China increases foreign movie quota, so what does it solve?

On 18 February, an agreement was concluded between China and the United States concerning market access quota and conditions for American cinema films.  According to the People’s Daily, the agreement states that China will import 14 American films per year more than before, and that the cut of revenue-sharing box office income will increase from 13% to 25%. The LA Times also reports that the deal will enable independent producers to negotiate higher licence percentages that are comparable with commercial rates in other markets.

On the Chinese side, the mood is one of optimism: in a number of pieces, the People’s Daily seems to be convinced that, although the Chinese film industry will probably suffer from increased competition in the short run, the relationship between the US and Chinese movie industries no longer is one of “wolves and sheep”, but that a small number of films can already compete with Hollywood products, and that the influx of more high-end American blockbusters will be a further stimulus to Chinese filmmakers to increase the quality and market success of their products. Feng Xiaogang, at least, is not afraid.  On the other hand, there are also fears that China’s already film ticket prices will further go up.

On the American side, there’s a lot of optimism. Vice-President Joe Biden said it would “make it easier than ever before for US studios and independent film-makers to reach the fast-growing Chinese audience”. The deal would also save “thousands of American jobs in and around the film industry,” and give Chinese audiences “access to more of the finest films made anywhere in the world.” MPAA Chairman Chris Dodd calls it a “major step forward in spurring the growth of US exports to China,” while Disney CEO Bob Iger is referring to a “new era”. However, let’s look beyond the niceties of the official spokespersons, as there are a lot of things as yet unclear about this agreement.

First, on the legal side, I’ll reserve my judgment until the original text is published, which will hopefully answer some of the following questions:

–       What is the status of these new commitments in terms of its relationship with WTO law? Can we consider this as a bona fide WTO commitment subject to potential DSB review, or is this a bilateral issue for which there is no immediate dispute resolution method? And if it is, would this not be a breach of Most-Favoured Nation requirements?

–       Given that the earlier film quota of twenty dealt with all foreign films, and if this agreement is solely a bilateral agreement with the US, what’s the basis for verification of the added 14 films? In other words, how is the added number of films calculated?

–       How will the agreement ensure that the State monopoly on distribution will be opened up, as stated by the White House?

–       How will the agreement remedy the inconsistencies found in WTO case DS363?

Second, foreign film screening will remain limited by other means. The two Chinese State-owned film distributors will probably remain in charge of foreign film distribution. Hence, at present, there’s no reason to believe that foreign films will be treated better than before, when Avatar was famously pulled to make way for the main-melody biopic Confucius. Chinese cinemas are still required to devote two-thirds of screening time to domestic films, so there may be more foreign films, but they’ll still have to share the same portion of the market, measured by time.

Third: although Xi Jinping seems to have been personally involved in the negotiation, it’s not clear to what extent the administrative offices and distribution companies were involved, and how they will translate these commitments into policy. In any case, the SARFT Film Department told People’s Daily that it hadn’t yet heard anything about the agreement. In other words, before these commitments will be realized, SARFT will want to have something to say about the matter as well, not to mention China Film Group and Huaxia.

I agree with Stan Abrams in thinking that this is perhaps the best deal that US filmmakers could have expected, and that this will essentially be the end of the DS363 proceedings. But let’s not kid anyone by thinking this is a triumph for free trade. As in most other economic fields, exactly how much foreign activity takes place in the film sector will be decided by the leadership in Beijing. Within a short few years, Hollywood will probably be knocking on Beijing’s doors again for further opening and more access. It will take another couple of years before the US government reacts on it, maybe files another WTO case, and we’ll be starting all over again. In the mean time, we can probably expect the basic policy line to remain the same: foreign films will be imported and distributed, but will only be available in such a way as the leadership decrees. Co-production will be stimulated, and I expect this will become a more popular mode of doing business in and with China. It will, however still be subject to strict government supervision, and is especially stimulated in areas where transfer of foreign filmmaking know-how to Chinese enterprises is possible. Outside of content, the Chinese government will be looking to bring in investment, know-how and technology that it deems necessary for the further develop its own creative industries.

As an illustration, let’s look at the deal struck two days earlier that enables Dreamworks to establish a joint venture (with a 45% minority partnership) with two Chinese partners in Shanghai. Given the particular attention that has been paid to developing the Chinese cartoon industries, this seems like a good deal. The fact that Dreamworks made Kung Fu Panda, which has become somewhat of a symbol about the inability of Chinese producers to use Chinese themes and gain international success, must surely have nudged things along a bit.  However, we have seen similar deals before, in particular with Warner brothers, who invested in a co-production venture and a cinema chain. Neither of these projects have been very successful, and Warner has since withdrawn from the cinema venture. I’m not sure whether the Dreamworks deal will work better.

The perennial problem of the Chinese media sector seems to remain not so much the strict control system placed on film and media production, but the fact that the regulatory structure has been set up in such a way as to maximize space for administrative discretion and intervention, creating an unpredictable economic environment. Regulations and obligations can shift significantly in a very short space of time, and the possibility for media enterprises to influence this policy is relatively limited. Making a film, especially one involving significant technical effects or animation, takes a long time from start to finish, and it’s difficult to see how investors would be willing to part with their money if there’s no guarantee that their project will be permitted on the market two or three years from now. Hence, the Chinese media sector, for the moment, seems to be stuck with films that can be recently rapidly produced and screened. This deal does nothing to structurally provide for more predictability and security for producers or investors.

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