China’s limits on entertainment imports violate free trade practices, WTO rules

In deciding that China broke international trade rules by restricting imports of movies, music and books, the World Trade Organization handed the U.S. a victory in a contentious issue that has long rankled purveyors of copyrighted media products.

But it doesn’t mean Hollywood or Silicon Valley will be cashing in any time soon.

The ruling, issued Wednesday by a WTO panel in Geneva, called on China to stop requiring foreign media suppliers to go through the costly process of distributing goods through Chinese state-owned entities. It also urged China to allow foreign companies to sell music over the Internet, a potentially huge opportunity for companies such as Apple Inc., with its iTunes. China has the largest number of Internet users, but piracy online and in the streets is rampant.

The decision was seen as one of the toughest against China by the WTO since it joined the trade body in 2001 and agreed to give equal treatment for domestic and foreign companies. And it comes as the U.S. continues to face a massive trade deficit with China -- $103 billion through June of this year -- an issue that the Obama administration has yet to tackle head on but which looms large in the coming months.

Although China has complied with past WTO rulings against it, analysts say Beijing could appeal the latest decision, which could drag out the case for many more months. The complaint was first brought by the U.S. in spring 2007.

There was no immediate official comment from Beijing, but an analyst connected with the Chinese government suggested that the two sides seek a negotiated resolution, which could water down the results.

“This sort of thing is normal,” Li Jian, a senior researcher with China’s Ministry of Commerce in Beijing, said of Wednesday’s ruling. “I think both governments are willing to improve the trade relationship. Even when there’s conflict, I think they would prefer to negotiate.”

Dan Glickman, chairman and chief executive of the Motion Picture Assn. of America, acknowledged that the ruling would not yield instant results but said it would nonetheless be a tool to open the Chinese market for more U.S. films.

For years Hollywood has struggled to make headway in the potentially lucrative Chinese market. But China has long restricted the number of foreign films in theaters to about 20 a year, and counterfeit DVDs and the viewing of movies online have cost U.S. studios countless sales over the years. The WTO panel did not rule against China’s right to restrict foreign films that it deems objectionable for political or other reasons.

“I don’t think there’s going to be an immediate, revolutionary impact, but it’s going to be helpful,” Glickman said. Glickman, who helped China join the WTO when he worked as secretary of Agriculture in the Clinton administration, said the Chinese government had ample incentive to comply with the ruling.

“They worked very hard to get into this international system of rules,” he said. “They don’t want to be outliers.”

If China doesn’t comply, the U.S. government could seek to retaliate by raising duties on Chinese goods imported to the U.S., although analysts say such measures could also harm U.S. companies.

In Washington, U.S. Trade Representative Ron Kirk hailed the decision as a “significant victory to America’s creative industries.”

“The decision promises to level the playing field for American companies . . . so that legitimate American products can get to market and beat out the pirates,” he said in a statement.

Trade specialists were more circumspect.

“This is a good step forward, but I wouldn’t say this would change the landscape for Hollywood or music studios doing business in China,” said Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, a think tank in Washington.

Clyde Prestowitz, president of the Economic Strategy Institute In Washington and a trade negotiator in the Reagan administration, said: “In a [Chinese] economy that’s very much administratively driven, if powers that be don’t want you to sell, they’ll find a way for you not to sell.”

Greater access to U.S. media goods in China and other developing markets could provide a significant lift for the U.S., especially for big exporting states such as California.

A Commerce Department report Wednesday showed that the U.S. trade deficit widened in June to $27 billion from $26 billion the previous month, in large part because of volatile oil prices. But the persistent deficit despite the recession underscored U.S. consumers’ continued heavy purchases and reliance on imports, especially from China.

Amid the global economic downturn, the overall U.S. trade deficit of goods and services fell in the first half of this year to $173 billion, less than half the amount during the same period a year ago. Trade with China has long been a contentious issue, with some members of Congress and organized labor pressing the White House to take tougher measures against Beijing.

In June, the Obama administration filed its first major complaint of unfair trade practices against China, accusing it of restricting exports of various materials for making steel such as zinc and coke.

Separately, a U.S. panel concluded in June that the sale of low-cost Chinese tires was disrupting the American market. Beijing has rejected that assertion.

President Obama is expected to decide by next month how to respond. Liu Baocheng, a professor at the University of International Business and Economics, said the Chinese central government would probably protest the latest WTO ruling to appease a nationalistic audience.

Behind the scenes, he said, Beijing’s view is probably more nuanced.

“They have to accept the reality in this age of globalization,” Liu said.

--

don.lee@latimes.com

Times staff writers Richard Verrier in Los Angeles and David Pierson in Beijing contributed to this report.