TWN Info Service on WTO and Trade Issues (Sept09/02)
1 September 2009
Third World Network

WTO dispute panel rules against China on publications, AV products
Published in SUNS #6763 dated 14 August 2009

Geneva, 13 Aug (Kanaga Raja) -- A dispute panel of the World Trade Organization (WTO) on Wednesday found that China had acted inconsistently with the provisions of its Accession Protocol, the GATS and the GATT 1994 concerning its measures affecting trading rights and distribution services for certain publications and audiovisual (AV) entertainment products.

The dispute was brought by the United States against China and involved products ranging from imported films for theatrical release, audiovisual home entertainment products such as video cassettes and DVDs, sound recordings, and publications such as books, magazines, newspapers, and electronic publications.

In its ruling, the panel concluded that to the extent that China has acted inconsistently with certain provisions of its Accession Protocol, the GATS, and the GATT 1994, it has nullified or impaired benefits accruing to the United States under those agreements.

Having found that China has acted inconsistently with the provisions of its Accession Protocol, the GATS, and the GATT 1994, the panel recommended that the Dispute Settlement Body request China to bring the relevant measures into conformity with its obligations under those agreements.

The United States however did not prevail in all of its claims. In respect of several measures, the panel either ruled them to be outside its terms of reference, or that the United States had not established that China was acting inconsistently with its WTO obligations. The panel also exercised judicial economy in a number of instances, and refrained from any ruling.

In a press release issued on 12 August, US Trade Representative Ron Kirk welcomed the results of the panel report. The report found that major Chinese restrictions on the importation and distribution of copyright-intensive products such as theatrical films, DVDs, music, books and journals are inconsistent with China's WTO obligations.

"Today, a WTO panel handed a significant victory to America's creative industries," said Kirk. "These findings are an important step toward ensuring market access for legitimate US products in the Chinese market, as well as ensuring market access for US exporters and distributors of those products. We will work tirelessly so that American companies and workers can fully realize the market opening benefits that this decision signals."

"This decision promises to level the playing field for American companies working to distribute high-quality entertainment products in China, so that legitimate American products can get to market and beat out the pirates. To me, that is a clear win. We believe that this report will help pave the way toward more open trade between China and America," the USTR added.

Media reports have cited China as saying that it is considering an appeal of the ruling.

In April 2007, the US had sought consultations with China on: (1) 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); and (2) certain measures that restrict market access for, or discriminate against, foreign suppliers of distribution services for publications, foreign suppliers of audiovisual services (including distribution services) for audiovisual home entertainment products, and foreign suppliers of sound recording distribution services.

The US subsequently requested supplemental consultations with China on certain market access concerns related to the distribution of imported films for theatrical release and the distribution of imported sound recordings, as well as sound recording distribution services.

The US concerns specifically related to: (1) certain measures that provide less favourable distribution opportunities for imported films for theatrical release than for like domestic films; and (2) certain measures that provide less favourable opportunities for foreign suppliers of sound recording distribution services and for the distribution of imported sound recordings than are provided to like service suppliers and like products.

A panel was established on 27 November 2007 to rule on these issues.

In a background to the dispute, the panel said that the dispute involved the US claims of violation with respect to: (a) Chinese measures that are alleged to unjustifiably restrict the right of enterprises in China and foreign enterprises and individuals to import into China reading materials, AVHE (audiovisual home entertainment) products, sound recordings, and films for theatrical release by limiting trading rights to Chinese state-owned enterprises; (b) Chinese measures relating to the distribution of reading materials, AVHE distribution services, and sound recording distribution services.

According to the panel, more specifically, the United States challenged Chinese measures that allegedly:

-- prohibit foreign-invested enterprises from engaging in the master distribution of reading materials, the master wholesale and wholesale of electronic publications, and the distribution of imported reading material;

-- impose, on foreign-invested enterprises permitted to engage in the sub-distribution of reading materials, requirements that are more burdensome than those applicable to wholly Chinese-owned distributors. Such requirements relate to registered capital, operating terms, pre-establishment legal compliance, examination and approval process, and decision-making criteria;

-- limit commercial presence for the distribution of AVHE products to Chinese foreign contractual joint-ventures with majority Chinese ownership;

-- as regards the sub-distribution of AVHE products, discriminate against Chinese-foreign contractual joint ventures by imposing on them certain requirements that are more burdensome than those that apply to wholly Chinese-owned enterprises. These requirements relate to operating terms, pre-establishment legal compliance, examination and approval process, and decision-making criteria;

-- prohibit foreign-invested enterprises, but not wholly Chinese-owned enterprises, from engaging in the electronic distribution of sound recordings, e. g. through the Internet and mobile telecommunications networks.

The panel also referred to Chinese measures that allegedly do not provide national treatment for imported reading materials, sounds recordings intended for electronic distribution, and films for theatrical release.

More specifically, the United States challenged Chinese measures that allegedly:

-- restrict distribution channels for certain imported reading materials by requiring their distribution to be conducted exclusively through subscription, by Chinese wholly state-owned enterprises, and only to subscribers that have been examined and approved by the Chinese government; unlike the situation for similar domestic reading materials;

-- limit the distribution of certain imported reading materials (which can be distributed other than through subscription) to wholly Chinese-owned enterprises, while the distribution of similar domestic reading materials can be effected by other types of enterprises, including foreign-invested ones;

-- discriminate against imported sound recordings intended for electronic distribution by subjecting them to more burdensome content review regimes than similar domestic products;

-- discriminate against imported films for theatrical release by limiting their distribution to two state-owned enterprises, while similar domestic products can be distributed by any distributor operating in China.

In its ruling Wednesday, the panel also addressed the issue of the broad defence raised by China based on the "right to regulate trade", as confirmed by paragraph 5.1 of the Accession Protocol, and Article XX(a) of the GATT 1994. However, after referring to the Chinese "broad defence" and some of the legal issues involved, the panel gave no definitive finding or ruling.

This type of approach by both panels and the Appellate Body has in recent periods come in for some adverse review and criticism from legal experts. In this particular case, the International Economic Law and Policy Blog has drawn attention to this.

Specifically, said the panel, China argues that the challenged measures, except to the extent that they apply to films for theatrical release and audiovisual products intended for publication, are covered by its "right to regulate trade" in a WTO-consistent manner, and are consistent with, and therefore justified by, the provisions of Article XX(a). China submits that, for this reason, its measures are fully compatible with its WTO obligations.

The panel cited Article XX(a) of the GATT 1994 which states: "Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures: (a) necessary to protect public morals; ..."

The panel said: "It is clear that the WTO Agreement includes the GATT 1994, and that the GATT 1994 includes Article XX(a). Nevertheless, China's invocation of Article XX(a) presents complex legal issues. We observe in this respect that Article XX contains the phrase "nothing in this Agreement", with the term "Agreement" referring to the GATT 1994, not other agreements like the Accession Protocol. The issue therefore arises whether Article XX can be directly invoked as a defence to a breach of China's trading rights commitments under the Accession Protocol, which appears to be China's position, or whether Article XX could be invoked only as a defence to a breach of a GATT 1994 obligation.

"We find it appropriate in this case to follow the approach of the Appellate Body in the US - Customs Bond Directive case. Thus, we will proceed on the assumption that Article XX(a) is available to China as a defence for the measures we have found to be inconsistent with its trading rights commitments under the Accession Protocol. Based on that assumption, we will examine whether the relevant measures satisfy the requirements of Article XX(a). Should we find that this is the case, we would revert to the issue of whether Article XX(a) can, in fact, be directly invoked as a defence to a breach of China's trading rights commitments under the Accession Protocol."

In concluding its examination of China's Article XX(a) defence, the panel said: "We have found that none of the provisions of China's measures which we have determined to be inconsistent with China's trading rights commitments under the Accession Protocol is "necessary" within the meaning of Article XX(a). In respect of these provisions, China has either not made a prima facie case that they are "necessary", or China has not demonstrated that an alternative put forward by the United States is not a genuine alternative or is not reasonably available to China, in the light of the interest being pursued and China's desired level of protection."

"Having regard to the Panel's finding that none of the relevant measures has been demonstrated to be "necessary" within the meaning of Article XX(a) to protect public morals, the Panel comes to the overall conclusion that these measures are not justified under the provisions of Article XX(a).

"In view of our conclusion that China has in any event not established that the measures at issue satisfy the requirements of Article XX(a), we need not, and hence do not, revert to the issue whether Article XX(a) is in fact applicable as a direct defence to breaches of China's trading rights commitments. We thus take no position on this issue," said the panel. +