Dear Mr. Chairman, Honorable Commissioners, I am pleased to have the opportunity to appear before you today to provide the views of the Motion Picture Association of America regarding our experiences in China, the lessons we have drawn from that experience, the impact of China’s accession to the WTO on our industry, and our views on compliance.

The Motion Picture Association of America is a trade association representing seven major studios that produce and distribute filmed entertainment – theatrical motion pictures, home video entertainment and television programming – in markets all around the world, including in China. Our members include Buena Vista Pictures Distribution, Inc., (A Walt Disney Company), Metro-Goldwyn-Mayer Studios Inc., Paramount Pictures Corporation, Sony Pictures Entertainment Inc., Twentieth Century Fox Film Corporation; Universal City Studios, Inc., and Warner Bros, a division of AOL/Time Warner.

A recent history of the American filmed entertainment industry in China:

American motion picture studios began moving into the China market after the US-China intellectual property negotiations in l994-95. Prior to those negotiations, millions of illegal cassettes and video compact disc (VCDs) of our member companies’ films were being manufactured in China. This pirate product was being sent all over the world and seriously affected our industry’s revenues in third countries. Needless to say, we were doing almost no business in China at that time because of the piracy and severe restrictions on our access to the market.

In the 1994-95 bilateral negotiations, the Chinese government pledged to shut down this illegal manufacturing. It backed this pledge with quick and decisive action against pirate factories - a step that many China observers had said would be politically impossible. The Motion Picture Association (MPA) was given authority in 1994 to open an office to help in the anti-piracy campaign and to establish channels for bringing in legal product. Top Chinese leaders looked to MPA to build a bridge of cooperation between the Chinese and American film industries.

That was the true beginning of our business in China. Factories illegally copying our films were closed. One such factory, a particularly large one, was rehabilitated as a partner for several of our studios making legal videos for the Chinese market. The export of pirated copies to world markets was brought to a halt.

Yes, there is more work to be done in fighting piracy on China’s domestic market, where piracy levels remain high. There is also more to do in opening the market to legal product. However, much has been accomplished over the past seven years.

Important Lessons Learned from relations with China: Over the past 16 years, we learned some important lessons about doing business in China.

1. When the Chinese government makes a promise, it will live up to that promise.

2. The most effective way to proceed in China is to build trust at the personal level by engaging in mutually rewarding activities. Finding ways to do things together, we slowly but surely moved into a number of mutually beneficial projects:

• The Chinese agreed to permit more of our films to enter the Chinese market and we agreed to do film festivals to introduce Chinese films to American audiences.
• Both sides agreed to work together to improve the efficiency and profitability of film distribution in China.
• Both sides found value in co-producing films in which Chinese stories are brought to life by our modern film technology.
• Both sides agreed to work together to open and modernize the home video and television industries in China.
• China agreed to take more of our film videos and more of our television programming. In turn, our studios agreed to bring in some Chinese television shows for US audiences.

It is a step-by-step process in which both sides identify objectives and work together to achieve them. What is being accomplished is especially striking given the unique nature of the film industry. Our entertainment deals routinely with ideas and values that can be culturally and politically sensitive. For two countries with such different political and cultural histories, it is remarkable how far and fast our cooperation has developed. Now that China has entered WTO, we can expect the pace of cooperation to pick up even further.

Last year, 14 of our films were imported into China on a revenue-sharing basis. This is the way we do our business in the US and around the world. This system of sharing box office proceeds is new to China. Under the terms of China’s WTO entry, the number of foreign revenue sharing films entering China in 2002 will rise to 20.

The Chinese are not taking our films just to make us happy. They believe our pictures can play an important part in revitalizing the Chinese film industry. The Chinese want us to help them build more and better cinemas, a goal that is clearly in our mutual interest. They want us to bring them new technologies to make better films. We are doing these things, and the Chinese are providing us ever increasing access to their market, whether it be film, home video or television.

Impact Of WTO Accession: China’s new membership in the WTO will clearly help us progress in our business in China. However, the primary reason we are moving ahead is because our two industries have learned to work together in the daily task of running the business. We more and more think along the same lines. It is becoming a true partnership. Now our practical working relationship will be backed by the transparency and legal certainties of the WTO. This is a plus for both sides.

We have found no instances in which the Chinese have failed to deliver what they have promised.

Let me make an important point here. The strong cooperation developing between the Chinese and American film industries comes against a backdrop of massive economic and social change in China. It is a nation and society moving forward at breakneck speed. The rapidly growing appetite for our films is clear evidence of that.

Let me go through quickly a short report card on Chinese performance on the issues of particular importance to us.

COPYRIGHT PROTECTION. The Chinese have moved decisively and strongly to honor its obligations in the l994-95 IPR agreements negotiated with the US. They closed down illegal factories and are pressing on with the fight against pirates at the retail level. That continues to be a huge and difficult battle. We work side by side with our Chinese friends on this, providing training and technical help. Now, under the terms of the WTO Agreement on Trade Related Intellectual Property (TRIPS), China is further committed to the fight against piracy. In that regard, on October 27, 2001, China adopted an amendment to its Copyright Law.

MARKET ACCESS. The November 15, l999 agreement between the US and China on China’s accession to the WTO contained assurances that:

• There will be 20 annual revenue-sharing imported films.
• US investors can invest in joint ventures for the distribution of videos.
• US investors can own up to 49% in companies that build, own and operate cinemas.
• Tariffs on films will be reduced from the current level of 9% to 5%.
• Tariffs on home videos will drop from 15% to 10%.
• China will protect intellectual property under the terms of the WTO Agreement on Trade Related Intellectual Property (TRIPS).

There is no doubt in my mind that China will abide by these commitments. China showed the value of its word in working to implement the terms of the 1995 and 1996 agreements on intellectual property. The fight against piracy continues to this day because of the enormity of the problem. What has been achieved so far, however, has been impressive and is the result of unremitting efforts at the working level and strong and unwavering instruction from top Chinese leaders. We are not there yet, and the Chinese would be the first to acknowledge that. But the course is set and outcome is not in doubt.

I would expect a similar process as China moves to fulfill its WTO obligations. China’s entry into WTO is only part of a broad and deep transformation underway across China. Many of the concessions that China made as part of its WTO entry were consistent with China’s own goals to advance domestic reform goals. Certainly, that has been true for our industry. China’s commitments in our sector under the WTO accession agreement were, in large part, things that the Chinese film industry decided it needed to do to revitalize its own business. That bodes well for prospects of compliance. Countries are most likely to honor commitments that they truly believe are in their own interest, rather than those foisted upon them by outsiders.

The reform process across China will not be without problems. The changes are wrenching and painful, but top leaders have been articulate in describing how these changes will benefit China and its people. It is our good fortune in the film industry to have reached a level of mutual respect and communication with our Chinese partners that we can now speak with total candor about how to expand our cooperation to the benefit of both industries. The WTO framework with its clear predictability in legal and trade terms adds immeasurably to the success of this process.

Thank you for this opportunity to appear before you today.