An Interpretation of New Sino-American Film Agreements

27 August 2012

In response to a World Trade Organization memorandum of understanding regarding film, China and the United States have reached an agreement increasing the presence of American films in China. China will increase its annual quota of imported foreign films from 20 to 34, 14 of which will be 3D or IMAX movies. American studios’ allowed share of box-office receipts from a film released in China will also rise from 13% to 25%.

China’s recent opening of the domestic market to more American films traces back to Sino-American trade tensions in 2007. The US raised two trade complaints to the WTO, criticizing Chinese inaction towards piracy as well as Chinese restrictions on import of American films, music, and printed matter. After two years of litigation and counterclaims, the WTO’s Dispute Settlement Body called for China to obey the WTO membership entry pact and WTO regulations allowing American companies to export films and entertainment products.

The WTO also called for China to remove discriminatory measures towards foreign distributors who import publications to the Chinese market. We have noticed that the newly revised Industrial Catalog Guiding Foreign Investment (2011) (referred to as the 2011 Catalog, effective from January 30, 2012) has moved a proviso mentioning “the general distribution and importation of books, newspapers and journals, and the importation of electronic publications” from the restricted category to the permitted category. The new film agreements reached by China and the US can also be construed as a positive response to the 2010 WTO rulings.

Nevertheless, the new film agreements still did not alter the Chinese stance on film importation, reserving China’s right for censorship and distribution. American studios seeking to release films in Chinese cinemas must still submit films for review by the State Administration of Radio Film and Television (SARFT). If SARFT finds issue with a film, the film must be amended accordingly and sent to SARFT for second review; films will not be shown in Chinese cinemas until successfully passing SARFT review. Secondly, the advertisement and release schedules of all imported foreign films will still be determined by the Chinese distributors.

The 34-film quota decided by the new agreements will not affect the quota of foreign films whose foreign distribution rights have been purchased by Chinese companies for a fixed price, known colloquially as batch films. Different from the individually negotiated films referred to in the new agreements, batch film box-office revenue is not divided between the Chinese and foreign investors and Chinese distributors of such films usually import them in batch, hence their name. With the addition of batch films, the number of the American films released in the Chinese market is not limited to 34 films, despite the new agreement.

Although further regulations will be needed for the actual implementation of the new film agreements, this change has already increased investor confidence and opportunities for foreign capital. On February 18, Dream Works Animation SKG Inc announced that it would set up a joint venture company with China Media Capital, Shanghai Media Group and Shanghai Alliance Investment Ltd. Despite these developments, foreign investors must keep in mind that the Chinese film industry is not yet fully open to foreign investors. Although the 2011 Catalog changed a clause describing “broadcast and television production projects and film production projects (limited to cooperation)” to “broadcast, television and film production business (limited to cooperation),” based on our understanding, this amendment is just for clarification purposes, and does not imply that foreign investors can establish film production cooperative joint venture companies with Chinese investors.

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