The WTO A/V Case Resolved? The US-China MOU in Detail.

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On Friday, China and the United States informed the WTO about the key points of the Memorandum of Understanding they had signed earlier this year, which amongst others, expands market access for foreign films and raises the proportion of box office income paid to film studios. This notice clarifies a number of concerns about the MOU, in particular the question about whether it doesn’t violate the MFN rule (it doesn’t, the opportunities of the MOU are open to all WTO members), and the more detailed structure of the agreement. Nonetheless, the laguage of the notice raises as many questions as it solves. Let’s look at the key points of the agreement in turn.

1. China confirmed that enhanced format films (such as 3D and IMAXfilms) are not subject to the 20-film commitment set forth in the Additional Commitments under Sector 2.D. of its GATS Schedule and agreed that China will allow the importation of at least 14 enhanced format revenue-sharing films per calendar year beginning in 2012.

This was, of course, the big kicker. The Chinese film market has grown explosively in recent years, and Hollywood was anxious to gain a bigger slice of the cake. It’s interesting to see how this commitment is framed, however. In effect, it creates a new category of ‘enhanced format’ films, and it will be instructive to see how this will be applied. For example, will a normal film and its 3D version be counted together? Furthermore, what does the phrase “China will allow […] at least 14 […] films per calendar year” mean? Is this to be construed as a minimum quota? In other words, what if China only permits 10 films per year? Is this a breach of this MOU, and will it be subject to WTO jurisdiction?

2. China agreed that, in a contract for the distribution of an imported revenue-sharing film, the producer of the imported revenue-sharing film will be allocated 25 percent of gross box office receipts, and the Chinese side shall be responsible for the payment of all taxes, duties and expenses.

3. In a contract for the distribution of an imported film other than a revenue-sharing film, where the two sides are not both private enterprises, China agreed that the contract will be based on commercial terms, consistent with the terms prevailing in countries whose markets are comparable to China’s market based on annual box office revenue, number of screens, annual admissions and admissions per screen.

These two provisions are clear: more money for US film studios. It remains to be seen where this squeeze will come from: the (State-owned) film distributors or the cinema operators.

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.

As you may remember, one of the key findings in the DS363 case was that China broke its WTO commitments by not extending the right to import foreign films to foreign enterprises. However, as China had made no commitments as regards distribution, these foreign enterprises would have still had to go through domestic, State-owned distribution companies. Now, China ostensibly commits to expanding the range of film distribution enterprises to also include the private sector. I’ll believe it when I see it. For starters, I have doubts about the notion of “private” enterprises. Often, Chinese “private” enterprises are in fact held by holding companies which in turn are held by State capital. They may also be controlled through Party capital. But even if we take a charitable view and assume that there will be a number of truly private film distribution enterprises, the films will still need to pass through censorship review, the quota that only one third of screen time can be used for foreign film screening and the predominance of China Film Group will still severely limit film distribution.

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.

Again, I’ll believe it when I see it. As far as I’m aware, this document has been negotiated by Xi Jinping and the Ministry of Commerce, and it will be the much more conservative State Administration of Radio, Film and Television that will need to implement these commitments. There’ll probably be some foot-dragging or obfuscation. Also, what is “standard industry practice”?

6. After five years, China and the United States will engage in consultations regarding key elements of the Memorandum of Understanding and to discuss the matter of China implementing the DSB’s recommendations and rulings with regard to films in DS363.

This does sound a bit like a can being kicked down the road.

From the point of view of trade law, this is a rather disappointing compromise. While China did update a few laws after the DS363 ruling, it has not in any meaningful way addressed the findings of the Panel and Appellate Body. This MOU concentrates exclusively on films, leaving out all matters relating to home entertainment products, books, periodicals and other product areas at issue in the case. While China cannot be faulted in law for being more attentive to the letter than the spirit of its WTO commitments, there does seem to be increasing dissatisfaction across different fields about the way China has been using other modes of control to limit foreign activity in its market.

In the end, however, this case was always more about politics and money than about law. Hollywood wanted to make more money on the Chinese market, and the US government was happy enough to run this case for them. The Chinese leadership, on the other hand, wanted to minimize foreign activity in China’s media market. The current agreement seems to have given Hollywood a bit of what they wanted, but it seems that ultimately, the Chinese government is still in firm control of the film sector, and nothing has fundamentally changed in the foreign film regime. It remains to be seen how much more profits Hollywood will be getting out of China, but quite possibly, we’ll have another push for further market opening on our hands in about three to five years or so.

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