Chinese Import Restrictions on Publications and Entertainment Products Found to be WTO Inconsistent
On August 12, 2009, the World Trade Organization (WTO) released the decision of the WTO dispute settlement Panel in China - Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products. The Panel (chaired by Florentino Feliciano, former Chairman of the WTO Appellate Body) ruled against restrictions imposed by China on the importation and distribution of publications, audiovisual home entertainment products, sound recordings and films for theatrical release. It found that these measures violated Chinaâs commitments under its Protocol of Accession, the General Agreement on Trade in Services (GATS) and the General Agreement on Tariffs and Trade (GATT).
Both China and the United States have appealed this decision to the WTO Appellate Body. The Appellate Bodyâs decision is expected to be issued around December 21, 2009.
This case dealt with market access, particularly âtrading rightsâ, that is the right to import and export. The United States argued that China âdenies U.S. companies the right to import books, journals, movies, music, and videos, and instead requires all imports to be channeled through specially authorized state-approved or state-run companies.â The United States also complained about similar restrictions on the distribution of these products, and about measures that prohibited foreign-invested enterprises from engaging in the electronic distribution of sound recordings.
This is the first WTO panel to rule on trading rights. These disciplines on the right to import and export are not included in the Uruguay Round Agreements and apply only to countries that acceded to the WTO after it was founded in 1995. Commitments on trading rights are now routinely included in the âWorking Party Reportsâ (WPRs) of acceding countries, principally to ensure that tariff concessions are not undermined by restrictions on the right to import. These are âWTO-Plusâ obligations that do not apply to the original Members of the WTO.
The Panel stated that it was âmindful of the possibility that the Accession Protocol may impose obligations on China that are not imposed on other Members under the WTO Agreement, or are stricter than those that are applicable to other Members.â The Panel read the trading rights provisions of the Protocol broadly, stressing that âChina was under an obligation to ensure that âall enterprises in Chinaâ, including foreign-invested enterprises registered in China (wholly foreign-owned enterprises, Chinese-foreign equity joint ventures and Chinese-foreign contractual joint ventures), have the right to import all goods into China.â Equally, the Panel noted that under the Protocol of Accession, Chinaâs trading rights obligations are ââ[w]ithout prejudice to Chinaâs right to regulate trade in a manner consistent with the WTO Agreement.ââ
Defending its regulatory scheme, China argued that its right to regulate trade included its right to invoke the âpublic moralsâ provision of the GATT. This is the first time a WTO Panel ruled on the GATT âpublic moralsâ defense.
The âpublic moralsâ provisionâone of the exceptions to the obligations set out in the GATTâstates that ânothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures . . . necessary to protect public morals.â This exception has been part of the multilateral trading system since its inclusion in the original GATT in 1947. However, the fact that it had not previously been invoked likely reflects the reluctance of many countries to override objective trade rules with something as subjective as public morals.
The United States invoked the public morals defense of the GATS in the 2005 US-Gambling dispute. The panel in US-Gambling found that âthe term âpublic moralsâ denote[d] standards of right and wrong conduct maintained by or on behalf of a community or nation,â and that âthe content of these concepts for Members c[ould] vary in time and space, depending upon a range of factors, including prevailing social, cultural, ethical and religious values.â That panel also stressed that WTO Members âshould be given some scope to define and apply for themselves the concepts of âpublic moralsâ . . . in their respective territories, according to their own systems and scales of values.â
In the present dispute, the Panel saw âno reason to departâ from the GATS interpretation of the âpublic moralsâ provision. However, the current Panel applied a strict standard to determine whether the invocation of the public morals defense by China was in fact ânecessaryâ under the GATT. The Panel ruled that China failed to satisfy the ânecessityâ standard, in part because the United States identified other, less trade-restrictive means for China to achieve its objectives. This ruling thus confirms the approach taken in US-Gambling that âpublic moralsâ will be defined on a national, country-specific basis, without regard to an international or WTO âpublic moralsâ standard. This in turn means that WTO Members can expect a certain degree of deference when they âdefine and apply for themselvesâ the concept of public morals, based on the âsocial, cultural, ethical and religious valuesâ of the invoking country. However, as is clear from the Panelâs report, no such deference will be accorded when determining whether the policy is ânecessaryâ to protect the defined public morals. In determining the viability of the public morals defense in future cases, the necessity test will continue to be determinative.
Notably, the Panel chose not to rule on the threshold issue of whether the exceptions in GATT Article XX, including the public morals clause, are available for non-GATT violations. Under GATT Article XX, measures otherwise inconsistent with âthis Agreementâ are authorized. It could be argued that such a defense cannot be invoked to defend violations of non-GATT commitments, such as those set out in Chinaâs Protocol of Accession. On the other hand, Chinaâs Protocol of Accession, by its own terms, is âan integral part of the WTO Agreement,â and the WTO Agreement includes the GATT. The Panel chose not to address these interpretive issues, and instead assumed, without deciding, that GATT Article XX could be invoked for non-GATT Agreements, pending a ruling on whether China met the terms of Article XX(a). This question is important not just for the public morals defense, but for all of the GATT Article XX provisions that could be invoked for non-GATT violations. The resolution of this interpretive issue will need to await a future dispute.
The Panel Decision
A more detailed summary of the Panelâs key rulings is set out below.
1. Trading Rights: âall enterprises in Chinaâ have the right to import
China made an explicit commitment in its Protocol of Accession that within three years after accession âall enterprises in China shall have the right to trade.â The Panel interpreted the clause âall enterprises in Chinaâ to encompass âboth Chinese enterprises registered in China and foreign enterprises invested and registered in China.â As noted above, the Panel found that âChina was under an obligation to ensure that âall enterprises in Chinaâ, including foreign-invested enterprises registered in China . . . have the right to import all goods into China.â Furthermore, the Panel interpreted the phrase âright to regulate tradeâ to mean the âright to regulate imports and exports.â It also âconsider[ed] that Chinaâs âright to regulate tradeâ in a WTO-consistent manner includes, by implication, a consequent right to regulate importers or exporters of the relevant good(s) in a WTO-consistent manner.â
The Panel noted that the Protocol of Accession provided that âall foreign individuals and enterprises, including those not invested or registered in China,â must be accorded treatment no less favorable than that accorded to enterprises in China with respect to the right to trade. According to the Panel, the phrase âall foreign . . . enterprises, including those not invested or registered in Chinaâ applied âboth to foreign-registered enterprises which wish to engage in importing or exporting, but have no commercial presence in China, and foreign-registered enterprises maintaining a commercial presence in China and wishing to engage in importing or exporting through the entity present in China.â
Having enunciated these principles, the Panel then examined Chinese limitations on the right to import publications, audiovisual products, and films for theatrical release. The Panel found Chinaâs requirements that publication entities be wholly state-owned enterprises, have a âsuitable organization and qualified personnelâ and conform to a State plan, were all inconsistent with Chinaâs trading rights obligations. In relation to Chinaâs restrictions on rights to import hard-copy cinematographic films for theatrical release and master copies of audiovisual products imported for publication, the Panel found that these were goods, and that Chinaâs restrictions were inconsistent with its trading rights commitments. The Panel also rejected some U.S. claims for procedural reasons, or because it found no violation had been established.
2. Chinaâs âpublic moralsâ defense fails the ânecessityâ test
Chinaâs Accession Protocol commitments on trading rights are â[w]ithout prejudice to Chinaâs right to regulate trade in a manner consistent with the WTO Agreement.â China argued that its limitations on entities permitted to import publications and audiovisual products are ânecessary to protect public moralsâ under GATT Article XX(a) in order to carry out content review in an efficient and effective manner.
Weighing each measureâs contribution to protection of public morals against its restrictive impact and considering reasonably available alternatives, the Panel found that the requirements for importing entities to have a suitable organization and qualified personnel and to conform to a State plan satisfied the ânecessityâ test. However, the exclusion of foreign-invested enterprises and any entities other than wholly state-owned enterprises failed the ânecessityâ test, in part because âit is not apparent to us that the requirements in question make a contribution to protecting public morals.â The Panel also found that these measures could not be considered as ânecessaryâ in light of a less trade-restrictive alternative proposed by the United States, which argued that allowing private firms to import and the government to review content would achieve the same objective. The Panel agreed, concluding that âthe US proposal would allow China to achieve its desired high level of protection of public moralsâ and would âhave no restrictive impact on those wishing to engage in importing the relevant products.â
3. National treatment obligations: âadversely modifying the conditions of competitionâ
GATS Article XVII imposes a national treatment obligation with respect to services trade. It provides in part that âeach Member shall accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no less favourable than that it accords to its own like services and service suppliers.â The Panel found a number of Chinese measures to be inconsistent with this obligation, including a law that had the âeffect of prohibiting foreign service suppliers from wholesaling imported reading materials, while like Chinese suppliers are permitted to do so.â The Panel concluded that such a measure âclearly modifies the conditions of competition to the detriment of the foreign service supplier and thus constitutes âless favourable treatmentâ in terms of Article XVII.â In addition to the multiple violations of GATS Article XVII, the Panel also found that Chinaâs prohibition on any foreign investment in sound recording distribution was inconsistent with Chinaâs market access commitments under GATS Article XVI. Notably, the Panel found that Chinaâs GATS commitment on sound recording distribution includes distribution of sound recordings in non-physical form through electronic means (the internet and mobile networks).
The United States made a number of claims under GATT Article III:4, a national treatment obligation applicable to goods. The Panel accepted two U.S. claims under this provision. Under one measure, imported reading material â but not domestically-produced reading material â must be distributed through a subscription-based regime. Another measure limited the âtype of sub-distributors available to imported books, newspapers, and periodicals by excluding foreign-invested enterprises from the potential pool of sub-distributors.â The Panel found that both measures âmay reasonably be expected to adversely modify the conditions of competition in the marketplace between imported and domestic like productsâ in violation of GATT Article III:4. The other U.S. claims under this provision were rejected for procedural reasons.
The U.S. claims included many overlapping and duplicative allegations, and not all could be discussed here. The Panel also ruled that some of the U.S. claims were outside its terms of reference on procedural grounds.
Brendan McGivern is the Executive Partner of the Geneva office of White & Case LLP. He is the head of the WTO practice of the Firm.
 Panel Report, China - Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/R (Aug. 12, 2009) [hereinafter Panel Report].
 Request for the Establishment of a Panel by the United States, China - Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, WT/DS363/5 (Oct. 11, 2007).
 Panel Report, Â¶ 7.281.
 Id. Â¶ 7.252.
 Id. Â¶ 7.235.
 Id. Â¶ 7.709.
 Panel Report, United States â Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WT/DS285/R (Nov. 11, 2004) (adopted Nov. 10, 2004), as modified by the Appellate Body Report, United States - Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WT/DS285/AB/R (Apr. 20, 2005) (adopted Apr. 7, 2005).
 Id. Â¶Â¶ 6.465, 6.461.
 Id. Â¶ 6.461.
 Panel Report, Â¶ 7.759.
 Id. Â¶ 7.233; Chinaâs Protocol of Accession, infra note 12, Â¶ 5.1.
 Panel Report, Â¶ 7.249 (citing Protocol of Accession of the Peopleâs Republic of China to the World Trade Organization, Â¶ 5.2, Dec. 11, 2001, WT/L/432, available at http://docsonline.wto.org/DDFDocuments/t/WT/L/432.doc).
 Id. Â¶ 7.252.
 Id. Â¶Â¶ 7.257.
 Id. Â¶ 7.275.
 Id. Â¶ 7.235 (citing Â¶ 5.2 of Protocol of Accession to the World Trade Organization, supra note 12).
 Id. Â¶ 7.292.
 Id. Â¶Â¶ 7.398, 7.410.
 Id. Â¶Â¶ 7.488-7.527, 7.642.
 Id. Â¶Â¶ 7.576, 7.598, 7.599, 7.657, 7.680, 7.690, 7.703.
 Protocol of Accession, supra note 12.
 Id. Â¶Â¶ 7.794-7.807.
 Id. Â¶ 7.868.
 Id. Â¶ 7.893.
 Id. Â¶ 7.996.
 Id. Â¶ 7.1265.
 Id. Â¶ 7.1545.
 Id. Â¶ 7.1539.