Insights into Issues: WTO Dispute – Domestic Content Requirement
The World Trade Organization’s Appellate Body has declared domestic content requirement (DCRs) in India’s Jawaharlal Nehru National Solar Mission (JNNSM) as illegal. Last year in Aug 2015, the WTO disputes panel also ruled that India’s subsidies for solar power contravene WTO trade rules and India must remove the subsidies or face trade sanction.
United States filed the WTO complaint in 2013. The US alleged that India’s subsidies for the JNNSM discriminates against foreign suppliers of solar component. The primary point of conflict is with regards to government entering into long term electricity purchase contract with eligible solar power developers (SPDs), assuring them guaranteed prices for 25 years. This government procured electricity is then sold to distribution companies who, in turn, sell it to consumers. However only those SPDs who source certain types of solar cells and modules domestically are eligible.
- In Phase 1 of NSM, the DCRs only covered solar cells and modules. From the US standpoint, this was bearable as US companies export few solar cells and solar modules to India.
- But in phase II to NSM, India extended the DCRs to thin film technologies that have traditionally dominated the Indian market
- A similar ruling was passed in 2013 when Canada had launched a similar effort to encourage the growth of solar power. Japan and EU objected to the local content requirement that Canada had manadated
- Ironically, the US itself provides subsidies for renewable. Over the past 5 years, federal subsidies for renewable energy have averaged 39bn$ a year.
- Domestic Content Requirement are part of many state and federal projects in the US. India had called attention to DCRs attached to renewable energy programmes in Michigan, Texas and California.
- Additionally, US also protects its own solar sector – it has imposed tariffs against Chinese solar products
Impact of the verdict on India:
- India has said that it will ratify the Paris Climate Deal on 2nd Under the treaty, India has committed to 30% of its energy requirements being met through renewables by 2030. By 2022, India plans to have 100GW of installed solar capacity. The domestic manufacturers are yet to establish their competitiveness vis a vis the imported solar panels and modules. The specification of DCR was built in to provide support to this nascent industry so that India would be able to fulfill the targets for renewable it had set out to achieve. This now seems problematic. However Ministry of New and Renewable Energy has indicated that it is willing to replace the DCR measures with subsidies to safeguard solar manufacturing
- India had claimed that the DCR should not be countered as it is a government procurement programme which fall under Article III.8 of GATT that renders rules against discrimination inapplicable to government procurement. This was the argument given by India’s Chief Economic Advisor Arvind Subhramaniam
- The WTO ruling signals once again that neoliberalism favours trade over environment protection. The measure of India was to promote green energy. India has also taken the lead in establishing International Solar Alliance which focuses on exploiting the potential of solar power for fulfilling energy needs
Legal Rationale at the WTO
- Indi argued that its DCR measures should be excused because they fall under three exceptions
- First is the Article III.8 of GATT. The Appellate body rejected it by citing the WTO jurisprudence in case of Canada, which ruled that for a measure to fall under Article III.8 of GATT, it should be in a competitive relationship with the product being discriminated against. Since the government procured electricity while the discrimination was against solar panels, the test of competitive relationship is not satisfied
- The second exception India sought was under Article XX(j) of GATT that allows a country to adopt measures essential to acquisition or distribution of products in general or local “short supply”. India argued that since the domestic production of solar modules is limited, these products are in “short supply”. The Appellate body disagreed stating that to decide whether a product is in short supply or not, need to look at all supply sources and not just domestic supply
- The third is under Article XX(d), which allows countries to adopt measures necessary to secure compliance with laws or regulations that are not inconsistent with GATT. India however failed to show a domestic law or international legal norm with direct application in India, compliance with which necessitated the DCR
Why India needs US support for achieving its objectives under JNNSM:
- India has not gone on to file a complaint against subsidies for renewable in the US. Nor has it applied anti dumping complaint against US for selling solar materials in India below cost
- Experts believe that is because of PM’s goal of expanding India’s reliance on renewable is achievable and will require around 100bn$ in new investment. US is providing support to India through its PACE programme.
- It is believed that more than half of the required 100bn$ is going to come from overseas, specifically US. Thus action against US may antagonize the very source of funding.
Does the ruling hamper India’s chances of expanding renewable energy:
- While the ruling does tie down government hand in promoting the domestic solar panel manufacturers and is another instance where WTO has favoured a developed country, the ruling per se would not impact India’s clean energy objectives.
- Because Indian manufacturing of solar panels etc has not developed fully, those installing solar plants prefer to purchase foreign content which is cheaper and subsidized
- The government can continue with JNNSM by allowing the SPDs the free choice to either import solar cells and modules or buy from domestic industry