WTO Case Challenging Market Access Restrictions in China on Products of Copyright-Intensive Industries

What WTO commitments did China make?

This case focuses on two sets of fundamental commitments that China made in the agreement allowing itto join the World Trade Organization in 2001: (1) trading rights, meaning the rights to import and toexport; and (2) distribution services.

• China committed to liberalize trading rights pursuant to an agreed schedule, with full liberalizationto occur by December 11, 2004. Until shortly before its WTO accession, China had severelyrestricted the number and types of enterprises that could import or export, and it had alsorestricted the products that a particular enterprise could import or export. For the most part,China confined trading rights to certain state-owned manufacturing and trading enterprises, whichcould import or export goods falling within their approved business scope. Under China’saccession protocol, virtually all of these restrictions were supposed to have been removed by nolater than December 11, 2004, at which time all foreign enterprises and individuals were to bepermitted to trade in all goods (subject to certain exceptions not relevant here).

• China made similar WTO commitments to remove restrictions on the distribution of productswithin China. Prior to China’s WTO accession, China had largely reserved product distribution toChinese enterprises, although some Chinese-foreign joint ventures were allowed to distributetheir products in certain circumstances. In its WTO accession agreement, China committed toprogressively phase out restrictions on foreign suppliers seeking to distribute products withinChina, with virtually all of these restrictions to have been removed by December 11, 2004.

Many in U.S. industry consider trading rights and distribution services to be among the most important ofChina’s WTO commitments. In the global business world, trading rights and distribution services arefundamentally interrelated, and are essential to carrying out companies’ business plans.

What Chinese policies are at issue?

While foreign companies and individuals in most sectors are now able to import goods into China withouthaving to use a middleman and are also able to establish their own distribution networks within China,China continues to maintain import and distribution restrictions on U.S. copyright-intensive industries, i.e.,publications (such as books, newspapers and periodicals) and audio and video products (such as newlyreleased movies and CDs, DVDs and video games).

• China continues to reserve the right to import publications and audio and video productsexclusively to a limited number of state trading enterprises, as reflected in several sector-specificmeasures.

• China also continues to maintain an array of measures restricting the rights of foreign entities toengage in the distribution of publications and audio and video products. Under these measures,for some of the products at issue, distribution is limited to Chinese state-owned enterprises. For others, foreign enterprises are allowed to engage in certain types of distribution but facerestrictive requirements not imposed on domestic enterprises. In yet other cases, only Chineseforeignjoint ventures under Chinese control are permitted to engage in distribution.

How do China’s market access restrictions harm U.S. copyright-intensive industries?

• China’s market access restrictions force U.S. copyright-intensive industries to rely on Chinesemiddlemen and agents to do business in the China market, resulting in significantly increasedcosts, poorer product marketing and delivery, and much fewer sales.

• China’s market access restrictions also encourage the rampant IPR infringement occurring inChina. The restrictions delay the entry of new products into the Chinese market and effectivelylimit the scope and quantity of established products available in the Chinese market, providingincentives for pirates to fill the void with their illegal copies.

Why pursue WTO dispute settlement?

• Market access is a very important right in the international trading system, and the United Statesis committed to protecting this right. This includes taking WTO action when it appears that Chinahas not met the market access commitments it made as a condition of joining the WTO.

• The United States sought to engage the Chinese in negotiations to arrive at a resolution.Unfortunately, those negotiations, to date, have failed to resolve our concerns. As a result, theUnited States today took the first step to bring this case before the WTO.

• Under WTO dispute settlement procedures, the United States and China would normally consultwithin 30 days. The United States hopes that these consultations will produce a satisfactoryresult. If they do not, then anytime after 60 days from the request for consultations, the UnitedStates will have the right to request that the WTO establish a dispute settlement panel to examinethe matter.

• WTO dispute settlement rules have facilitated and are assisting us in the resolution of other tradedisputes with China:

1. • March 2004 – After the United States filed a WTO dispute against China challengingvalue-added tax rebates that discriminated against imported semiconductors, the UnitedStates and China resolved the matter during the consultation phase, ensuring fair accessto a market worth over $2 billion to U.S. manufacturers and workers in the semiconductorindustry.
2. • January 2006 – The United States and China resolved a dispute involving China’simposition of antidumping duties on kraft linerboard shortly after the United Statesinformed China that it would soon be filing a request for WTO consultations. Chinaeliminated the antidumping order on kraft linerboard, terminating the unfair barrier to U.S.paper products and benefiting U.S. kraft linerboard mills in 14 states.
3. • March 2006 – The United States, the European Communities and Canada began panelproceedings at the WTO challenging Chinese regulations that impose de facto localcontent requirements in the auto sector through discriminatory charges on imported autoparts.
4. • February 2007 – The United States and Mexico have held joint WTO dispute settlementconsultations regarding several export subsidy programs and import substitution subsidyprograms, which appear to be prohibited under WTO rules. These widely availablesubsidies offer significant benefits, and the export subsidies alone potentially benefitnearly 60 percent of China’s exports of manufactured goods.