WTO Appellate Body Rules Against Use of Domestic Content Requirements in US-India Solar Case

22 September 2016

The WTO’s highest court has released its final report in the US dispute against India’s use of domestic content requirements in the Jawaharlal Nehru National Solar Mission (NSM), disagreeing with the points raised in New Delhi’s appeal of an earlier panel ruling.

The 16 September ruling by the Appellate Body comes over three years after the US initially requested consultations with India on the subject. (See Bridges Weekly, 13 February 2013)

The original dispute panel had released its findings the past February, deeming that these domestic content requirements violated the WTO’s “national treatment” requirement under both the General Agreement on Tariffs and Trade (GATT) and the Agreement on Trade-Related Investment Measures (TRIMs). (See Bridges Weekly, 3 March 2016)

Energy, development objectives

India launched its National Solar Mission six years ago, pledging to scale up its grid-connected solar power capacity to reach 20,000 megawatts by 2022. This objective was later revised upward to 100,000 megawatts.

Since its inception, the mission has been rolled out in various phases, with the solar power developers participating in the NSM during the years 2010-2014 required to use domestically-produced modules and cells – though some exceptions for foreign inputs were made in the earlier stages.

However, the NSM did not extend domestic content requirements to the entire spectrum of planned project capacity. In the second phase of the Mission (2013-17), for example, only 50 percent of 750 MW was designated for the domestic content requirement category.

Under the NSM, the Indian government would enter into purchase agreements with these producers, buying electricity at a guaranteed rate. These deals would be in place for 25-year periods. From there, the government would then sell the power to distributors, who ultimately sell to consumers.

“The objective of the National Solar Mission is 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,” said the Indian Ministry of New and Renewable Energy when the scheme was launched.

Along with its benefits on an international scale, the country’s officials also noted the domestic gains that such a scheme could entail. Manmohan Singh, who served as India’s prime minister at the time, touted the NSM’s value for the country’s rural population. Not only would they gain access to energy, he said, but this same energy could help power essential lighting and water systems for these communities.

“Already, in its decentralised and distributed applications, solar energy is beginning to light the lives of tens of millions of India’s energy-poor citizens,” he said at the time.

Narendra Modi, who succeeded Singh in office, has similarly made the deployment of solar energy a policy priority, particularly for those areas currently lacking access to electricity. More recently, India and France announced at last year’s UN climate talks in Paris that they were launching an International Solar Energy Alliance, with the goal of helping developing countries scale up their solar energy capabilities. (See Bridges Weekly, 22 May 2014)

US officials have repeatedly stated since the dispute began that they welcome New Delhi’s efforts to build their renewable energy sector, and that their issue is mainly about the policy’s design and how it allegedly prioritised domestic content manufacturers over their foreign equivalents.

“We strongly support the rapid deployment of solar energy worldwide, including in India,” said US Trade Representative Michael Froman following the release of the report.

The US trade chief reiterated that Washington’s complaint was specific to the use of domestic content requirements – both in terms of their legality, along with concerns over whether these might make the process of scaling up the use of clean energy sources more difficult, given that such measures would prioritise equipment that is more costly and less efficient.

Government procurement

Both the original dispute panel and the Appellate Body focused their analysis on the policy’s design and whether it gave national producers an illegal edge over their foreign counterparts, and did not question the legitimacy of the claimed policy goal.

One of the two overarching issues reviewed by the Appellate Body was whether the exemption on government procurement under GATT Article III:8(a) can be extended to cover discrimination relating to inputs and production processes used in products procured by the government –in this case, electricity.

The Appellate Body said that the products under this “government procurement derogation” must be in competition with the foreign product actually being discriminated against. In other words, the WTO judges said that the electricity being purchased by the Indian government is not in direct competition with foreign-made solar cells and modules – meaning that it does not qualify for the exemption.

Among other issues, India had also argued in its appeal that the previous panel should have found that purchasing the electricity produced by solar modules and cells was tantamount to government procurement of the modules and cells themselves. The Appellate Body agreed with the panel on this subject, however.  

Supply scarcity, fulfilling other legal obligations

The other main issue appealed by India was with whether two of the exceptions included in GATT Article XX would also justify the use of these domestic content requirements.

GATT Article XX allows WTO members to use measures that would otherwise violate international trade laws, in order to meet certain public policy objectives. However, these measures must not be “disguised” trade restrictions or cause “arbitrary or unjustifiable discrimination” between members.

This article cites a range of possible public policy objectives that could fall under this category, such as those policies aimed at the conservation of natural resources or for protecting public morals.

The two Article XX defences cited by India in its appeal were Articles XX(d) and (j). The former allows for using measures needed to fulfil other laws or regulations, so long as these are not in violation of GATT provisions. The latter permits measures essential for either acquiring or distributing products facing supply scarcity, under certain conditions.

In its appeal, India argued that it does not have the manufacturing capacity to produce the level of solar modules and cells needed to meet demand, and that it is currently facing a supply shortage in these products. However, the Appellate Body said that whether the availability of a particular product is enough to meet demand cannot be determined just by looking at local sources. It would also need to consider other relevant factors, including both domestic and international supply.  

Citing Article XX(d), India had also argued that its obligations under various domestic and international laws or instruments necessitated the use of these domestic content requirements.

On the domestic side, India named its National Electricity Policy, National Electricity Plan, and the National Action Plan on climate change. However, the Appellate Body agreed with the panel that the language in all three of these examples is “hortatory, aspirational, declaratory, and at times solely descriptive” – meaning that these  appear to be non-binding, and lack a “sufficient degree of normativity and specificity” to qualify as “laws and regulations” under Article XX(d).

The Appellate Body added that even the language within the Electricity Act requiring authorities to put together the other two national instruments does not clearly give those other instruments a more normative nature. Ultimately, the WTO judges said that it was not clear how these domestic instruments, either read separately or jointly, could be interpreted as establishing actual, binding rules aimed at tackling problems of energy security while ensuring “ecologically sustainable growth,” as India had argued.

On the international side, India identified the preamble of the WTO Agreement, which includes a specific reference to the need for using resources in a way that best meets the “objective of sustainable development.” India also cited the UN Framework Convention on Climate Change (UNFCCC), the 1992 Rio Declaration on Environment and Development, as well as the Rio+20 document on “The Future We Want” issued in 2012.

Agreeing with the original panel, the WTO’s Appellate Body said that India ultimately did not prove that these international policies meet the standard of “laws or regulations” set out in Article XX(d). More specifically, the Appellate Body noted that India would need to take steps that incorporate these international instruments into its domestic legal system – therefore those international obligations do not have “direct effect” in India.

Adapting to the outcome

Under WTO rules, if India is unable to immediately bring the relevant measures into compliance, a reasonable period of time will be set for doing so.

Should Washington and New Delhi disagree afterward as to whether these changes are sufficient to bring the measures in line with global trade rules, they can then ask for India’s compliance to be assessed by a panel – and, if necessary, the Appellate Body.

Some Indian power developers have told local press outlets that the Appellate Body’s findings were largely expected, and that they have already been making the necessary preparations to adjust for a change in government policy.

For example, some producers suggest that the Indian government could instead procure solar cells and modules directly from local producers – rather than buying the electricity generated from these inputs. Doing so, IndoSolar Managing Director H.R. Gupta told the Economic Times, could be a way to address the issues at hand.

Since India is not a party to the WTO’s Government Procurement Agreement (GPA), the plurilateral accord which governs public contracts, some experts suggest this could help shield direct Indian government procurement of solar cells and modules, whether under federal or state schemes for installations such as the railway and defence establishments, from additional challenges.

Welcoming the Appellate Body decision, one Indian private sector source told Bridges that developers were always looking for the best quality product at the lowest prices – and that domestic manufacturers could likely meet this supply in the long term, should the country manage to build its own manufacturing capacity to the necessary standard.

However, the source noted that achieving this goal would require addressing the related constraints, which would require time – therefore imports would inevitably be needed over the next several years to meet the Indian government’s ambitious solar targets. He stated that while the Appellate Body decision was positive, Indian solar power developers have not been significantly impacted by the domestic content requirements given its limited scope under the NSM.

The Appellate Body’s ruling was more significant, he suggested, in upholding the principle that domestic content requirements, however limited in scope, are a well-recognised non-tariff barrier that is clearly WTO-inconsistent.

Some industry watchers also suggest that these domestic content requirements may be more impactful in the government procurement market, where they would not face any project caps and could be better shielded from WTO challenges. However, they caution that this would also depend on the extent to which domestic manufacturing capacity grows. With a likely view to cornering a piece of this lucrative future market, India has lately seen an increasing number of small and large firms – including foreign ones – entering or considering joining the solar manufacturing space.

According to many experts, domestic content requirements could be counter-productive to speedy attainment of climate objectives if these lead to increased costs of equipment used as inputs in clean energy expansion.

In this regard, they note that the Appellate Body ruling was in no way a judgement against the host of other climate policy measures that could be pursued under the Paris Agreement on climate change, including incentives for clean power generation that do not create obstacles to global diffusion of clean energy.

ICTSD reporting; “Solar manufacturers at ease over WTO ruling upholding US complaint against India,” THE ECONOMIC TIMES, 19 September 2016; “India's $100 billion solar push draws foreign firms as locals take backseat,” REUTERS, 2 July 2015; “WTO rules against India's domestic content requirements in solar power,” DOWNTOEARTH, 2 September 2016.

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