Insights into Editorial: Why the WTO is right in the solar panel dispute
03 March 2016
A World Trade Organization (WTO) panel has ruled against India in a dispute raised by the US over the country’s solar power programme, requiring the government to offer a level playing field to both foreign and domestic manufacturers of solar panels.
- The panel found that the domestic content requirement imposed under India’s national solar programme is inconsistent with its treaty obligations under the global trading regime.
- This is the second case that India has lost to the US at the WTO. In June 2015, the WTO’s appellate body upheld an earlier ruling against an Indian ban on poultry meat and eggs supplied by American producers. The ban had been imposed to prevent an outbreak of avian influenza.
What’s the issue?
It all started with the announcement of India’s national solar programme, which was launched in 2010. This programme aims to “establish India as a global leader in solar energy, by creating the policy conditions for its diffusion across the country as quickly as possible”.
- To incentivise the production of solar energy within the country, the government under the programme agrees to enter into long-term power purchase agreements with solar power producers, effectively “guaranteeing” the sale of the energy produced and the price that such a solar power producer could obtain.
- Thereafter, it would sell such energy through distribution utilities to the ultimate consumer. However, a solar power producer, to be eligible to participate under the programme, is required compulsorily to use certain domestically sourced inputs, namely solar cells and modules for certain types of solar projects.
- In other words, unless a solar power producer satisfies this domestic content requirement, the government will not ‘guarantee’ the purchase of the energy produced.
- In 2013, the U.S. brought a complaint before the WTO arguing that this domestic content requirement clause imposed under India’s national solar programme is in violation of the global trading rules.
- Specifically, it said, India has violated its “national treatment” obligation by unfavourably discriminating against imported solar cells and modules. Thus, indicating a clear violation trade commitment.
How India defends its move?
India principally relied on the ‘government procurement’ justification, which permits countries to deviate from their national treatment obligation provided that the measure was related to “the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale or use in production of goods for commercial sale”.
- India also argued that the measure was justified under the general exceptions since it was necessary to secure compliance with its domestic and international law obligations relating to ecologically sustainable development and climate change.
What the WTO Panel says?
However, after a detailed examination, the panel concluded that India, by imposing a mandatory domestic content requirement, had violated its national treatment obligation.
- In so far as the government procurement derogation was concerned, the panel found that the product being subject to the domestic content requirement was solar cells and modules, but the product that was ultimately procured or purchased by the government was electricity.
- The domestic content requirement was therefore not an instance of “government procurement”.
- Besides, the panel also found that since India failed to point out any specific obligation having direct effect in India or forming part of its domestic legal system, which obligated India to impose the particular domestic content requirement, the general exception was not available to the Indian government in the instant case.
Was India really wrong?
The ruling has been described as yet another instance of archaic trade rules trumping important climate imperatives. It is being seen as undermining India’s efforts towards promoting the use of clean energy. However, this criticism is not entirely justified.
- There appears to be no rational basis for how mandatory local content requirements contribute towards promoting the use of clean energy.
- Besides, by mandatorily requiring solar power producers to buy locally, the government is imposing an additional cost, usually passed on to the ultimate consumer, for the production of clean energy. The decision may therefore stand to benefit the interest of the ultimate consumer.
How should the policy be?
If the objective is to produce more clean energy, then solar power producers should be free to choose energy-generation equipment on the basis of price and quality, irrespective of whether they are manufactured locally or not.
- It is entirely possible to give preferential treatment to clean energies (in the form of tax rebates for solar power producers and so on) without requiring mandatory local content.
The panel ruling, however, is not final and reports indicate that India will prefer an appeal to the appellate body. Simultaneously, India may be exploring the option of filing a counter complaint against the U.S., with several states in the U.S. such as Michigan, Texas and California having also reportedly been accused of employing mandatory local content requirements in the renewable energies sector.
In a bid to support its ‘Make in India’ campaign India is coming out with such policies. However, India must resist the temptation of adopting protectionist measures such as domestic content requirements which are inconsistent with its international obligations. Domestic content measures, despite their immediate political gains, have a tendency to skew competition. Manufacturers must remain free to select inputs based solely on quality and price, irrespective of the origin. The government must continue working towards building a business and regulatory environment which is conducive to manufacturing. This would require systemic changes in the form of simpler, transparent and consistent laws and effective dispute resolution mechanisms.