign films. After years of getting nowhere in China, the movie industry understandably is celebrating this WTO win: Dan Glickman, chairman and CEO of the Motion Picture Association of America, called the ruling “a major victory” and said in a statement it “points a way forward that will begin to even the playing field in this important market.”

Maybe, but there’s still a long way to go before Hollywood can count on China as a big source of revenue. Glickman says the WTO ruling strikes down China’s film import monopoly as well as barriers that keep American companies from importing and distributing DVDs. Because of rampant piracy, though, there’s very little demand for imported DVDs, no mater who is distributing them. Likewise, the WTO ruling against China’s monopoly on film imports doesn’t do anything about the bigger problem, which is the 20-movie annual quota on foreign movies. As Glickman’s statement says in a succinct final sentence, “that restriction remains in place.”

The second is a very thoughtful article by Brian Wingfield at Forbes.com, entitled, "Hold The Applause On WTO's China Ruling." Wingfield notes how the ruling only tangentially relates to piracy in China and will have only marginal impact on it:

The WTO has nudged China to give foreign firms better access for certain copyrighted products; it's not ordering Beijing to clamp down on piracy, which has made much officially restricted Western media widely available in China. As long as there's money to be made in the manufacturing and selling of bootlegged CDs, movies and videogames, thieves will do it--regardless of market rules. And they'll always have lower prices than the legit Western merchandise.

Henry Gao also emailed me the following excerpt from his 2007 article on this case published in the Asian Journal of WTO & International Health Law and Policy. This article provides an excellent summary and background of the US complaint in non-technical terms. The full article is entitled, "The Mighty Pen, the Almighty Dollar, and the Holy Hammer and
Sickle: An Examination of the Conflict between Trade Liberalization and Domestic Cultural Policy with Special Regard to the Recent Dispute between the United States and China on Restrictions on Certain Cultural Products." Henry Gao is a law professor at Singapore Management University (on leave from the University of Hong Kong) and a former staff member of the WTO Secretariat. Professor Gao has a blog called WTO and China, which the site describes as "A blog set up by the first-ever Chinese lawyer at the WTO secretariat on issues relating to china's trade policy, WTO issues, etc." Professor Gao tells me that he intends to write on the WTO ruling as soon as he gets a chance.

Here is Professor Gao's summary of the case, written before yesterday's ruling came down:

I. The US Complaint

According to the request for consultations, the US complaint includes two claims. The first claim concerns 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). The second claim concerns 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. The details of the two claims are discussed as follows.

1. Trading Rights

Before China’s accession to the WTO, only a limited number of Specialized Foreign Trading Companies and some Sino-foreign Joint Foreign Trading Companies had trading rights. In addition, some manufacturing firms, research institutes and foreign invested enterprise have also been granted special approval for exporting their own products and importing technologies, equipments, components and raw materials for their own production needs.

During the negotiations leading to China’s accession to the WTO, many Members urged China to remove its restrictions on trading rights, which they regard as barriers to keep foreign products out of the Chinese market. After extensive negotiations, China agreed to the following commitments with regard to trading rights:

“China shall progressively liberalize the availability and scope of the right to trade, so that, within three years after accession, all enterprises in China shall have the right to trade in all goods throughout the customs territory of China…... Such right to trade shall be the right to import and export goods.

Except as otherwise provided for in this Protocol, all foreign individuals and enterprises, including those not invested or registered in China, shall be accorded treatment no less favourable than that accorded to enterprises in China with respect to the right to trade”.

In addition, China has agreed to some further obligations in its Working Party Report. These include the following:

First, upon accession, China would eliminate for both Chinese and foreign-invested enterprises any export performance, trade balancing, foreign exchange balancing and prior experience requirements, such as in importing and exporting, as criteria for obtaining or maintaining the right to import and export.

Second, China would reduce the minimum registered capital requirement (which applied only to wholly Chinese-invested enterprises) to obtain trading rights to RMB 5,000,000 for year one, RMB 3,000,000 for year two, RMB 1,000,000 for year three and would eliminate the examination and approval system at the end of the phase-in period for trading rights.

Third, beginning one year after accession, joint-venture enterprises with minority share foreign-investment would be granted full rights to trade and beginning two years after accession majority share foreign-invested joint-ventures would be granted full rights to trade.
Within three years after accession, all enterprises in China would be granted the right to trade. Foreign-invested enterprises would not be required to establish in a particular form or as a separate entity to engage in importing and exporting nor would new business license encompassing distribution be required to engage in importing and exporting.

Fourth, trading rights would be granted in a non-discriminatory and non-discretionary way. Any requirements for obtaining trading rights would be for customs and fiscal purposes only and would not constitute a barrier to trade. While foreign enterprises and individuals with trading rights had to comply with all WTO-consistent requirements related to importing and exporting, such as those concerning import licensing, TBT and SPS, requirements relating to minimum capital and prior experience would not apply.

To sum up, China’s commitments on trading rights include the following:

First, eligible persons: Trading rights may be granted to all legal persons. These include both domestic Chinese enterprises, foreign-invested enterprises in China, as well as foreign enterprises which are not invested or registered in China. In terms of natural persons, the accession commitments only grant the rights to trade to foreign natural persons, but not domestic natural persons. In other words, under the accession commitments, foreign natural persons get a “supra-national treatment” that is much better than local Chinese individuals. Moreover, foreign individuals do not even need to invest or register in China to enjoy the trading rights.

Second, scope: The right to trade includes both the right to import and to export goods. It covers all goods, except some products which are subject to designated trading exceptions. These goods are listed in Annex 2B. They include natural rubber, timber, plywood, wool, acrylic and steel. Even for these products, however, China could not maintain the limitations on trading rights forever. Instead, these limitations would need to be phased out within three-years after China’s accession to the WTO.

Third, substantive and formal requirements: Upon accession, China would eliminate all export performance, trade balancing, foreign exchange balancing and prior experience requirements for obtaining or maintaining trading rights. Within three years of accession, China would also abolish any requirements for foreign-invested enterprises to establish in a particular form, as a separate entity or obtain new business license encompassing distribution before they could obtain trading rights. Minimum capital requirements would not be applicable to foreign firms or individuals either.

Fourth, these commitments will be implemented in phases. Within three years of accession, trading rights shall be fully liberalized for foreign enterprises and individuals. In line with the liberalization, the examination and approval system will also be abolished.

Pursuant to the accession commitments, China revised its Foreign Trade Law in 2004. According to Articles 8 and 9 of the new Law, both individuals and legal persons can obtain the right to trade. No examination or approval from the foreign trade authorities is needed; instead, the foreign trade operators only need to register with the relevant authorities. Also, they will need to register with the Industry and Commerce Bureau to obtain a business license.

As neither the accession commitments nor the new Foreign Trade Law specify any limitations on the right to trade foreign publications and audiovisual products, one might think that anyone could freely import these products. A closer look at the relevant laws and regulations of China indicates, however, that censorship is far from being washed away with the recent waves of economic prosperity.

The most important regulation on publications in China is the Administrative Regulation on Publishing. According to Article 41 of the Regulation, no entities or individuals may import publications without prior approval from the government authorities. Anyone who wishes to establish a publication importation entity has to satisfy several requirements, with the key requirement being that such entity shall be a wholly-state-owned enterprise. With regard to the importation of newspapers and periodicals, the rules are even
stricter: only those designated by the General Administration of Press and Publication may carry out such business. By definition, foreign individuals and enterprises can never become a wholly-state-owned enterprise of China. Thus, this Regulation essentially denies foreign enterprises the right to import publications into China. Thus, this violates China’s obligation under Paragraph 5.1 of the Accession Protocol to fully liberalize trading rights within three years of accession. As this Regulation accords foreign enterprises and individuals treatment less favorable than (some) enterprises in China, it also violates China’s obligation under Paragraph 5.2 of the Accession Protocol and paragraph 83 of the Working Party Report to not to discriminate against foreign enterprises and individuals. This regulation also re-introduce an examination and approval system with regard to the grant of trading rights, thus violates China’s commitment under paragraph 83 of the Working Party Report to eliminate the examination and approval system at the end of the phase-in period.
Last but not least, to the extent that the Regulation imposes prohibitions or restrictions other than duties, taxes or other charges on the importation into China of publications, it also violates China's obligations under Article XI:1 of the GATT 1994.

2. Distribution Services

Even though China has agreed to fully liberalize trading rights in its accession commitments, such rights only include the rights to import and export and does not automatically gives importers the right to distribute the products they import within China. Instead, foreign service providers may only provide distribution services to the extent that commitments have been inscribed for such services in China’s Schedule of Specific Commitments. China’s commitments for distribution services can be found in several sectors of its services schedule, two of which are most relevant here.

A. Distribution Services for Publications (e.g., books, newspapers,
periodicals, and electronic publications)

In Sector 4 of its services schedule, China made commitments on both market access and national treatment for the distribution services for publications. With regard to market access, China agreed to grant full market access on Mode 3 (commercial presence) for foreign service supplier for the retailing of books, newspapers and magazines within one year after accession, and for the wholesale distribution of books, newspapers, and magazines within three years after China's accession.
With regard to national treatment, China also agreed to grant full national treatment for Mode 3 (commercial presence) immediately since its accession.

However, several laws and regulations of China seem to deny or limit foreign service suppliers such distribution rights. For example, according to Article 4 of Several Opinions of the Ministry of Culture, State Administration of Radio, Film and Television, General Administration of Press and Publication, National Development and Reform Commission and the Ministry of Commerce on Introducing Foreign Investment into the Cultural Sector , foreign service suppliers are prohibited from engaging in the “master distribution” of publications.
The word “master distribution” is not defined in the Opinions.
Instead, the definition is provided for in the Administrative Regulations on the Publication Market (revised) . Under this Regulation, distribution services include, inter alia, master distribution, wholesale distribution, and retail. It further defines “master distribution” to mean exclusive distribution of a publication to others, while “wholesale distribution” means ordinary distribution to other dealers of publication. The key difference between the two seems to be the exclusively for the provider of the “master distribution” service, meaning that there is only one distributor in the whole market at such a level. Thus, China could well argue that it treats master distribution service differently from wholesale distribution service, and the fact that it has made commitments on wholesale trade services does not necessarily mean that it has also made commitments on master distribution services. This is also confirmed by the Administrative Regulations on Management of Foreign-Invested Book, Magazine and Newspaper Distribution Enterprises , which only include wholesaling and retailing in its definition of distribution services. On the other hand, the definitions on “distribution services”, attached as Annex 2 to China’s GATS schedule, points to the other direction. According to the Annex, distribution trade services are comprised of four main sub-sectors, i.e., commission agents services, wholesaling, retailing and franchising. Of the four, the most relevant sub-sector would be wholesaling services, which is defined in the same Annex as “the sale of goods/merchandise to retailers to industrial, commercial, institutional, or other professional business users, or to other wholesalers and related subordinated services”. Thus, the Annex does not differentiate between wholesaling services provided on an exclusive basis and those provided in competition with other wholesalers at the same level of the distribution chain. As the definitions in Annex 2 are made at the same time of the specific commitments in China’s services schedule and have been referred to in the specific commitments on Sector 4, they would be given more weight than the Administrative Regulations on the Publication Market (revised) if the Panel or Appellate Body were to decide the proper scope of China’s commitments on distribution services. Thus, China’s prohibition on foreign service suppliers to provide “master distribution” for publications is in potential violation of the commitments under Sector 4 of its GATS schedule.

Moreover, under Article 62 of the Administrative Regulations on Electronic Publications , foreign service suppliers cannot even engage in the wholesaling of “electronic publications”. As there is no special carve-out for distribution services of electronic publications in China’s services schedule, China also violates its commitments under Sector 4 of its GATS schedule.

Even where foreign service suppliers are allowed to provide some distribution services, they are subject to higher entry requirements than domestic Chinese service suppliers. For example, under the Administrative Regulations on Management of Foreign-Invested Book, Magazine and Newspaper Distribution Enterprises, foreign service suppliers on publication distribution services need a minimum registered capital of 30 million RMB for providing wholesaling services and 5 million RMB for providing retailing services , while domestic service suppliers only need 2 million RMB in registered capital to provide wholesaling service and are not subject to minimum capital requirement for retailing services . In addition, foreign service suppliers need to have a minimum prior operating term of 30 years before they could be granted the right to provide wholesaling or retailing services , while the domestic service suppliers do not have any prior experience requirement at all. Furthermore, even for foreign service suppliers who got over these barriers to obtain the right to provide distribution services, their rights might be curtailed if they are suspected of trying to sneak into propaganda businesses such as radio and television channels and frequencies, newspaper and journal space, or editing and publication.

As these limitations do not fall within the terms, limitations, conditions, or qualifications on market access or national treatment that China has specified in its Schedule for the distribution of publications through commercial presence in China by service suppliers of other Members, they are inconsistent with China’s obligations under Articles XVI and XVII of the GATS.

B. Audiovisual home entertainment products

China’s commitment for audiovisual services is scheduled under Sector 2D of the services schedule. For National Treatment, China undertook to accord full national treatment for Mode 3 upon accession. For Market Access, China’s commitment under Mode 3 reads as following:

“Upon accession, foreign services suppliers will be permitted to establish contractual joint ventures with Chinese partners to engage in the distribution of audiovisual products, excluding motion pictures, without prejudice to China’s right to examine the content of audio and video products (see footnote 1)”.

This seems to indicate that the only limitation is related to the types of joint venture through which the service may be supplied, without any cap on foreign equity participation. This is confirmed by the explanation in footnote 1, which states that “[t]he terms of the contract, concluded in accordance with China's laws, regulations and other measures, establishing a ‘contractual joint venture’ govern matters such as the manner of operation and management of the joint venture as well as the investment or other contributions of the joint venture parties. Equity participation by all parties to the contractual joint venture is not required, but is determined pursuant to the joint venture contract.”

Again, however, further restrictions have been placed upon the ability of foreign service suppliers to provide distribution services on audiovisual products by the laws and regulations of China. First, the prohibition on foreign service suppliers to engage in “master distribution” services applies to audiovisual products as well as publications. Second, for Sino-foreign contractual joint venture enterprises specializing in the wholesaling and retailing of audiovisual products, the Chinese partner must have a dominant position , which means that the interests of the Chinese partner in the joint venture shall be no less than 51% . Neither of these limitations fall within the terms, limitations, conditions, or qualifications on market access or national treatment that China has specified in its Schedule for the distribution of such products through commercial presence in China by service suppliers of other Members, thus they are inconsistent with China's obligations under Articles XVI and XVII of the GATS.

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