India lost an appeal on Friday against a World Trade Organisation (WTO) ruling that it has violated global trade rules by discriminating against foreign products in imposing a “domestic content requirement (DCR)” on Indian solar power developers.
The Appellate Body (AB) upheld an earlier ruling by a dispute settlement panel at the WTO that local content requirements imposed on solar power developers violated rules under the General Agreement on Tariffs and Trade (GATT) 1994 and the WTO’s Agreement on Trade-Related Investment Measures (TRIMs).
The US had lodged a complaint with the WTO in February 2013 asking for consultations after India had made it mandatory for its solar power developers selling electricity to the government under the National Solar Mission (NSM) to use certain types of solar cells and modules that were made in India. This, the US complained, was discriminatory towards American products.
A year after registering its complaint, Washington requested for supplementary consultations concerning certain measures relating to DCR under “Phase II” of the NSM.
The matter was taken to the dispute settlement body (DSB) in April 2014 on US’ request to look into its claims after consultations between the disputing parties failed. The DSB panel arrived at a ruling in November 2015 but the findings were circulated to WTO members on 24 February, 2016 after a request from the concerned parties that they were continuing discussions relating to the dispute.
The DSB ruling stated that India’s DCR measures are inconsistent with the national treatment obligations under Article III:4 of GATT 1994, Article 2.1 of the TRIMs agreement and certain requirements under the agreement on Subsidies and Countervailing Measures (SCM).
National treatment obligations of Article III:4 of GATT requires that imported products cannot be discriminated against (“accorded treatment no less favourable”) vis-à-vis like local products in matters of all laws, regulations and requirements “affecting their internal sale, offering for sale, purchase, transportation, distribution or use”.
Article 2.1 of TRIMs stipulates that no WTO member state will undertake any investment measure related to trade that is “inconsistent” with provisions of Article III or Article XI of GATT 1994.
India had argued that it was "effectively procuring" solar cells and modules by purchasing electricity generated from such cells and modules and, therefore, claimed exemption under the government procurement derogation provision in Article III:8(a) of the GATT 1994. This provision allows countries to ignore national treatment obligations if government agencies procure products for government purposes and not commercial resale.
Additionally, India argued that it lacks the capacity for domestic manufacturing of solar cells and modules leading to a general and local situation of short supply of such products and, thus, DCR measures are essential for addressing this short supply.
India also took the ground that such measures were essential for combating climate change and ensuring sustainable development referring to article XX(d) of GATT -- that it had “an obligation to take steps to achieve energy security, mitigate climate change, and achieve sustainable development, and that this includes steps to ensure the adequate supply of clean electricity, generated form solar power, at reasonable prices”.
The US, among other arguments, had told the trade judges that the “the product procured (electricity) is not in a competitive relationship with the product being discriminated against (solar cells and modules), and, therefore, New Delhi cannot claim exemption under the government procurement derogation provision of GATT."
Brazil, Canada, China; the EU, Japan, Korea, Malaysia, Norway, Russian, Turkey, Ecuador, Saudi Arabia and Taipei had requested third party rights to the dispute.
The WTO panelists dismissed India’s short-supply argument and the government-procurement-derogation claim. The DSB panel cited an earlier AB ruling in a case involving Canadian feed-in tariff program for renewable energy. In the Canada – Renewable Energy / Canada – Feed-in Tariff Program dispute, the AB concluded that derogation extends to products in a 'competitive relationship', and rejected India's claim on the ground that 'electricity' and 'generation equipment' are not in such a relationship. Thus, in this context DCR measures for solar cells and modules was discriminatory against imported solar cells.
It agreed with the US that such measures were inconsistent both with article III:8(a) of the GATT and article 2.1 of TRIMs.
Finally, the ruling said that India had failed to demonstrate that the challenged measures are justified under articles XX (j) and (d) of GATT 1994 because they were essential to the acquisition or distribution of products in general or local short supply.
New Delhi appealed to the highest international trade court against the panel’s ruling on 20 April stating that the DSB panel had erred in its conclusion that discrimination related to solar cells and modules through the Indian DCR measures was not covered by derogation measures under article III:8 (a) of GATT 1994. It also disagreed with the panel’s views that DCR measures are not justified under the general exception in articles XX (j) and (d) of GATT 1994.
The WTO’s appeals judges agreed with the DSB ruling and rejected India’s arguments. The AB upheld the panel's finding that solar cells and modules are not "products in general or local short supply" in India. An assessment of whether products are in short supply or not should not focus exclusively on availability of supply from domestic sources—the assessment should take into account available supply from domestic as well as international sources and whether this meets the demand in the market.
The assessment should also consider other relevant factors, including the availability of imports, the level of domestic production, potential price fluctuations in the relevant market, and the purchasing power of foreign and domestic consumers, the AB stated.
The adjudicative body also dismissed India’s claims and upheld the panel’s ruling that the DCR measures were not necessary to ensure ecologically sustainable growth, and meeting India’s obligations relating to climate change, as set out in four international instruments and four domestic instruments.
It stated that the relevant texts of the domestic instruments do not specify a "rule" to ensure ecologically sustainable growth, as argued by India, nor could India demonstrate that the international instruments identified fall within the scope of "laws or regulations" under article XX(d) of GATT.
“The report is a clear victory for American solar manufacturers and workers, and another step forward in the fight against climate change,” said US Trade Representative Michael Froman in a statement.
Since India brought in the DCR rules American solar exports to India have fallen by more than 90 percent, Froman added.
The appeals ruling is final and India will now have to bring its laws in compliance with WTO rules.
The ruling will be formally adopted by WTO members within the next 30 days after which the disputing countries will decide the time frame within which New Delhi has to comply with the ruling. In case of a disagreement on the matter, the WTO director-general will step in to make a decision.
After India complies with the ruling it has to notify the WTO. The US has to be satisfied with India’s notification of compliance. In case, Washington does not believe that India has complied then it could initiate compliance proceedings to challenge India’s claim. In such a scenario, a panel would be set up again to review US’ claims. If the compliance panel rules that India has not complied then it could open the way for the US to request the WTO for authorization to retaliate, like it has done in the ongoing America-initiated poultry case against India.
India registered a similar complaint against the US on 9 September by requesting WTO for consultation regarding DCR and subsidies provided by the American government to the eight states of Washington, California, Montana, Massachusetts, Connecticut, Michigan, Delaware and Minnesota in the renewable energy sector.
India has argued that the American DCR measures are inconsistent with TRIMs and SCM agreement because they discriminate against domestic products, also because the subsidies are contingent on using domestic over imported products.
If consultations fail, India could request WTO to set up a DSB panel and the same process could start against America.
It is unclear, however, why New Delhi took three years to register a complaint against the US if the country had similar DCR measures in the renewable energy sector as India. It may have been a negotiating advantage for India to have done this earlier when the dispute was evolving.