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China — Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products: Dispute 363. Jesse Lambert Se Yeon Lee Maryanna Maistros. Main content of the Dispute 363.

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    1. China — Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products: Dispute 363 Jesse Lambert Se Yeon Lee Maryanna Maistros

    2. Main content of the Dispute 363 • Reading materials (e.g. books, newspapers, periodicals, electronic publications) • Audiovisual home entertainment (AVHE) products (e.g. video compact discs, digital video discs) • Sound recordings (e.g. recorded audio tapes) • Films for theatrical release. Content • The dispute arises over certain measures that affect … • The importation of relevant goods into China • The distribution within China of relevant goods, and services and service suppliers in relation to certain of the above mentioned products. Issues

    3. China's Entertainment Product Industry Both intellectual property piracy and market access barriers have hindered the U.S. film industry's attempts to establish a foothold in China. Film piracy in China is massive and accounts for as much as 95 percent of all films sold in China (up from 91% in 2002). The piracy problem is compounded by market access barriers. According to the MPAA, around 90 percent of all AV content distributed in China is pirated.

    4. China Media Industries Regulatory Framework

    5. Business Context of the Case • Piracy cost filmmakers in China US$2.7 billion in 2005 according to a separate survey released in May by LEK Consulting. • China Film controls most of the 20 import licenses that grant foreign films the right to a modest slice of their box-office earnings, usually about 13 percent. • China’s copying of movies, music and software cost companies $2.2 billion in 2006 sales, according to the International Intellectual Property Alliance • These barriers slow down the flow of genuine products within China and give opportunities for IPR piracy and counterfeiting to flourish instead. •

    6. Political Context of the Case China sets 3 month ban on U.S. films The Bush administration filed the original complaint in 2007, partly to head off possible legislation requiring a more confrontational trade policy toward China. The Obama administration now faces pressure from the Democratic majority in Congress to take more assertive action in response to China’s trade surplus during the current recession, and could use the ruling as evidence that the issue is already being addressed. It may also use the victory as a precedent to take more cases against China to the trade organization, said Gary Clyde Hufbauer, a trade expert at the Peterson Institute for International Economics.

    7. Prior Proceedings Strategic Economic Dialogue 2006 2007 2008 • The U.S.-China Joint Commission on Commerce and Trade(JCCT), in conjunction with the high-level U.S.-China Strategic Economic Dialogue established in September 2006. • SED is the main vehicles through which USTR, together with the Department of Commerce, cooperate with China on Trade and IPR issues. • U.S. and Chinese agencies responsible for IPR protection and enforcement meet regularly in the IPRWG to discuss IPR issues. • SED have been held 5 times from 2006 to 2008. • While the SED's may have lead to the resolution of other trade problems they did not resolve the importation and distribution of AVHE situation.

    8. History of the Dispute 363

    9. History of the Dispute 363

    10. U.S. and China’s Position • United States: • Chinese measures discriminate against imported hard-copy sound recordings: subjecting them to more heavy content review than similar domestic products.  • China • Believed that their own criminal law was strong enough to deter piracy. Their censorship was to protect their people and their culture.

    11. GATT 1994 Article III:4: Products of any territory should receive equal treatment to the country’s own products Article XX(a): There should be no discrimination between countries where there are similar conditions (a) “necessary to protect public morals.”

    12. GATS • Article XVI: Each member must give favorable treatment to other members in respect to market access, services and service suppliers. • In sectors where market-access commitments are undertaken, the measures which a Member shall not maintain either on the basis of its entire territory: • Limits on service suppliers, transactions or assets, service operations totals, employment, joint venture restrictions, foreign capital • Article XVII • Section 1: 1. each Member shall accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no less favorable than that it accords to its own like services and service suppliers.(10) • Section 2: A Member may meet the requirement of paragraph 1 by according to services and service suppliers of any other Member by applying formally identical or different treatment as it treats its own service and service suppliers • Section 3: Formally identical or different treatment will be less favorable if it changes the conditions of competition in favor of services or service suppliers of the Member compared that of any other  Member

    13. Chinese Protocol 5. Right to Trade 1. China shall liberalize the availability and scope of the right to trade….all enterprises in China shall have the right to trade in all goods throughout the customs territory of China. 2. All foreign individuals and enterprises shall be accorded treatment no less favorable than that accorded to enterprises in China with respect to the right to trade.

    14. Panel Established on November 27th, 2007 Director-General composed panel on March 27th, 2008 Panel report circulated on August 12th, 2009

    15. Panel Report (1/2) Concluded that a number of Chinese measures were inconsistent with China's obligation to grant “trading rights” Regarding China's Article XX(a) defense: the panel determined that, because there was at least one other reasonably available alternative, China's measures were not “necessary” within the meaning of Article XX(a) Chinese measures prohibiting foreign-invested enterprises from engaging in wholesale of imported reading materials, the master distribution of books, periodicals and newspapers, and the master wholesale and wholesale of electronic publications: Inconsistent

    16. Panel Report (2/2) Concluded Chinese measures imposing requirements relating to registered capital and operating terms for the distribution of reading materials: Inconsistent Concluded that China's prohibition on foreign-invested enterprises with regard to the supply of sound recording distribution services: Inconsistent Chinese measures limiting commercial presence for the distribution of DVDs, etc. to joint ventures with Chinese majority ownership, and measures limiting the operating term for joint ventures: Inconsistent

    17. Conclusion to U.S. & Chinese Claims U.S. had not been able to demonstrate that China's regulations and rules established a duopoly that would prevent other enterprises from applying for a license to distribute imported films.  Therefore, there is no violation in relation to this claim. U.S. had not demonstrated that that the measures were inconsistent with Article III:4.  The WTO agreed with China that the Chinese criminal law was strong enough to deter piracy. Also, the WTO permitted China to make U.S. films (to be shown in Chinese cinemas) to go through one of two designated distributors, a requirement not required of Chinese movies.

    18. Appeals 22 September 2009, China notified its decision to appeal to the Appellate Body 5 October 2009, the United States notified its decision to appeal to the Appellate Body 21 December 2009, the Appellate Body report was circulated to Members

    19. Appellate Report • Upheld • Article 30 of the Film Regulation and Article 16 of the Film Enterprise Rule: inconsistent with China's trading rights commitments in its Accession Protocol and Accession Working Party Report.  • Article 5 of the 2001 Audiovisual Products Regulation and Article 7 of the Audiovisual Products Importation Rule: inconsistent with China's obligation, in paragraph 1.2 of China's Accession Protocol and paragraph 84(b) of China's Accession Working Party Report, to grant in a non-discretionary manner the right to trade. • Reversed • The Panel erred in finding that the State plan requirement in Article 42 of the Publications Regulation is able to make a material contribution protecting public morals and that, without a good alternative, it can be characterized as “necessary” to protect public morals in China.

    20. Conclusion At its meeting on 19 January 2010, the DSB adopted the Appellate Body report and the panel report, as modified by the Appellate Body report. On 12 July 2010, China and the United States informed the DSB: time to implement would be 14 months, which expires on 19 March 2011.

    21. Implementation China has had 14 months until they need to implement these changes by March 19, 2011

    22. Background: Cultural Products & Propaganda in China • Policy tools • Culture-related industry: SOEs, very little FDI • After WTO accession: Difficult to protect cultural sectors from foreign involvement • Currently, despite some reforms, censorship and distribution restrictions remain

    23. Public Morality & Chinese Law No publication may contain content that: • Defies basic principles specified in Constitution • Jeopardizes solidarity, sovereignty and territorial integrity of nation • Divulges national secrets, jeopardizes national security or injures national glory and interests • Incites hatred or discrimination of nationalities, undermines solidarity of nationalities or infringes upon customs and habits of nationalities • Propagates evil cults or superstition • Disturbs public order or destroys social stability • Propagates obscenity, gambling or violence, or instigates crimes • Insults or defames others, or infringes upon legitimate interests of others • Jeopardizes social morality or fine cultural traditions of nationalities • Is otherwise prohibited by laws, administrative regulations and provisions of State

    24. DS 363: U.S. Argument China employs administrative regulations to protect public morals, issued by various government agencies, which have the following effects: • Reduce competitiveness of American products • Provide piracy opportunities in Chinese market

    25. China’s Defense • GATT Article XX(a): Establishment of specific entities for content review of imports is “necessary to protect public morals.” • Special treatment of “cultural goods” • Reading materials and finished audiovisual products are “unique … with potentially serious negative impact on public morals.”  • “… as vectors of identity, values and meaning … play an essential role in evolution and definition of … values, ways of living together, ethics…” • Because of this impact, China devised “an appropriate content review mechanism” • To prevent dissemination of negative cultural goods • Applied to both imports and domestic products  • For imports, China determined that content review should happen at the border, so government import agencies were involved

    26. Protection of “Public Morals” • GATT, Article XX(a): “… nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures … necessary to protect public morals” • U.S.: Challenged means of protecting morals, not rights of China to protect them • Does China’s content review mechanism protect public morals? • Is China’s mechanism “necessary” for protecting public morals? • Panel: No

    27. Decision (1/3) • In principle … Panel accepted proposition that “content review” of certain imports was designed to “protect public morals” • Undermines trade rules use to limit censorship • So sensitive! Panel did not contend China’s concerns over specific content violating public morals • Western concepts of free speech could conflict with China’s “public morals” concerns

    28. Decision (2/3) • Disagreement: Panel vs. A/B • Panel stated that content review mechanism made a material contribution to protection of morals • Later, A/B found that specific measures used in mechanism to protect morals are not determined as “necessary” • Final Decision:China unfairly restricts trading rights and market access and fails to provide national treatment

    29. Decision (3/3) • Direct Impacts • Helps American media sectors, ensuring market access and rights for export and distribution • Could contribute to efforts against intellectual property piracy

    30. Culture & Trade Law (1/2) • UNESCO Instruments as Defense • China: Cultural products cannot be treated like commodities or consumer goods • May impede upon public morals so content review is legitimate • No legal binding effect • “Public Morals Exception” [GATT XX(a)] • Measures determined unnecessary by A/B; no defense proven for: • Denying trade rights • Employing existing content review mechanism

    31. Culture & Trade Law (2/2) • Cultural Goods or Cultural Services? (GATT vs. GATS) • Many cultural products have both good and service components (e.g., films for theatrical release) • GATT and GATS are still unclear in definitions of such goods and services • “Likeness” of Cultural Products • “Likeness” of goods determines National Treatment requirements • “directly competitive or substitutable products” • Historically unclear in WTO agreements, determined under dispute on a case-by-case basis

    32. Recommendations • Domestic policy alignment and consolidation • WTO policy alignment with other international agreements • Codify WTO treatment of cultural products – special cases or not?

    33. Discussion • Should WTO agreements be utilized to counter censorship or promote free speech in Member States? • Will the rulings of this case have the effect of reducing “black” markets for pirated products?

    34. Observations • National interests: • Cultural interests; but piracy gets around this • Applying public morals on a state-by-state basis: how can this be regulated? • International interests: • China only shows 20 foreign films a year • Dispute was too broad: could not focus on every detail • There was too much material to cover, too much! • Liberalization of trade law is related to media. Piracy could be reduced.

    35. Sources • Shi, J., & Chen, W.. (2011). The 'Specificity' of Cultural Products versus the 'Generality' of Trade Obligations: Reflecting on 'China - Publications and Audiovisual Products'. Journal of World Trade, 45(1), 159-186. • Qin, J.. (2010). The Challenge of Interpreting 'WTO-PLUS' Provisions. Journal of World Trade, 44(1), 127-172. • Dispute Settlement Commentary (2010). Appellate Body Report: China - Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products (WT/DS363/AB/R). LLC. Last update: July 23, 2010. • Dispute Settlement Commentary (2010). Panel Report: China - Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products (WT/DS363/R). LLC. Last update: July 23, 2010. • Dispute Settlement Commentary Blog. LLC. Last post: January 27, 2010. • Wu, X.. (2010). Case Note: China – Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products (WT/DS363/AB/R). Chinese Journal of International Law 9(2): 415-432. • Malawer Book • • • • • •