In a significant ruling last week, a >World Trade Organisation (WTO) panel found that the domestic content requirement imposed under India’s national solar programme is inconsistent with its treaty obligations under the global trading regime. The ruling has been described as yet another instance of archaic trade rules trumping important climate imperatives. However, this criticism is not entirely justified.
Violation of global trading rules
Jay Sanklecha In 2013, the U.S. brought a complaint before the WTO arguing that the domestic content requirement imposed under India’s national solar programme is in violation of the global trading rules. Specifically, it said, >India has violated its “national treatment” obligation by unfavourably discriminating against imported solar cells and modules. In other words, India was discriminating between solar cells and modules which were otherwise identical on the basis of the national ‘origin’ of the cells and modules, a clear violation of its trade commitment. India principally relied on the ‘government procurement’ justification, which permitted countries to derogate from their national treatment obligation provided that the measure was related to “the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale or use in production of goods for commercial sale”. India also argued that the measure was justified under the general exceptions since it was necessary to secure compliance with its domestic and international law obligations relating to ecologically sustainable development and climate change.
The panel, in its 140-page report, examined in detail the submission of the parties and rightly concluded that India, by imposing a mandatory domestic content requirement, had violated its national treatment obligation. In so far as the government procurement derogation was concerned, the panel found that the product being subject to the domestic content requirement was solar cells and modules, but the product that was ultimately procured or purchased by the government was electricity. The domestic content requirement was therefore not an instance of “government procurement”. Finally, the panel found that since India failed to point out any specific obligation having “direct effect in India” or “forming part of its domestic legal system”, which “obligated” India to impose the particular domestic content requirement, the general exception was not available to the Indian government in the instant case.
Use of clean energy The ruling, however, has come under intense criticism, particularly from environmentalists, as undermining India’s efforts towards promoting the use of clean energy. However, there appears to be no rational basis for how mandatory local content requirements contribute towards promoting the use of clean energy. If the objective is to produce more clean energy, then solar power producers should be free to choose energy-generation equipment on the basis of price and quality, irrespective of whether they are manufactured locally or not. In fact, by mandatorily requiring solar power producers to buy locally, the government is imposing an additional cost, usually passed on to the ultimate consumer, for the production of clean energy. The decision may therefore stand to benefit the interest of the ultimate consumer. It is entirely possible to give preferential treatment to clean energies (in the form of tax rebates for solar power producers and so on) without requiring mandatory local content. Perhaps, what is even more instructive is the fact that India during its submissions before the WTO did not invoke the general exceptions under article XX(b) or (g) of the General Agreement on Tariffs and Trade typically relied upon in trade disputes by parties seeking to protect their domestic regulations on ‘environmental’ or ‘health’ grounds. India therefore did not itself believe that the local content requirement under the programme was imposed for the ‘conservation’ of ‘clean air’.
>The panel ruling, however, is not final and reports indicate that India will prefer an appeal to the appellate body. Simultaneously, India may be exploring the option of filing a counter complaint against the U.S., with several states in the U.S. such as Michigan, Texas and California having also reportedly been accused of employing mandatory local content requirements in the renewable energies sector.
Nevertheless, amidst the cacophony of the Prime Minister’s ‘Make in India’ campaign, India must resist the temptation of adopting protectionist measures such as domestic content requirements which are inconsistent with its international obligations. Domestic content measures, despite their immediate political gains, have a tendency to skew competition. Manufacturers must remain free to select inputs based solely on quality and price, irrespective of the origin. The Modi government must continue working towards building a business and regulatory environment which is conducive to manufacturing. This would require systemic changes in the form of simpler, transparent and consistent laws and effective dispute resolution mechanisms.
(Jay Manoj Sanklecha is a graduate of the West Bengal National University of Juridical Sciences, Kolkata, and is working with a law firm in Mumbai.)
