Statement of Jack Valenti,
President and Chief Executive Officer,
Motion Picture Association

Hearing on United States-China Trade Relations and the
Possible Accession of China to the World Trade Organization

June 8, 1999

I am pleased to have the opportunity to share with you the views of the Motion Picture Association on U.S. - China trade relations and the possible accession of China to the World Trade Organization

The Motion Picture Association is a trade association representing seven of the largest producers and distributors of filmed entertainment (theatrical motion pictures, television programming and home video) in the United States. Its members include Buena Vista International, Inc. (The Walt Disney Company), Columbia TriStar Film Distributors International, Inc., Metro-Goldwyn-Mayer Inc., Paramount Pictures Corporation, Twentieth Century Fox International Corporation, Universal International Films, Inc., and Warner Bros. International Theatrical Distribution.

The U.S. copyright-based industries, which include the motion picture, sound recording, computer software, and book industries, were America's number one export sector in 1996. These industries together achieved foreign sales and exports of $60.18 billion, surpassing every other export sector, including automotive, agriculture and aircraft.⁽¹⁾ The U.S. filmed entertainment industry alone earned about $12 billion in foreign revenues in 1997, 40% of the total revenues earned by the U.S. film industry.

MPA SUPPORTS RENEWAL OF NTR STATUS FOR CHINA

MPA strongly supports renewal of normal trade relations (NRT) for China this year. Moreover, MPA urges you to consider providing authorization now to the President to extend permanent NTR status upon the President's certification that he has completed an acceptable WTO accession package for China. It is difficult to imagine anything more frustrating than having the U.S. Government conclude a good WTO accession package with China, but not being able, as U.S. industries, to benefit from the agreement. Yet, this is what could happen unless Congress authorizes unconditional NTR by the time China joins the WTO. If the U.S. were not in a position to extend unconditional NTR to China, the U.S. would have to invoke the non-application clause of the WTO. The end result would be that every other country in the world would enjoy the full benefits of China's accession - but the United States would be left out.

MPA SUPPORTS PROMPT CONCLUSION OF NEGOTIATIONS ON OUTSTANDING ISSUES FOR CHINA'S WTO ACCESSION

MPA strongly supports the goal of China's accession into the World Trade Organization. MPA believes that it would be substantially more effective for the U.S. and China to manage their trade relationship from within the agreed standards of the global trading community.

However, it is important as part of the accession process that China agrees to improve access to its market in sectors that are important to the U.S. economy - including the filmed entertainment sector. China has taken some important steps toward this goal, but one critical piece is still missing - some liberalization of the restrictions on exports of US films under revenue sharing conditions.

MPA member companies currently face market access problems in China that severely limit the size of U.S. filmed entertainment exports. Total U.S. revenues earned in China in 1997 were only around $18 million. We conservatively estimate that losses due to restrictions in import and distribution of motion pictures cost the U.S. industry at least $80 million annually. This estimate does not include the potential growth in the export of filmed entertainment, if the infrastructure were significantly expanded, for example, through liberalization of foreign investment in cinemas or broadcast, cable or satellite television. In addition to the losses resulting from market access restrictions, the U.S. filmed entertainment industry lost $120 million to piracy in China last year. In short, if the barriers to film distribution were lifted, and if a legitimate video sales and rentals market captured the market now lost to piracy, an increase in US revenues in China in excess of $200 million is achievable. That number could grow even higher, if additional reforms were undertaken to expand the distribution of films and television programming.

Access for motion pictures - the missing piece: American motion pictures face quantitative limits on access to China's market. Before the WTO accession negotiations are completed, it is essential that the USG secure a commitment from China to relax restrictions on import of foreign films under revenue sharing⁽²⁾ conditions in a modest way. There is a de facto limitation of 10 films per year on the first-run films that may be brought into China under revenue-sharing conditions. MPA's main goal in the accession negotiations is to secure a gradual increase in the number of films.

Cinemas: China has made useful commitments in the WTO accession negotiations to allow foreign investment in joint ventures to build, own, operate, and manage cinemas. This could help build up the infrastructure and expand the total market for motion pictures in China - for US films, as well as Chinese films. At present, foreigners are not permitted to own or operate cinemas in China.

China remains one of the more under-screened markets in the world. There are about 3000 cinemas exclusively dedicated to exhibition of motion pictures. In addition, there are approximately 7000 others theaters that exhibit motion pictures on a part-time basis; included in this number are theaters that also host live exhibitions (dance, concerts, opera) and theaters that serve specialized clientele, such as the workers in a large factory, rather than the general public. The ratio of screens per person is only 1 screen per 122,000. This compares to a total of 30,825 screens in the United States and a ratio of screens per person of 1 per 8,600 people.

However, the value of this commitment is limited, at present, by the restrictions on access for foreign films. Without knowing that more foreign films will be available to fill all the new screens, investors are unlikely to be interested in building new cinemas in China.

Tariffs: China made meaningful commitments in its accession package to reduce the heavy burden of import duties on filmed entertainment products. Some technical work remains on the valuation method for assessing those duties. Prevailing world practice is to value films on the basis of the "material substrate." U.S. duties, for example, are expressed in terms of cents per meter of film, or, in the case of optical media products, on the value of the blank diskette. Chinese valuation practices remain unclear.

Protection Of Intellectual Property: Since 1996 China has achieved a remarkable record in an important area of intellectual property protection. China has stemmed the unauthorized reproduction and halted the export of Video Compact Discs and other forms of pirated optical media products. China's domestic market continues to be plagued with extremely high levels of piracy - 90 percent for home video entertainment in 1998. Based on China's record for combating export piracy and the good working relationship that MPA has developed with China's copyright enforcement authorities, MPA is confident that China can make rapid progress in significantly lowering domestic piracy rates to meet the standards contained in the WTO's Agreement on Trade Related Intellectual Property (TRIPS.)

CONCLUSION

MPA strongly supports renewal of normal trade relations (NRT) for China. If the vote on annual renewal is the vote that first comes before this body, then MPA urges support for annual renewal. But, a better approach would be to provide authorization now to the President to extend permanent NTR status, to be effective upon the President's certification that he has completed an acceptable WTO accession package for China.

China has made commitments in the accession negotiations that could potentially benefit MPA's member companies, but only if these commitments are supplemented by some liberalization of access for U.S. motion pictures distributed on a revenue sharing basis. As soon as this final step is taken, MPA looks forward to supporting strongly China's accession into the WTO.

1. Siwek, Stephen E. and Mosteller, Gale, Economists Incorporated, "Copyright Industries in the U.S. Economy: The 1998 Report," prepared for the International Intellectual Property Alliance, 1998.

2. Revenue-sharing refers to the commercial terms that are the industry standard for MPA member companies. Under "revenue sharing" the distributor and the cinema owner negotiate the percentage of the box office receipts each will receive, such as a 50/50 split.