By Robert Cain for China Film Biz

December 23, 2011

Will China ever live up to its obligations to loosen the importation of Hollywood movies as required by World Trade Organization (WTO) rules?  Don’t bet on it.

This month marked two major anniversaries for China and the WTO. December 11^th was the 10^th anniversary of China’s entry into the 153 nation global trade club, an accession that took 15 years of negotiation before it was approved. And December 21^st was the 2^nd anniversary of the WTO’s formal denial of Beijing’s request to maintain its restrictions on imports of foreign movies and television programs. Although the WTO told Beijing in no uncertain terms two years ago that it had to start playing by the same rules as all the other 152 member countries with respect to movie imports, Beijing has yet to budge.

Before China’s accession in 2001, both China and the major developed countries like the U.S. eagerly lobbied for the PRC’s entry into the WTO. China sought freer international access to its exports of textiles, tires, and microwave ovens, and the developed nations saw opportunities both for trade and also to instill the values of democracy and human rights in China. Hollywood, for its part, relished the chance to open up a market of more than a billion potential paying customers for its movies and TV shows.

Ten years on, China has won big; Hollywood and those hoping for political change, not so much.

Owing largely to its WTO access to global markets, China since 2001 has enjoyed one of the most successful economic periods ever in global history; its global trade has quintupled, and GDP as measured in dollar terms has quadrupled. Hundreds of millions of people have been lifted out of poverty. China now has the world’s largest middle class, and dozens of billionaire fortunes have been made.

But those in the U.S. and other developed nations have generally seen China’s WTO membership as a bust for them. Even though it has mostly abided by the letter of its accession agreement, which required Beijing to relax over 7,000 tariffs, quotas, and other trade barriers, it’s a widely held perception that China has often ignored the spirit of the agreement and that the benefits of rising trade have accrued in a lopsided manner to the PRC.

As for politics, the WTO has had virtually zero effect on China. If anything, China’s conservative political values have only hardened over the past decade. Speaking to his countrymen just four months after China’s WTO entry, then prime minister Zhu Rongji warned that “Western hostile forces are continuing to promote their strategy of Westernizing and breaking up our country,” and he accused these people of conducting “infiltration and sabotage.” It’s important to note that, although Zhu didn’t specifically mention Hollywood in his speech, the western ideals and cultural values expressed in Hollywood’s films were and continue to be viewed with extreme suspicion by China’s leaders. As far as the U.S. film industry’s hopes went for friendlier trade relations with China, Prime Minister Zhu might as well have been pointing his finger directly at Hollywood.

So when the WTO told Beijing two years ago that it was violating its commitments to free trade and that it would have to get its act together on film imports, the Chinese felt they had much to lose and little to gain by complying.

Specifically, China was required by the WTO to make two major changes in its policies on film imports. First, that China’s limitation of the right to import films to just two state-owned companies, China Film Group and Huaxia, be abolished. The state monopoly on film importation is clearly anti-competitive, and it allows China to set below-market pricing for the films it allows into the country. As a result, although China is now undoubtedly the biggest foreign market for American movies, with perhaps $7 billion in legitimate and (mostly) black market revenue generated annually by Hollywood films, very little of this revenue—about $200 million by my estimate—flows back to the U.S. The state monopoly creates a double whammy for foreigners: it eliminates their ability to negotiate fair deal terms with legitimate buyers, and it also encourages the system of illegal piracy that imports and distributes the hundreds of films each year that aren’t allowed in via official channels.

The second WTO demand was that China end its prohibition against foreign invested enterprises’ (FIEs) ownership of film import and distribution companies. As Berkeley professor and China law specialist Stanley Lubman wrote in an April, 2011 article for the Wall Street Journal, “The exclusion of FIEs violated China’s obligation to treat foreign enterprises the same as Chinese enterprises.” Control of the import and distribution of their films would enable foreign companies to enjoy a much greater share of the value they generate.

Two other major barriers to film import that Hollywood would like to see abolished are China’s 20-film annual import quota, and its censorship review of each and every imported film for “content which could have a negative effect on public morals.” Unfortunately for Hollywood, the WTO has not pursued these two barriers to film imports, reasoning that other WTO member countries already have similar restrictions in place.

In any event, the rather generous deadline the WTO imposed for China’s compliance with its edicts came and went back on March 19, 2011. China hasn’t made a single change. Despite maintaining a system of trade barriers that former MPAA CEO Dan Glickman called “among the most restrictive and burdensome in the world,” China has been allowed to continue its unfair trade practices with impunity.

So what happened? After all this time and negotiation, and despite relentless pressure from the MPAA, Congress, and U.S. trade representatives, why is China still not playing by the rules to which it committed when it joined the WTO?

The answer, simply, is that China doesn’t want to and no one can make them.

Control over the content that reaches its population is a key pillar of the Chinese Communist Party’s political power. “Public morals” are a genuine concern, but even more than that, censorship is designed to protect the status quo of authoritarian rule. Any ideas and values that aren’t handed down by the Communist Party to the people are potential threats to the legitimacy of government power. An attack on censorship and content controls is tantamount to an attack on the Chinese government itself.

It’s not that China can completely ignore the WTO’s rulings, but so far it has managed to get by paying lip service to its obligations. When the March compliance deadline arrived, China responded with a terse, one-page “status report” that said it “respects the ruling and recommendations of the [WTO]” but also expressed “serious concerns” about the [WTO’s] Report.” It was an artfully noncommittal response. As Lubman put it in his WSJ article, ‘Formalistic and uninformative, the one-page ”status report” gives no hint of how or when China will respond to the WTO.’

So China is deeply entrenched in its position, prepared to wage a much fiercer battle over film imports and restrictions than the WTO, or even the U.S., seems willing to stomach. Assuming that Congress doesn’t have the political will to retaliate by imposing harsh import penalties on Chinese products, Hollywood’s only real options are either to create some sort of trade embargo of its own to pressure the Chinese to accept changes, or to simply abide by the status quo. Either way, American movies will continue to flow into China, whether by legitimate channels or not.

Robert Cain is a producer and entertainment industry consultant who has been doing business in China since 1987. He can be reached at rob@pacificbridgepics.com and at www.pacificbridgepics.com.