China became a full member of the World Trade Organization (WTO) in December 2001 and made various commitments in connection with opening up its markets for goods and services. In addition, as a WTO member, China is required to abide by various governing principles of the WTO, including the principle of equal treatment for foreigners and its own nationals – this is the principle of “national treatment”. The principle of national treatment applies differently in the context of goods and services. For goods, national treatment is a general principle and China is required to treat foreign and domestic manufactured goods equally both in terms of allowing foreign manufactured goods to be imported into China and to allow foreign investors to distribute such goods in China. For services, however, national treatment is only applicable where China has made a specific commitment, and even then, limitations are allowed. This article will focus on the latest regulatory developments in connection with China’s opening up of its markets for foreign investment in the import of audiovisual products and publications (collectively, “AV Products”).
Even though China has committed itself to the principle of national treatment after joining the WTO, the Chinese government required strict content review for AV Products in order for such products to be imported. In the past, the Chinese government has entrusted 100% State-owned enterprises (SOEs) to conduct preliminary content review. PRC governmental authorities would then conduct a final content review before an AV Product can be imported. In the past, Chinese regulations only permitted 100% State-owned enterprises that have been approved by the General Administration of Press and Publications (“GAPP”) to import AV Products. While this restriction ensured that the State controlled the contents imported into China, it also discriminated against foreign investors intending to import AV Products into China.
As a result of the above restriction, in 2007, the United States filed a complaint with the Dispute Settlement Body of the WTO (“DSB”) that several Chinese measures violated the trading rights commitments China had undertaken as a member of the WTO. The United States claimed, among other things, that Chinese regulations contain measures that restrict trading rights with respect to imported films for theatrical release, AV Products and sound recordings. Those measures according to the U.S., violated the Protocol on the Accession of the People’s Republic of China to the WTO, the Report of the Working Party on the Accession of China to the WTO, the General Agreement on Trade in Services (GATS), and the General Agreement on Tariffs and Trade 1994 (“GATT”).
China, in turn, argued that the claims by the United States should be rejected as its provisions were not subject to the obligations the United States invoked and were implemented in order for its government to review the content of the relevant products so as to protect public morals, which is justified under the GATT. Nevertheless, in 2009, the WTO panel appointed by the DSB to investigate the complaint did find China’s laws regarding distribution and import for AV Products to be inconsistent with the national treatment commitments when China joined the WTO. The DSB endorsed a suggestion raised by the United States that the Chinese government should take upon itself the responsibility for reviewing and censoring any content submitted for import, and should then grant the right to import the approved AV Products to all persons on a nondiscriminatory basis. China appealed the findings but the appellate body of the DSB upheld the panel’s findings and required China to implement the panel’s recommendations by dismantling the discriminatory regime within a reasonable period of time. China and the United States agreed that the reasonable period of time to implement the recommendations and rulings of the DSB would expire on March 19, 2011.
In an effort to implement the recommendations and rulings of the DSB, China amended the Rules on Administration of Publications on March 19, 2011, to remove the requirement that only a 100% SOE can be approved to import AV Products. However, China still has to amend the current Catalogue for Guiding Foreign Investment in Industry (the “Catalogue”) which entered into effect on December 1, 2007. The Catalogue sets out China’s national policy with respect to foreign investment in various industries. According to the Catalogue, the import of AV Products is still listed under the prohibited industry category whereby foreign investors are prohibited from investing and being involved. The Chinese government has circulated a revised draft of the Catalogue for public consultation and under this revised draft, the import of AV Products has been removed from the prohibited industry category. Hence, we believe that this foreign investment prohibition would be lifted when the amended Catalogue has been promulgated. While it is unclear when the Catalogue will actually be amended, the amendment would likely be promulgated soon, given that the deadline for China to implement the recommendations of the DSB expired on March 19, 2011. After the Catalogue has been amended, a foreign-invested enterprise, upon obtaining GAPP approval, should be able to engage in the business of importing AV Products.
Clearly, through China’s recent regulatory developments, it appears as though the AV Products import market will become more open for foreign distributors and investment. With the import market opened up, foreign investors would be able to participate in the entire supply chain for foreign AV Products, as foreign investors are already permitted to distribute AV Products in China subject to certain equity ownership restrictions1 and approval requirements. However, even though foreign investment may be permitted, the Chinese government may still impose various restrictions (e.g., equity ownership limits). Without question, more potential exposure into the Chinese market will greatly benefit foreign distributors. Still, it remains to be seen to what extent foreign investors can truly benefit from China’s efforts to open up the market for import of AV Products.