Setback for U.S. films in china

Hollywood’s long-running battle to pry open the vast Chinese market suffered another setback Tuesday.

China has appealed a ruling by the World Trade Organization that it broke international rules by restricting imports of movies, music and books.

The ruling, issued last month, stipulates that Beijing cannot force foreign media companies to distribute their content through Chinese state-owned entities that have a monopoly over the market.

That was a victory for major Hollywood studios and others who have been frustrated for years over limited access to the Chinese market.

But in its appeal, China contended that the WTO panel “committed errors of law and legal interpretation in concluding that none of the measures are necessary to protect public morals.”

The Motion Picture Assn. of America, the trade group representing the six major studios, expressed disappointment. “The initial decision was a significant win for the U.S. film industry, and we are confident that the U.S. position will prevail, again, as the appeals process unfolds,” MPAA Executive Vice President Greg Frazier said in a statement.

Trade tensions have risen between the U.S. and China as the Group of 20 nations prepares for an economic summit this week in Pittsburgh. This month President Obama approved steep tariffs on imported tires from China. Beijing denounced the tire tariffs and said it would complain to the WTO.

Chinese and Western analysts, while expressing concern about the increasing friction between the two economic powers, attribute the jawboning to pre-summit posturing that will not have any effect on the meeting and say both sides will seek to avoid an outright trade war.

By appealing the WTO ruling, China is showing it is still deeply upset about tariffs on Chinese tires, said Liu Baocheng, a professor at the University of International Business and Economics in Beijing.

“They must show the government is not soft in the knees,” Liu said. He added that Beijing also fears that the upholding of the WTO ruling will set an unwelcome precedent to open China’s market for entertainment -- one that would test the limits of the state’s censorship apparatus.

“They see a danger of ideological confusion,” Liu said, “and more cost in supervising the behavior of foreign publishers.”

The WTO might not issue a final ruling until early next year.

Even if it upholds its initial ruling as expected, it’s not clear when Hollywood would be able to gain greater access to Chinese consumers, which studios view as a largely untapped market.

The ruling, for example, allows China to continue its long-standing practice of restricting the number of foreign films in theaters to about a 20 a year. Also, the WTO panel did not rule against China’s right to restrict foreign films its censors deem objectionable or to call for shutting down state-owned movie theater companies.

If China doesn’t comply, the U.S. government could retaliate by raising duties on Chinese goods imported to the U.S., although that would further escalate trade tensions.

With a population of 1.3 billion and a rising middle class, China represents a big opportunity for Hollywood studios increasingly dependent on overseas markets to recoup productions and marketing costs.

China’s box-office business has grown to $509 million from $181 million over the last five years, making it the 14th-largest in the world, according to Screen Digest, an entertainment industry research firm, and the MPAA. Hollywood has scored some big successes in China with such movies as “Kung Fu Panda” from DreamWorks Animation and “Transformers: Revenge of the Fallen” from Paramount Pictures.

But studios collect only about 13% of the box-office receipts in China, severely limiting their share of the potential market. Profits are further eroded by widespread piracy.

“Hollywood films are being distributed in China,” said Stanley Rosen, professor of political science and director of the East Asian Studies Center at USC, “but Hollywood isn’t making a profit out of it.”

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richard.verrier@latimes.com

david.pierson@latimes.com

Times staff writer Don Lee contributed to this report.