US to initiate WTO action against India’s ‘Domestic Content Requirement’ in Solar Mission

In a recent move, United States has sought to initiate World Trade Organisation (“WTO”) dispute settlement consultations with India concerning ‘domestic content requirement’ (“DCR”) in Phase-II of India’s national solar mission. This is the second time when US has initiated WTO action against India’s Jawaharlal Nehru National Solar Mission – the first action was brought in February 2013 against similar DCR in Phase-I of Jawaharlal Nehru National Solar Mission (“JNNSM”).

In a statement issued by the Office of United States Trade Representative (“USTR”), it has been contended that DCR under JNNSM is against the obligations contemplated under General Agreement on Trade and Tariffs, 1994 (“GATT”), Agreement on Trade Related Investment Measures (“TRIMs”) and Agreement on Subsidies and Countervailing Measures (“SCM”). Under WTO dispute settlement mechanism, consultation is the initial step which a member state can resorts to.

In this blog post, I have explained what DCR or domestic/local content requirements are, relevant description of JNNSM and relevant WTO provisions concerning the present case.

What is ‘Domestic’ or ‘Local’ Content Requirement?

‘Local Content Requirement’ can be understood as a regulation that requires a specified fraction of a final good, work or service to be sourced domestically. Article 7.2 of EU-Singapore Free Trade Agreement defines the phrase as a requirement for an enterprise to purchase or use goods of domestic origin. In other words, where a state imposes an obligation to have ‘local content’ in product or service, producers (both domestic and international) would mandatorily be required to source specified quantity of local content.

However, in a statement published by USTR, local content requirement or DCR has been described as the obligation to produce content locally. It has been described in the following terms:

“ ........require businesses to produce a certain level of content (materials, parts, etc.) within the country where the end product will be sold.”

The above description, as provided by USTR, has been doubted in a blog post. For the purpose of present dispute, DCR should be understood as a condition which requires developers to use specified quantity of domestically manufactured content.

Though the objective of DCR may vary, it is generally accepted that DCR measures seek to encourage domestic industry and further seek to increase employment. In fields such as solar energy, initial governmental support is required for the existence of firms and development of proper infrastructure. Usually, the government support is also required for the innovation at domestic level. Equally forceful arguments are available against the usage of measures such as DCR – one of them being that DCR increases the cost of solar energy.  

The usage of DCR measures vary from country to country depending on factors such as but not limited to technology, infrastructure, financial stability etc.

Jawaharlal Nehru National Solar Mission (JNNSM) and Domestic Content Requirement

As mentioned in the mission document of JNNSM, the mission seeks to promote ‘ecologically sustainable growth while address India’s energy security challenge’. Implementation of JNNSM has been divided into three phases - first phase upto 2012-13, second phase from 2013 to 2017 and the third phase from 2017 to 2022. For the purpose of present dispute, it is second phase that appears to be relevant.

For the implementation of first phase (Batch-II), guidelines document stipulated that developers are expected to procure their components from domestic manufacture. The reason for this was simple – promotion of domestic manufacturing. In fact, it was mandatory for project developers to ensure the presence of ‘30% of local content’ in all plants/installations. In pursuance of this, the project developer was required to specify their plan of meeting the requirement of local content under Solar Thermal Technology.

The policy document for JNNSM (Phase-II) mentions six possible ways to operationalise the domestic content requirement (“DCR”). Interestingly, one of the mentioned options envisages to have even ‘100% domestic content requirement’ for some batches. The original Request for Selection (“RfS”) document, issued by Solar Energy Corporation of India in October, 2014, provides that bidders can apply for project either under Part-A or under Part-B. For projects to be implemented under Part-A, both the solar cells and modules used in the Solar Power Projects must be made in India. This condition stipulated under DCR clause was later amended in January, 2014 (“second set of amendments”), thus relaxing the local content requirement to a certain extent. Under the amended clause, along with ‘other’ raw materials, P-type or N-type wafers [in case of crystalline Silicon (“CSi”) Technology] and starting substrate (in case of thin film technology) was allowed to be imported. (Note: DCR clause was not amended in ‘first set of amendments’).

Before the release of second set of amendments, a clarification document for RfS was also issued. Through this document, it was clarified that importion of cells was not allowed even if a developer, after putting all efforts, is not able to procure them domestically. Further, in revised draft guidelines issued for the implementation of Phase-II (Batch I) of JNNSM, it has been mentioned that ‘out of the total capacity of 750 MW under Batch-I Phase-II, a capacity of 375 MW will be kept for bidding with Domestic Content Requirement (DCR)'.

During the implementation of phase-I, developers ‘were allowed to import PV Modules made from thin film technologies or concentrator PV cells’. Contrary to this, under Phase-II, it has been stipulated that the ‘entire Modules assembly comprising Thin-film Solar Cells shall be manufactured in India’ (see: ‘second set of amendments’). In a research paper published by International Centre for Trade and Sustainable Development (“ICTSD”) and authored by Sherry M. Stephenson, it has mentioned how DCR exemption for ‘thin film’ had shifted the solar technology market in India from CSi to thin film. Since no such exemption exists in Phase-II, it has to be seen whether usage of thin-film technology would be equally popular in comparison to CSi technology (in solar energy production, the global market share of thin-film is comparatively lesser than CSi ).

Domestic Content Requirement in JNNSM: Is it in Conflict with WTO Rules?

As mentioned in the statement issued by USTR, it considers DCR/LCR in JNNSM inconsistent with following provision(s):

(i)            Article III, General Agreement on Tariffs and Trade (1994): It obliges state parties to treat imported products of other contracting party no less favourable than that accorded to ‘like products’ of national original. (Clause 4). Further, Article III also prohibits the quantitative restriction requiring the use of domestically sourced materials (Clause 5).

(ii)          Article 2, Agreement on Trade Related Investment Measures: It prohibits the application of a measure which is inconsistent with Article III or Article XI of GATT, 1994.

(iii)         Article 3 and 5, Agreement on Subsidies and Countervailing Measures: While Article 3 prohibits certain kinds of subsidies (e.g., subsidies contingent upon the use of domestic goods over imported goods), Article 5 restrains a member from adversely affecting the interest of other member through the use of subsidies.

In a research paper published by ICTSD, it has been argued that the possible violation of GATT provisions may lie in Article III:4 and Article III:5. The former provision (Article III:4) refers to the ‘treatment’ accorded to the imported products and the latter provision (Article III:5) refers to the requirement to use domestically sourced materials. The application of these provisions is, however, restricted if the impugned action comes within the ambit of Article III:8. The provision (Article III:8) exempts application of both the provisions where, (i) a procurement is made the government for non-commercial purpose, and (ii) certain payment of subsidies exclusively to domestic producers.

It is this exemption under Article III:8 which India may take recourse of while arguing that it has not committed violation of WTO norms. It has been contended that procurement of solar power will essentially be done by the government through NTPC Vidyut Vyapar Nigam and hence no violation of WTO norms. Further, the LCR/DCR in JNNSM has been defended on the ground that it will lead to an increase in domestic manufacturing capacity.

Recently, Canada has lost a WTO dispute wherein its feed-in-tariff (“FIT”) program was challenged by Japan (European Union later joined the dispute). Canada, which required firms to use certain amount of locally manufactured material (for wind and solar projects) to receive government support, could not convince Appellate Body that measures are exempted under Article III:8 of GATT 1994. In the light of this decision, it would have to be seen whether India would be able to succeed in defending its stand on domestic content requirement in JNNSM. (Detailed discussion of ‘Canada — Certain Measures Affecting the Renewable Energy Generation Sector’ is not intended to be done in this blog post)

(I am currently pursing optional course on World Trade Law at National University of Juridical Sciences, Kolkata. I can reached at abhinav.s@nujs.edu)