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Jan 2017 - Implications of the upcoming US-PRC Film Trade Negotiations In February 2017

Introduction

The PRC signed an agreement on its current quota system of foreign film importation with the World Trade Organization (WTO) in 2012, valid for 5 years. The second round of negotiations on the PRC’s quota system, which is greatly anticipated by the international film industry, will commence around 17 February this year.

 

The US speculations

The most recent projections indicate that the PRC will become the world’s largest film market by revenue as early as next year (http://www.pwccn.com/home/eng/pr_130616.html). This offers great opportunity for foreign filmmakers and content producers, particularly the Hollywood studios, but throws into relief the range of the PRC’s market access barriers imposed, despite its World Trade Organization (WTO) membership. Foreign content producers, particularly in the area of movies and audiovisual, would strive to eliminate or at least erode away these barriers through the PRC and US negotiations due to start in February 2017.

Given the market's potential and magnitude, the Motion Picture Association of America (MPAA) remains enthusiastic for the PRC to open its doors more extensively. Box office experts say the PRC's ticket sales will surpass those of Canada and the United States within the next few years. A MPAA official said it was "very encouraging" that PRC and US officials had agreed in recent talks to discuss matters including increasing the revenue share that foreign studios receive and the annual foreign film quota in the PRC.

In this year’s Section 301 submission to United States Trade Representative (USTR), the International Intellectual Property Alliance (IIPA) laid out its desire for further developments in the upcoming 2017 agreement (that will technically be negotiated between the PRC and US government officials) as follows (https://hughstephensblog.net/2016/07/12/china-and-the-content-industry-friend-or-foe-part-two/) :-

  • increase US content producers’ share of revenues from the current 25%;
  • further relaxation of the quota for revenue sharing movies so content producers may enjoy the rapidly developing PRC marketplace for movies;
  • ensure US content producers are able to carry out appropriate revenue reporting through enhanced access to ticketing system information; and
  • permit US content producers more control over release dates to resolve the problem of the PRC locking out US movies from the prime release dates and to terminate the practice of “double booking” theatrical releases

 

While foreign content producers would like to see the PRC become more like an “ordinary” distribution market, the foreign government will also not want to kill the golden goose—namely, their share of the rapidly growing PRC box office. Moreover, it is clear that the PRC is unlikely to blink when it comes to retaining final monopolized control of its domestic distribution of films (https://hughstephensblog.net/2016/07/12/china-and-the-content-industry-friend-or-foe-part-two/).

 

The PRC speculations and potential change of PRC monopoly over distribution

According to the PRC Film Insider, PRC’s top film regulator has hinted the PRC’s willingness to inflate the foreign films quota in 2017, and cautioned the PRC film industry executives to prepare themselves for further competition from foreign films. Furthermore, various sources have indicated that the PRC will be ready to negotiate the quota in February 2017. The number specifically refers to cinematic theatrical releases, as imported movies sold as VOD and streaming are usually sold for a flat fee, although everything must pass the same censorship process. Zhang Hongsen, a director at the powerful PRC regulator, the State Administration of Press, Publication, Radio, Film and Television (SAPPRFT) said there would be more “intensive and fair” competition in 2018 as more imported films will be entering the PRC’s movie market (http://chinafilminsider.com/china-film-bureau-boss-flags-competition-foreign-films-2018/).Various officials have also indirectly indicated in recent years that PRC’s quota system restricting imports of foreign movie to 34 titles a year will be increased further in 2017-2018.

Despite all the ongoing speculation and rumors, a swift review of some of the relevant official guidelines, central directives and leadership statements in relation to the PRC’s cultural sector offer a glimpse of the PRC’s priorities and suggest that foreign content producers should not expect much to change during the 2017 negotiations (http://thediplomat.com/2016/12/us-china-frictions-in-film-hollywood-with-chinese-characteristics/).


13th Five-Year Plan Guidelines

The 13th Five Year Plan, which establishes the most authoritative strategic source for the country’s social and economic rules, decodes central directives into an official proposal for the PRC’s cultural sector for the period of 2016-2020. The guidelines demand for the prosperous television and film development in the framework of enhancing socialist arts and literature. Under the framework of assimilating core socialist values with all aspects of social and economic advancement, the guidelines also requests for assembling an arts and literature force that is “excellent in both performance skills and moral integrity”, in addition to developing the dissemination of the PRC’s cultural spirit and values.

18th Party Congress Report Directives

The 18th Party Congress Report constitutes the most authoritative vision for central orders on the country’s cultural sector, which consists of the film industry. The report sets out the Communist Party of China’s (CPC) agreement on all policy sectors in anticipation of the forthcoming 19th Party Congress, which will take place in fall 2017. The core of these orders is the notion of consolidating the PRC’s central system of socialist values, which is considered by the CPC to be the “soul of the Chinese nation.” This concept of “core socialist values,” first implemented by the 17th Party Congress, establishes the CPC’s first step to establish itself as the country’s moral standard holder to enrich its political legitimacy. This core socialist values system entails the following:

  • the notion of socialist ideal with Chinese attributions;
  • the guiding Marxism philosophy;
  • the concepts of honor and disgrace under socialism, which accentuates living plainly, the necessity of adhering to the law and patriotism;
  • the PRC’s core patriotic spirit; and
  • 5) the PRC’s core spirit of the times with innovation and reform.

The report strategizes to complete the aforesaid values by releasing and maturing the country’s “cultural productive forces” by producing and dispersing cultural products that offer people with “nourishments for the mind.” Such cultural products are essential to emphasis traditional Chinese value, virtues of family names and the rule of law. The report also utilizes comparisons with foreign countries’ “cultural achievements” to demand for the reinforcement of “the free flow of cultural inspiration from all sources” in the PRC. On the other hand, the PRC will continue to assess other countries’ “cultural achievements” by the domestic standard of the CPC’s central socialist value system, which is the foundation for the country’s development of a strong socialist culture.

High-Level Leadership Statements

The CPC leadership’s high-level statements advance the objectives and values of the 13th Five Year Plan as well as the 18th Party Congress Report. Last May, PRC President and CPC General Secretary Xi Jinping specified that the basic PRC “cultural genes” must be interpreted and reformed in accordance to modern day’s society and culture. President Xi also emphasized the paramount significance of the country’s cultural sector’s self-assurance. He highlighted that confidence in the common ideal of socialism with Chinese attributions is established on assurance in the PRC’s 5000-year-old culture.

Last September, Liu Qibao, who was the CPC Propaganda Department Minister that administered the SAPPRFT, endorsed the designation of “advanced individuals”. These “advanced individuals” uphold essential socialist values and act as role models for the PRC citizens. Liu accentuated that the people of the PRC must believe that advanced standard bearers are “in front of their eyes” and “at their side”. Liu highlighted the necessity to reinforce artistic requirements, abide by to CPC Propaganda Department rules, and improve efforts of foreign propaganda. In November 2016, Nie Chenxi, who was the SAPPRFT Chief, requested at a SAPPRET work conference that his administration stimulates and encourages the PRC people’s long-standing traditional culture, the core values of socialism , and the manufacture of superior products. In October 2016, formal announcement were made that Nie is to be the new chief of SAPPRFT, and it is anticipated that he will supervise the administration for the near future.

In relation to the PRC’s cultural sector, the CPC will continue to develop the domineering encouragement of socialist principles that maintain its own political legitimacy to preserve a position of predominance in the country. The central purposes associated with the CPC’s plans include: to inculcate the people of the PRC with a sense of patriotism; to publicize a values system that supports the CPC as the frontline of decency and morality in the country; to propagate traditional Chinese culture as significant to today’s society; and to promote the current PRC authorities as just and fair. These values will apparently continue to conflict with the interests of foreign content producers that wish to pursue the growing PRC film and audiovisual markets through enforcing implicit restrictions on content that may cause a inclination towards self-censorship.

In light of the aforesaid targets of the CPC, the PRC authorities is likely to continue to exploit the foreign content producers’ expertise through the current unlimited co-production arrangements that impart imported filmmaking technology and abilities to the PRC film industry. In essence, like other industries that strives to access to the goldmines of the PRC markets, U.S. and other foreign film producers will be need to abide by the PRC’s conditions and restrictions by making sure their films possess “Chinese characteristics,” whilst contributing to PRC’s domestic content producers and bearing the risk that domestic competitors may one day replace them.

 

Effect of 2016 box office

Although there has been a slowdown in the PRC box office, it continues to remain one of the most attractive markets around the world. In 2016, the PRC movie market retained its position as the second biggest movie industries internationally (18.8% of worldwide movie ticket sales), and it is expected to preserve its status quo in the next few years. As such, the PRC market will be the paramount overseas market for the US film industry. President of Sony Corp's Columbia Pictures (SNE, +0.20%) Stanford Panitch shrugged off the decreased growth of the PRC film market and said, "We'll take this slowdown in any territory in the world. It's still an incredible story of a big growth market." (http://fortune.com/2016/12/16/china-to-review-film-limits-as-box-office-growth-slows/)

The limit of foreign movie imports was voluntarily relaxed by the PRC in 2016 in response to declining box office revenue, with the number of total releases reaching 38 titles including the last minute Hollywood holiday releases: Paramount’s Allied (23 November), Disney’s Moana (25 November), Warner Brother’s Sully (29 November), Century Fox’s Keeping up with the Joneses (8 November) and Miss Peregrine’s Home for Peculiar Children (2 December) (http://chinafilminsider.com/china-abandons-quota-hollywood-films-amid-box-office-slowdown/).

The relaxation of the PRC seems to endorse earlier comments made by senior producer, Industry adviser and China Central Television (CCTV) executive Lu Hongshi that the imported movie quota in the PRC is on track to be further increased in 2017-2018. Lu said, “Leveraging the Chinese market is the Chinese dream of the Americans,” although he added that the speed of restrictions removal remains a mystery.

The MoU between US and PRC also demands for further negotiations in 2017 to consider allowing more importations of foreign movies and proportions of revenue sharing. The U.S. reserves the right to pursue procedural WTO action against the PRC in 2018 if the two countries fail to reach a new agreement during the upcoming negotiations

Nonetheless, US’s bargaining power may not be as strong as they anticipate because the PRC movie industry is the second leading market in the world after the US. With the European and US markets saturated, the US movie industry only has PRC to turn to for increased profit (http://chinalawandpolicy.com/tag/quota/).

 

Trump Effect

Although PRC’s WTO obligation must satisfy all other members of the organization, U.S negotiators representing the leading film market internationally, could possibly be the toughest, and could potentially experience the greatest resistance from the PRC. Earlier on, President Trump specifically called out the PRC in his plan for the first 100 days of his administration, “I will direct my Secretary of the Treasury to label China a currency manipulator.”

On 2 December 2016, President Trump fueled tensions with the PRC by speaking to the president of Taiwan. He then said in one of his public statements that the "one China" policy was up for negotiation. Wilbur Ross, President Trump's commerce secretary, also accused the PRC as "the most protectionist country of very large countries." Ross also slammed the PRC for discarding excess aluminum and steel as well as the CPC’s funding for unprofitable state-owned enterprises. Nevertheless, U.S.-based media officials still maintain high hopes for improved relations with the PRC in 2017. Consultant to major Hollywood studios and PwC director Matt Lieberman commented, "That question is now up in the air." President Trump's representatives was silent to a request for comment.

Nonetheless, it is uncertain whether President Trump’s administration will defend Hollywood’s interests specifically against the PRC. President Trump was strongly criticized for his political standpoints by various distinctive Hollywood figures such as Alec Baldwin, Robert DeNeiro, and Tom Hanks, although others including Jenna Jameson, Stephen Baldwin and Scott Baio support President Trump. "If the Trump administration imposes punitive tariffs on Chinese goods, the PRC will not hesitate to take revenge," The Editorial said. "The arrogant Trump team has underestimated China's ability to retaliate."

 

Potential for quota change

Under the existing system, the PRC raised the number of foreign films that can be imported on a revenue- sharing basis to 34 (14 of which must be 3D or Imax) . Hollywood products received most portion of this limit of 34 films due to their popularity and profitability.

As discussed above, the general view is that quota for foreign movies will be increased but the extent of such increase is unpredictable.

Qualified co-production between PRC and foreign entities are not limited by the quota under the existing agreement. Chairman of Dalian Wanda Group Wang Jianlin said, “The new model of joint production has no limit for companies working with China to produce films as long as the Chinese investment is more than 30% and there are at least one or two Chinese actors in the cast. These films will not be on the control list.”

 

Potential change in revenue sharing

Under the current arrangement, foreign content producers and studios are currently only allowed to keep 25% of the PRC box office revenue. There is no indication of whether the will be a change in the revenue sharing during the 2017 negotiations. Given the necessary control the PRC retains on its market, it may not be surprising that there will ultimately be no change at all in the revenue sharing ratio. Even if there will be an increase, there is no indication that it will reach the 40% average in other international markets .

 

Written by: Ada Chan, Trainee & Edited by John McLellan, Partner


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