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China Sites 'Morals' in Its WTO Appeal

9/23/09 - Wall Street Journal - View Source

By John W. Miller

BRUSSELS -- China invoked defense of its "public morals" in appealing a World Trade Organization ruling against restrictions on distribution of Hollywood movies and other Western media, according to a copy of the appeal seen by The Wall Street Journal.

The move reflects escalating trade tensions between the two trading partners ahead of the Group of 20 summit in Pittsburgh starting Thursday. This month, the U.S. slapped tariffs of 25% to 35% on imports of Chinese tires. Beijing retaliated by opening probes into imports from the U.S. poultry products and auto parts.

In its last-minute appeal of the WTO's Aug. 12 ruling on media distribution restrictions, China charged the WTO panel "committed errors of law and legal interpretation in concluding that none of the measures are 'necessary' to protect public morals."

The WTO's 460-page August ruling said Beijing must stop forcing U.S. artists and production companies to go through state-controlled distributors. If implemented, the measure would be a boon to Western makers of movies, music and videogames that currently face extra costs and obstructions to distribute in China. The August ruling also instructed China to let foreign companies sell music online, which could help Apple Inc. and its iTunes music-downloading business.

In its appeal, China also challenged the decision on downloaded music, saying it had never promised to open markets in "electronic distribution of sound recordings in non-physical form."

The "public morals" argument has been used in only one other trade dispute, by the U.S. in 2005 to defend a ban on Internet gambling -- and it lost.

In that case, the WTO accepted the premise that morals "can vary in time and space, depending upon a range of factors, including prevailing social, cultural, ethical and religious values."

However, the country using this argument, the WTO said, must prove that the trade restrictions are "necessary" to defend its morals. The WTO found that U.S. restrictions on Web gambling weren't essential to preserve morals, given that Americans can gamble freely by telephone and in casinos in Las Vegas and elsewhere.

"Just like in the U.S. case, China must now prove its trade restrictions are necessary to protect public morals," says Brendan McGivern, a Geneva-based trade lawyer for White & Case LLP. "It will be a difficult argument to make."

China did win some points in the WTO's Aug. 12 ruling, which said China could continue to protect the two state-owned movie-theater companies and to carry out some censorship. The U.S. didn't appeal those findings.