Written evidence submitted by the Advertising Association [TWC0035]

Advertising Association

Response to UK trade with China inquiry

Executive Summary

1. The UK’s advertising industry, renowned throughout the world for its excellence and creativity, benefits the country’s economy and society in a number of ways. It has a huge impact on economic performance, supports the growth of small- and medium sized businesses, generates large-scale employment and makes a considerable contribution to UK exports.

2. On the whole, China is seen as an exciting market with huge potential. Due to its complexity, it is not an easy market and requires substantial investment and patience to deliver meaningful success. We think there is merit in the UK negotiating a trade agreement with the China with a view to strengthen a number of horizontal provisions typically found in FTAs.

3. UK advertising companies are already taking advantage of the China opportunity and are already involved in helping Chinese companies brand themselves domestically and internationally.

4. Our relationship with DIT is good and the work done together on China trade has been fruitful. The Shanghai International Advertising Festival has now become a regular fixture for our advertising export promotion work. This relationship is seen as a potential model for other sectors to emulate.

About the Advertising Association

5. The membership of the Advertising Association is very broad and includes the associations representing industry sectors, such as the advertisers (through ISBA), the agencies and advertising production houses (through the IPA and APA), all the media (from broadcasters and publishers, cinema, radio, outdoor and digital) and marketing services such as direct marketing, promotions and market research.  Given the broad membership of the Advertising Association it is important to set out that this submission focuses on the case for the advertising industry and not related industry sectors (for example, UK broadcasters take a different view on trade liberalisation given the need to maintain the UK’s unique television ecology built up around the PSB system). 

6. Advertising is a driver of economic growth and competition. Every pound spent on advertising returns £6 to GDP. Advertising spend will be over £23.6 billion this year and this will result in over £142bn to GDP, supporting 1 million jobs across the UK.

7. According to Deloitte research carried out on behalf of the Advertising Association, the one million jobs supported by advertising can be broken down as follows:

• 350,000 jobs in advertising and the in-house (brands) production of advertising
• 76,000 jobs in the media sectors supported by revenue from advertising
• 560,000 jobs supported by the advertising industry across the wider economy

8. The UK is a world-class hub for advertising, with the latest available figures also showing exports of British ad services reached a record high of £6.9bn in 2017, an 18% increase on the year before[1].

9. Please contact Konrad Shek (konrad.shek@adassoc.org.uk) for further information on any of the points raised in this submission.

Our response

How should the UK approach its trade and investment relationship with China? What opportunities does the relationship present, and what challenges and risks are involved?

10. China is without doubt a massive economic success story. China has the largest population (over 1.3 billion) and the second largest economy in the world (or the largest if measured by purchasing power parity[2]). 40 years have elapsed since China launched its market reforms (“Reform and Opening Up”), and its economy has rapidly transformed from being a largely agrarian economy to a highly industrialised one. During this process more than 850 million people have lifted themselves out of poverty[3].

11. China has been deeply integrating itself in the global supply chain. It still remains a magnet for FDI and, over the last decade, a major source of ODI. China attracted FDI to the value of USD139 billion in 2018 and in the same year non-financial ODI reached USD120 billion, 40% of which went into Belt & Road Initiatives[4]. China also spent an estimated USD279 billion on R&D, an increase of 14% on the year before and a rise of 70.9% from 2012[5]. The gap between the US and China on R&D spending is narrowing significantly, and China is leading in areas such as high-speed rail, electric vehicles, 5G and AI.

12. In short, China is exerting a “gravitational pull” such that the geographic centre of the global economy, according to The Economist[6], has shifted decidedly eastwards. The key takeaway is that, regardless of whether the UK decides strategically to embrace trade with China wholeheartedly or not, China’s influence will be felt, both directly and indirectly, over the years to come. We have moved from a world that was previously dominated by the US and Western Europe, to a multipolar one. The question is therefore, whether the UK is able to respond effectively to this new paradigm shift. The question will come sharper into focus for a post-Brexit UK.

China Opportunity

13. The Advertising Association regards China as a key market, the potential of which has not yet been fully realised.  According to McKinsey research[7], by 2022, more than 75% (approx. 270 million) of China’s urban population will be middle class, that is earning between USD9000 to USD34,000 per annum. This growing middle class will undoubtedly mean a greater demand for brands and services, which has already translated into increased advertising and media spending. China’s total media spend in 2018 was estimated at USD90billion and in 2019 forecasted to be USD95billion[8].

14. Our industry is already making inroads into the market to tap into this potential. In a 2018 online survey, we conducted for DIT as part of our “Promote UK” agenda with some of our member associations (IPA, APA, IAB and the Market Research Society), it was found that outside Europe, China and Hong Kong (among others) were key markets. Larger well-known agencies such as M&C Saatchi have been established in China for a number of years, as are a number of WPP group companies. 

15. UK-based ad agencies have been well placed to help Chinese companies to develop their international branding and are already winning bids to deliver such campaigns. For example, Crowd[9], an independent creative agency, helped China Southern Airlines to raise awareness of the brand by launching three new long-haul routes from London to Australia, New Zealand and South East Asia. Above&Beyond’s[10] relationship with Chinese smartphone maker OnePlus continues to gain in strength and are now involved in work launching the OnePlus 7 and OnePlus 7 Pro. The independent digital agency MBA has helped both the Brazilian manufacturer Embraer Executive Jets as well as Cambridge University Examinations raise their profile and sales amongst specialist corporate and educational audiences respectively over many years in China.

16. Edinburgh-based Freakworks, which specialises in post-production, is behind the most famous advert in China, for a bottled water company (Ganten), with an estimated audience of 1 billion. The commercial has been a boon for Edinburgh, effectively boosting Chinese tourism there. Feref, an integrated creative agency, responsible for international campaigns for some of the world's biggest entertainment brands and are behind some of the world’s best-loved advertising and PR launches for movies like Star Wars, Deadpool, James Bond, Frozen, Marvel's Avengers and La La Land, have recently set up a knowledge sharing programme with Shanghai Media Group, one of China’s largest media groups.

17. Additionally, the Institute of Practitioners in Advertising (IPA), the trade association that represents agencies, is also on the organising committee of the Shanghai International Advertising Festival and has been attending and providing speakers for the China International Advertising Festival, organised by the China Advertising Association (CAA), since 2009.

18. The IPA is due to sign an MoU with the CAA on 26 October at the 2019 China International Advertising Festival in Nanchang. This will include co-operation of trade, and advertising qualifications including hosting China delegations into the UK market and participation in the CAA China programme at Cannes Lions each year.

19. The IPA are in talks with the CAA for joint collaboration on the launch of the IPA International Foundation Certificate in China and the creation of a new Mandarin-version IPA Foundation Certificate for the China market.

20. China is an exciting opportunity and offers a huge market potential for many advertising companies. A number of companies are starting to see success after some patience and substantial investment. One agency said to us that without China in its strategy, it would never become a truly global agency.

Challenges and Risks

21. China is a very complex market and does business in a way we are not used to in Europe. Firstly, it is a fragmented market, contrary to most people’s impression that it is a largely homogenous market. There are hundreds of Chinese dialects, with many mutually unintelligible. The climate variation across China is very large: in Beijing during November is a cool 10-14oC, whereas the southerly city Guangzhou typically experiences temperatures of 25-29oC. Food preferences are very different too, places such as Sichuan and Hunan are well known for their spicy dishes, whereas Shanghainese food tends towards sweeter flavours.

22. Secondly, China’s political and economic system is largely state-driven and state-centric which means that the boundaries between the public and private sphere are very blurred. The legal system also allows for some space for different interpretations at the central and provincial level. Both of these factors mean that the decisions of local government officials can have a disproportionate effect on the market. This makes it difficult for foreign companies to address anti-competitive or discriminatory behaviour in a transparent manner.

23. China still uses “Soviet style” 5-Year Plans at all levels of government and state-owned enterprises. The significance of these plans is somewhat lost among many UK companies wanting to do business with China, but they give a huge amount of insight in the political direction of the economy. It also gives an understanding of what sectors and industries the government sees as a priority for foreign investment.

24. Thirdly, China is not shy to use the leverage of its economic power to achieve geopolitical aims. For example, China stopped travel agencies from sending Chinese tourists to South Korea in protest to Seoul’s decision to deploy a US missile defence system[11].

25. Hyper-nationalism has also manifested itself among Chinese consumers. Companies such as Versace faced a backlash after marketing a t-shirt which implied Hong Kong and Macau were independent countries[12].

26. Finally, it would be remiss not to mention China’s slowing economy and the ongoing US-China trade war. The slowing economy is largely a result of structural changes to deleverage the Chinese economy. But both the slowing economy and trade war are adding to business uncertainty in China.

What are the main barriers to trade and investment between China and the UK at present and how might these be addressed?

27. The gravity model of international trade predicts bilateral trade flows based on the economic size and relative distance between two countries. UK - China trade must overcome physical barriers, in the form of distance, as well as different cultural, language and legal systems. These factors are often overlooked, but are important to consider when looking at the overall trade picture.

28. China’s strict capital controls make it less than straightforward to get money into the country, as well as taking money out. The country has made moves to liberalise the capital account but these reforms have moved at a slower pace in recent years. There are competing views on the pace of liberalisation, but we agree with comments by the Deputy Director of the People’s Bank of China monetary policy department that “China needs a more flexible and convertible yuan to improve investors’ confidence in the currency”[13].

WTO GATS Commitments

29. China WTO GATS commitments[14] lists the limitations for Advertising Services (CPC 871) for the following modes of supply. China operates restrictions on modes 1, 2 and 4.

Mode of Supply: 1) Cross-border supply    2) Consumption Abroad    3) Commercial presence    4) Presence of natural persons.

Domestic Legislation

30. The key legislation in China is the Advertising Law which prohibits mis-selling and making false claims. There are restrictions on tobacco and alcohol advertising and the use of minors in endorsing products. However, advertising services also cut across other areas of domestic legislation. We have identified a number of issues that could have an impact on the ease of doing business in China.

Establishment

31. For the establishment of a foreign-invested advertising company in China, it is now much “simpler” because advertising is no longer regarding as a regulated/sensitive industry. There are a number of steps to set up a wholly foreign-owned advertising company (WFOE). The list below is not comprehensive but is meant to illustrate the type of bureaucracy faced.

Should the UK seek a post-Brexit trade and/or investment agreement with China? What other initiatives should the UK government pursue to facilitate trade and investment between the UK and China?

32. The UK’s main trade-related dialogues with China are the Economic & Financial Dialogue (EFD) and the Joint Economic and Trade Commission (JETCO). Understandably, the EFD is more focussed on financial matters but the Advertising Association has not been consulted or previously asked to input any information about the advertising industry into these discussions. Given the importance of trade in services to the UK economy, we would emphasise the need to get a broad and diverse set of views that are fully representative of businesses across the UK.

33. We think that the UK should seek an ambitious trade agreement with China which covers areas such as national treatment pre- and post-entry; temporary movement for business persons; investment protection; e-commerce and data; IP; Competition and state enterprises and public procurement. Stronger horizontal disciplines in any trade agreement would be helpful to the exports of UK advertising. If UK advertising services providers are put at a disadvantage compared to local firms, the UK’s advertising industry – which does so much to fuel the economy - will suffer, leading to diminished choice for brand owners and less opportunity for them to market their goods and services.

34. We therefore see merit in the UK identifying and pursuing offensive interests for the advertising industry, where appropriate, through a new trade liberalisation agenda with China that is balanced against the need to protect specific domestic defensive interests i.e. around broadcasting. As with any free trade agreement it is important to analyse the trade-offs against any perceived benefits.

35. It is worth highlighting that the UK – China Agreement[15] concerning the promotion and reciprocal Protection of Investments was signed in 1986. It can be argued that circumstances and conditions have changed considerably since it was signed, not least, it has no reference to the International Centre for Settlement of Investment Disputes (ICSID).

Does the Department for International Trade provide adequate support and expertise to UK companies wishing to export to and invest in China, as well as those currently operating in China?

36. The Advertising Association’s relationship with the Department of International Trade (DIT) is excellent and is bearing fruit, in terms of supporting UK companies wanting to export to and invest in China. The IPA also works in close partnership with DIT in China and the UK, and London & Partners to develop these plans and programmes. In China, official government backing carries weight and hence partnering with DIT was important. This partnership can be best illustrated by the Promote UK group, launched in 2017 by the Advertising Association in support of the Government’s Industrial Strategy. This joint industry-government group was formed to position the UK as the top global hub and centre of excellence for advertising post-Brexit and ensures UK advertising takes a central place in the GREAT campaign. It has been hailed as a potential model for other sectors. The group’s objectives focus on raising the awareness of UK advertising at scale to drive reputation; target key influencers and decision-makers for in-depth engagement; and ensure marketing services are included in DIT FDI pitch presentations across all sectors of the economy.

37. For China, it was decided that Shanghai International Advertising Festival (SHIAF) was an appropriate platform in which to demonstrate UK excellence in advertising, given the strong backing it had from the local government. This also meant early engagement with the organisers: Janet Hull, Promote UK Chair and the then Advertising Association chairman, James Murphy, presented at the inaugural SHIAF2018 on the topic – The Advertising Opportunity to take China Brands Global: a UK Perspective.

38. Following the success of this, our association and the Institute of Practitioners (IPA) signed an MoU on cooperation with the SHIAF organising committee to enhance the UK advertising’s presence at the 2019 festival. The signing ceremony was witnessed by Baroness Fairhead, the then Minister of State for Trade and Export Promotion. The development marked a major step for Promote UK, in partnership with DIT, to support the UK as the global hub for advertising.

39. Fourteen companies from the UK advertising industry joined the SHIAF2019 trade mission, led by DIT and arranged in conjunction with the Advertising Association and the IPA. For companies that already had offices in Shanghai, they felt that the trade mission provided invaluable insights and involvement in discussions they would never have experienced without a visit. All participants benefited from the cultural insight of being in China. One participant said that they had achieved three new business leads as a result of being on the trade mission. One delegate received an invitation to pitch for a £3m project. Eight said they were definitely looking forward to extending the relationships when they were back in the UK. For at least three companies, China had now become a key focus and for one delegate it reinforced why Shanghai was a Tier 1 hub, and somewhere they should set up an office.

40. The delegates felt that they benefitted from seeing the presentations from other trade mission participants. One company commented how enjoyable it was to see the outstanding work from other agencies – and seeing how impressed the audience was with the work.

41. The cumulative successes of the Promote UK group on China and other territories, has led to the decision to launch the UK Advertising Export Group in 2020, as a formal membership organisation. DIT have strongly supported this initiative and it is hoped that they are able to secure matched funding, to establish the group on a firm footing and to make events like SHIAF a regular fixture in its calendar of events.

42. Going forward, the China strategy, within the wider industry Promote UK agenda is to encourage

• UK agencies in international groups to develop UK/China business development strategies;
• UK independent agencies to set up in China or find China independent agencies with which to partner;
• China agencies to set up in the UK;
• China brand owners to internationalise their brands through the UK.

To what extent does the Belt and Road Initiative present opportunities and/or risks to UK businesses?

43. The Belt and Road Initiative includes 1/3 of world trade and GDP and over 60% of the world's population. According to the World Bank[16], for the 70 Belt & Road (BRI) “corridor economies” (excluding China), US$575 billion worth of projects have been executed, implemented or planned. And if completed, BRI transportation projects could reduce travel times along these economic corridors by 12%, increase trade between 2.7% and 9.7%, increase income by up to 3.4% and lift 7.6 million people from extreme poverty. In summary, it has the potential to accelerate the economic development of the BRI corridor economies.

44. The scale and ambition of the initiative is unprecedented and it will have a major impact on the global economy. It is a means for China to increase its connectivity with the world, increase the number of markets in which it trades with and to absorb its surpluses. It is worth noting that the Chinese have not set a deadline for its delivery, and this should be interpreted that the BRI is a long-term or a generational project, going far beyond most political cycles in Western democracies.

45. The obvious area in which UK advertising could benefit would be involvement in tourism campaigns linked to any of the BRI beneficiary countries. The increase in trade of goods and services could also lead to more international branding opportunities.

46. Risks of BRI have been well-publicised and concerns have been expressed over the debt sustainability of recipient countries and the governance of BRI projects.

How should human rights, security, and environmental concerns shape the UK’s trade policy in respect of China?

47. UK advertising companies take their corporate social responsibilities very seriously and work to a high standard of business and ethical standards in areas such as human rights and sustainability. Some of the larger advertising agencies have a review and referral process to examine client work which may present ethical risks.

48. We think that human rights, security and environmental concerns should be an important factor in the UK’s trade policy with China.

49. But it is important to take an innovative and balanced approach. The UK’s policy levers for enacting change in China are somewhat limited, and over time even these will erode. Berating China over its human rights record, for instance, has had limited resonance with its citizens. The restricted flow of information plays a role in this, but it is also true to say that most Chinese citizens’ concept of what human rights is different to that of the West, as China has traditional favoured economic rights over civil and political rights.

50. Moreover, Chinese awareness and sensitivity towards environmental concerns have been borne out of a response to the high levels of atmospheric, ground and water pollution in the country rather than as a result of international pressure.

8 October 2019

OCTOBER 2019