Switching off the Sun? The India-US Solar Cells Dispute

19th Jan 2015 Global-Trade, Sustainability

Introduction : India-US Solar Cells Dispute

The US has initiated action before the WTO against India, alleging that the measures concerning domestic content requirements under the Jawaharlal Nehru National Solar Mission (NSM) for solar cells and solar modules are discriminatory in nature. The US is contending that the measures in question accord less favourable treatment to imported products in comparison to like products of domestic origin. Other countries such as Japan have also joined in the consultations as they have ‘substantial trade interest’ in the dispute. The outcome of this dispute can have far-reaching ramifications for both advanced and developing countries.

This action has created a stir among the environmental groups in the US whereby they have expressed that the US should not discourage emerging economies, such as India, from creating an optimal environment for use of renewable energy. They are arguing that India’s renewable energy endeavours can have long-term positive effects on the battle against climate change. As India is gearing up for the Global Renewable Energy Investment Promotion Meet in February, 2015, a first ever initiative from the Government of India (GOI) to encourage investment in the renewable energy sector, such actions against India before the WTO forum, can have adverse implications on its clean energy drive.

Background to the WTO Dispute

On 6 February, 2013 and 10 February, 2014, the US requested consultations with India regarding certain domestic content requirements contained in ‘Phase I’ and ‘Phase II’ of the Jawaharlal Nehru National Solar Mission (NSM). However, these consultations did not resolve the dispute. Hence, on 14 April, 2014, the US requested for the establishment of a panel and subsequently, the panel was established on 23 May, 2014. Several countries such as Brazil, Canada, China, Chinese Taipei, Ecuador, the European Union (EU), Japan, Korea, Malaysia, Norway, Russia, Saudi Arabia and Turkey reserved their third party rights. Following the agreement of the parties, the panel was composed on 24 September 2014.

US’s Position

According to the US, India’s domestic content requirements violate the national treatment principle, as enshrined under Article III of the General Agreement on Tariffs and Trade (GATT), as the solar power developers, or their successors are contractually-bound to purchase or use solar cells or solar modules of domestic origin in order to enter into and maintain certain power purchase agreements under Phase I or Phase II of the NSM. As these measures adopted by India accord less favorable treatment to imported products than to like products of national origin, they are inconsistent with Article III of the GATT.

Further, the US is contending that the measures in question are also inconsistent with Article 2.1 of the Agreement on Trade-related Investment Measures (TRIMs Agreement) as they are investment measures related to trade in goods that are in contravention of the national treatment principle under the GATT. Paragraph 1(a) of the Illustrative List, contained in the Annex to the TRIMs Agreement, provides that TRIMs, which require the purchase or use by an enterprise of products of domestic origin or from any domestic source, are inconsistent with the national treatment obligation.

The US has also invoked Articles 3.1(b) and 3.2 of the Subsidies and Countervailing Measures (SCM) Agreement as these measures allegedly provide a subsidy contingent upon the use of domestic over imported goods. Further, Articles 5(c), 6.3(a), and 6.3(c) of the SCM Agreement have been invoked as these measures allegedly affect the interests of the United States prejudicially through displacement or impedance of imports of U.S. solar cells and solar modules into India and through lost sales of U.S. solar cells and solar modules in India. Moreover, according to the US, India has failed to comply with Article 25 of the SCM Agreement allegedly as it did not notify the measures in the appropriate manner.

India’s Possible Response

India might argue that as the domestic content requirements of the NSM Program are overseen by the NTPC Vidyut Vyapar Nigam Limited or the Solar Energy Corporation of India, which are governmental agencies, for the purpose of government procurement, these measures are beyond the purview of the WTO framework. Article III:8 of the GATT provides that the national treatment obligation shall not be applicable to laws, regulations or requirements governing the procurement by governmental agencies, of products purchased for governmental purposes, as long as the program is not undertaken with a view to ‘commercial resale’.

In the Canada-Certain Measures Affecting the Renewable Energy Generation Sector (Canada-RE) dispute, Japan had initiated action against Canada’s measures relating to domestic content requirements in the feed-in tariff program (FIT Program). The Panel found that Canada had not established that it was entitled to rely upon Article III:8 of the GATT as the procurement of electricity under the FIT Programme was undertaken ‘with a view to commercial resale’. Further, the Panel found that the measures in question fell within the scope of paragraph 1(a) of the Illustrative List.  The Panel thereby concluded that Japan had demonstrated that the challenged measures were inconsistent with Canada’s obligations under Article 2.1 of the TRIMs Agreement and Article III:4 of the GATT.

The Appellate Body (AB) reversed the Panel’s findings that the Minimum Required Domestic Content Levels (DCR) of the FIT Program were laws, regulations, or requirements governing government procurement within the meaning of Article III:8 of the GATT and found that the DCR did not meet the conditions of derogation under Article III:8 of the GATT. According to the AB, the FIT Program and its related contracts were not covered under Article III:8 and hence, the Panel’s findings were upheld.

Therefore, India might need to establish that its domestic content requirement measures meet the conditions of derogation under Article III:8 of the GATT to effectively counter US’s contentions. It may be added that even though the WTO does not have an explicit culture ofstare decisis, there has been an emergence of de-facto stare decisis. Thus, the outcome of theCanada-RE dispute may hold precedential value in the ongoing dispute.

Implications of this Dispute

As per Article 10 of the Understanding on Rules and Procedures Governing the Settlement of Disputes (DSU), when a party reserves its third party rights, it essentially entitles that party to make written submissions to the panel and receive submissions of the parties to the dispute till the first meeting of the panel. These submissions are provided to the parties to the dispute and are also reflected on the panel report. The third parties should display a ‘substantial interest’ in the dispute in question.

In this case, developing countries such as Brazil, China, Ecuador, Malaysia and Turkey have reserved their third party rights along with advanced economies such as Canada and Japan. These economies can either be directly or indirectly affected by the outcome of this dispute. For example, Japan in its communication to join the dispute consultations, claims that as one of the world’s largest producers of solar thin film, which is covered by the domestic content requirements under Phase II of the NSM, it has a ‘substantial trade interest’ in the dispute.

Japan also conveyed that as a major supplier of solar power generation equipment to the world, it indirectly had a ‘substantial interest’ in the dispute, as is also evident from its role as the complainant in the Canada-RE dispute. Further, some of these third parties might be affected indirectly if they have domestic content requirements of their own in various forms. Hence, the WTO ruling has the potential to affect trade in the renewable energy sector globally.

Moreover, if the ruling goes in favour of the US and against India, it can spark a north-south divide with respect to climate justice actions. The US government is strongly defending its action before the WTO by stating that it supports the deployment of clean energy technologies all across the world, including India.  However, if a country’s clean energy initiatives adversely affect the US manufacturers and workers, whereby there is a rise in the cost of clean energy, it would result in the undermining of the shared vision with regard to promotion of use of renewable energy.

However, the very reason the domestic content requirements have been incorporated in the NSM is so that the domestic solar manufacturing sector is stimulated towards development in the entire value chain. Often, such measures are incorporated in the policies by those nations who wish to push for economic growth in their domestic industry, bolster indigenous capacities and create opportunities for employment. Hence, a ruling in favour of India will serve as a great encouragement to emerging economies such as India which wish to reduce the dependence on fossil fuels and increase the use of renewable energy, and at the same time create a sustainable industry.

Conclusion

In the run up to the first-of-its-kind Global Renewable Energy Investment Promotion Meet in February, 2015, where the Ministry of New and Renewable Energy, GOI, will be launching a platform to facilitate renewable energy stakeholders, and investors, both domestic and international, to connect with each other, the ongoing solar cells dispute against India, before the WTO, might pose as a dampener. However, India is not only getting ready to defend its renewable energy policies before the WTO but is also preparing to host a meet in order to project India as an ideal destination for investment with regard to the renewable energy sector. The conflict between trade and environment has been a long-drawn one, and with the ongoing dispute, several issues relating to trade-distorting effects of domestic content requirements, domestic policies of government procurement vis-à-vis national treatment obligations, and very significantly, the question of development and trade in the context of global efforts to combat climate change, might be addressed in a manner which would assist the interested economies in building their renewables industry more efficaciously, in line with the multilateral trading rules.

 

The author is a  junior researcher at Oval Observer Foundation. The views presented in this article do not reflect the views of the Foundation, its partners and affiliates.