A case for accepting the WTO ruling

Updated - November 01, 2016 09:21 pm IST

Published - September 28, 2016 12:34 am IST

Compliance will be in India’s interest because mandatory domestic sourcing irrespective of costs might make solar power generation unfeasible.

The World Trade Organisation’s (WTO) Appellate Body has declared certain domestic content requirements (DCRs) in India’s Jawaharlal Nehru National Solar Mission (JNNSM) illegal. Under JNNSM, whose goal is to make India “a global leader in solar energy”, the government enters into long-term electricity purchase contracts with eligible solar power developers (SPDs), assuring them guaranteed prices for 25 years. This government-procured electricity is then sold to distribution companies who, in turn, sell it to consumers. However, only those SPDs who source certain types of solar cells and modules domestically are eligible. The objective evidently is to favour domestic solar cells and modules over imported ones. It was this DCR measure that the U.S. challenged in the WTO. There are three dimensions in this case that need a closer look: the legal issues, environmental impact, and India-U.S. trade relations.

Legal issues

Subject to limited exceptions, the WTO treaty prohibits countries from discriminating against goods based on origin or destination. This core non-discrimination commitment is given effect through several legal provisions, including the one that outlaws domestic laws that make it necessary for an enterprise to purchase or use products of domestic origin to obtain an advantage. According to the Appellate Body, India’s DCR measure in JNNSM violates this rule and the general prohibition against discrimination between imported and domestic products.

India argued that its DCR measures should be excused because they fall under three exceptions. The first is under Article III.8 of the General Agreement on Tariffs and Trade (GATT) that renders the rule against discrimination inapplicable to government procurement. The Appellate Body rejected this. Relying on the previous WTO jurisprudence in Canada, the Renewable Energy/Canada — Feed-in Tariff Programme case, it held that for a measure to fall under Article III.8, the product procured should be in a competitive relationship with the product being discriminated against. Since the government procured electricity while the discrimination was against solar panels, this test of competitive relationship is not satisfied.

The second is under Article XX(j) of GATT that allows a country to adopt measures ‘essential’ to the acquisition or distribution of products in general or local ‘short supply’. India argued that since the domestic production of solar modules is limited, these products are in ‘short supply’. The Appellate Body disagreed and held that whether a product is in ‘short supply’ has to be determined by looking at supply from all sources, not just domestic. On this basis, the Appellate Body said there is no shortage of supply of solar panels.

The third is under Article XX(d), which allows countries to adopt measures ‘necessary to secure compliance with laws or regulations’ that are not inconsistent with GATT. However, India failed to show a domestic law or an international legal norm with direct application in India, compliance with which necessitated the DCR.

Environmental impact

Two questions are pertinent here. First, does this ruling stifle India’s efforts to move towards clean energy? No, because the ruling is not against JNNSM but only against use of DCR measures. So, the government can continue with JNNSM by allowing the SPDs the free choice to either import solar cells and modules or buy from domestic industry.

Second, does this ruling reflect WTO’s bias towards free trade over environment? No, because Article XX of GATT clearly recognises a country’s sovereign right to regulate not just for environmental objectives but also for health, public morals, and so on. However, the WTO treaty limits the policy choices available to WTO members as to how to achieve these goals. The fundamental principle is that inequitable costs of pursuing these goals should not be unilaterally transferred to other WTO member countries. So, for example, if multiple options are available to achieve an environmental purpose, the least trade restrictive one that is reasonably available to the state must be chosen. Similarly, to pursue environmental objectives, a country cannot adopt measures that result in arbitrary or unjustified discrimination or constitute disguised restriction on trade.

India-U.S. trade relations

Today, India-U.S. trade stands at over $100 billion annually. Both countries aspire to increase this to $500 billion by “breaking down barriers to movement of goods and services”, as stated in the India-U.S. Joint Statement of June 2016. However, the solar panel case paints the opposite picture where new barriers are being erected. In fact, it is not just this dispute. Currently, in four ongoing disputes at the WTO, the two countries accuse each other of raising trade barriers.

One, India has recently, similar to the US challenge, filed a case against the U.S. at the WTO challenging the DCRs and subsidies provided by eight U.S. states in the renewable energy sector. India should have done this when the U.S. challenged India’s DCR measures in 2013. That might have given India some scope to negotiate for a bilateral settlement. Two, in March this year, India filed a case against the U.S. for its alleged violation of its WTO commitments by imposing increased fees on certain applicants for L-1 and H-1B categories of non-immigrant visas. Three, the U.S. has requested the WTO to allow it to suspend concessions to the tune of $450 million annually against India for India’s alleged failure to comply with the WTO ruling in the poultry case. India’s ban on imports of poultry products from the U.S. on concerns related to Avian influenza was held illegal by the WTO in 2015. Four, in another 2014 case related to imposing countervailing duty measures by the U.S. on certain hot rolled carbon steel flat products from India, India accuses the U.S. for not complying with the WTO ruling yet.

The solar panel case is a sober reminder that India should not pursue protectionist measures outlawed by the WTO under the garb of pursuing clean energy goals. India should comply with this ruling. Else, under WTO law, the U.S. will erect new trade barriers against India. Compliance will be in India’s interest because mandatory domestic sourcing irrespective of costs might make solar power generation unfeasible, thus impairing India’s own objective. India should not commit the mistake of replacing the illegal DCR measures with WTO-prohibited subsidies to safeguard solar manufacturing, as the Ministry of New and Renewable Energy has indicated, because these subsidies might trigger more WTO cases against India. Interests of domestic solar companies need to be divorced from clean energy goals.

Prabhash Ranjan is an assistant professor of law at the South Asian University. Views are personal.

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