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)
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