WTO win could open China's door to U.S. companies

GENEVA -- The World Trade Organization backed the United States on Wednesday in a major trade battle with China, issuing a ruling that could ease tight controls and open markets for U.S. makers of everything from DVDs to books and music downloads.

The decision came down against Beijing's policy of forcing American media producers to route their business through state-owned companies. It will not yield immediate revenue in Hollywood or Silicon Valley, and it may take sanctions -- or the threat of them -- to force China to ease access for U.S. companies to the world's largest marketplace.

Still, U.S. trade representative Ron Kirk said the decision will help "level the playing field for American companies working to distribute high-quality entertainment products in China."

"To me, that is a clear win," he said. "We believe that this report will help pave the way toward more open trade between China and America."

The case could have worldwide ramifications as it sets a precedent for how China is allowed to manage and control foreign manufacturers and service providers.

The country's rigid restrictions have been a key gripe of Western powers, who have complained that China's rapid rise as a trade power has been in part aided by unfair policies that boost sales of Chinese goods abroad while limiting the amount of foreign products entering its own market.

A first step

While the ruling was seen as an important first step, U.S. content companies say it will take a renewed push to clamp down on piracy to have a meaningful effect.

The WTO decision comes as President Barack Obama is being pressed to get tough on trade rules with China, which many Democrats in the U.S. Congress blame for America's soaring trade deficit and lost manufacturing jobs. The case is sensitive because the Chinese government asserts the right to restrict content it finds objectionable in products such as video games and computer software.

The Associated Press reported the main findings of the then-confidential ruling last month, but the public release of the 464-page document Wednesday revealed dozens of smaller decisions that support the complaints of trade associations representing record labels such as EMI and Sony Music Entertainment; publishers including McGraw Hill and Simon & Schuster; and, to a lesser extent, the major Hollywood studios of Warner Bros., Disney, Paramount, Universal and 20th Century Fox.

These associations say discriminatory Chinese rules are costing them millions each year in lost business opportunities.

"The Chinese system for distributing U.S. films to Chinese audiences is among the most restrictive and burdensome in the world," said Dan Glickman, chairman of the Motion Picture Association of America.

Up to now, state-owned China Film Corp. decided which movies could make it into the country legally. But its tastes can differ from the Chinese public.

Say China Film wants to import "G-Force" when the public wants to see "The Hangover." Pirates who steal a copy of "The Hangover" can sell illegal DVDs at a huge profit and satisfy consumer demand before the studios have a chance to compete, said Greg Frazier, executive vice president for international policy for the Motion Picture Association of America.

Allowing studios to have more direct access to the Chinese market can smooth the process of selling movies in China legitimately although it does not address the issue of censorship.

"If we can remove some of those hurdles and get some competition in that market, then we can compete with the pirates," Frazier said.

The decision also offered hope of greater business for companies like Apple's iTunes store, finding that China was breaking trade rules by preventing companies selling music downloads to computers and mobile phones from offering their services directly to Chinese customers.

The restriction is one of the key reasons there is no iTunes store in China, despite demand signified by the prevalence of smuggled Apple Inc. iPods and iPhones, said Neil Turkewitz, executive vice president international of the Recording Industry Association of America.

The case is without a true precedent in the WTO's 14-year history, and there has been no indication that China has been considering relaxing restrictions on imports despite the looming decision.

However, China has committed itself to the WTO process and will likely try to come into compliance in some fashion. The government could set up new regulations and procedures for vetting and approving cultural imports that would allow a wider opening of the market.

Or, it could seek to negotiate lower thresholds for Chinese ownership in joint ventures for distributing American goods, giving U.S. companies a greater portion of the profits.

That may not be enough for American recording companies, film studios and publishers, who could ask the Office of the U.S. Trade Representative to pressure China into full compliance by threatening retaliatory trade sanctions. The WTO can authorize higher tariffs and other measures against countries failing to adhere to the rules, but generally only after years of litigation.

China can appeal the ruling, but officials at the country's WTO mission in Geneva declined to comment.

When China joined the WTO in 2001, it agreed to grant equal trading rights to foreign and domestic companies operating in China.

The panel made no finding that implies it is illegal for China to review foreign goods for objectionable content. But it said China's methods were invariably breaking the rules, with the WTO backing the U.S. on almost every key point.

The three-member panel rejected, however, a U.S. argument that burdensome censorship of American music was hampering sales in China. Washington also suffered a setback on cinema rights as it failed to prove that China was illegally restricting the distribution of films in movie theaters to two state-owned companies.

Tom Allen, CEO of the Association of American Publishers, called it a landmark ruling.

"It protects legitimate creators of valuable content and offers them fair access to this extremely important market," Allen said. "Both these long-standing market-access barriers and widespread piracy and counterfeiting in China cause serious economic damage to publishers, who make substantial investments in developing and promoting creative content."

--------

AP Business Writer Ryan Nakashima in Los Angeles contributed to this report.