TWN Info Service on WTO and Trade Issues (Oct16/18)
19 October 2016
Third World Network

DSB adopts rulings in US-India solar dispute
Published in SUNS #8335 dated 18 October 2016

Geneva, 17 Oct (Kanaga Raja) -- The Dispute Settlement Body (DSB) of the World Trade Organisation (WTO) on 14 October adopted the Appellate Body (AB) and panel reports in the dispute raised by the United States against certain domestic content requirements imposed by India on solar power developers who sell electricity to governmental agencies under its Jawaharlal Nehru National Solar Mission (NSM).

In a ruling issued on 16 September, AB had upheld an earlier panel ruling that domestic content requirements (DCR) imposed by India on solar power developers who sell electricity to government agencies under the NSM are inconsistent with its obligations under the WTO.

The AB had said having upheld the Panel's finding that India did not demonstrate that the DCR measures are measures "to secure compliance with laws or regulations which are not inconsistent with the provisions of [the GATT 1994]", it did not consider it necessary further to examine India's claims on appeal pertaining to the Panel's "limited review and analysis" of whether the DCR measures are "necessary" within the meaning of Article XX(d).

Nor did the AB consider it necessary to examine India's arguments as they relate to the requirements of the chapeau of Article XX of the GATT 1994.

The AB had recommended that the DSB request India to bring its measures, found to be inconsistent with the TRIMs Agreement and the GATT 1994, into conformity with its obligations under those Agreements (see SUNS #8315 dated 20 September for details of the AB ruling).

[India has now filed a dispute against the United States in respect of similar local content requirements, and preference and subsidy on that basis, in respect of laws and regulations in eight US states; and if India pursues the dispute to its logical conclusion, similar rulings against the US can be expected to follow.]

In its statement at the DSB meeting on 14 October, the US emphasized that it strongly supports India's effort to promote the generation and use of solar power in India, and that it looks forward to a continued partnership with India in the global fight against climate change.

However, the US was of the view that discriminatory policies in the clean energy sector - such as India's domestic content requirements - undermine efforts to promote the generation of clean energy by requiring the use of more expensive and less efficient equipment.

The US drew attention to several key findings in the AB and panel reports.

First, the Panel found - and the Appellate Body affirmed - that India's domestic content requirements are inconsistent with India's national treatment obligations under Article III: 4 of the GATT 1994 and Article 2.1 of the TRIMs Agreement.

The Panel and Appellate Body rejected India's argument that its domestic content requirements can be justified under the government procurement exemption of Article III: 8(a) of the GATT 1994.

This finding makes clear that Article III: 8(a) does not apply when a Member purchases one product, but discriminates against another, wholly different product, the US maintained.

Second, the Panel found, and the Appellate Body upheld, that India had failed to establish that its domestic content requirements are justified under Article XX(j) of the GATT 1994, which permits Members to adopt WTO-inconsistent measures that are "essential to the acquisition or distribution of products in general or local short supply."

According to the US, the Panel and Appellate Body rejected India's argument that solar cells and modules are in "short supply" in India on account of India's lack of domestic manufacturing capacity for solar cells and modules.

Rather, a product is in "short supply" under Article XX(j) when the quantity of available supply of a product, from all sources, does not meet demand in a relevant geographical area or market.

Third, the Panel found, and the Appellate Body upheld, that India had failed to demonstrate that its DCR measures are justified under Article XX(d) of the GATT 1994, which permits Members to adopt WTO-inconsistent measures that are necessary to "secure compliance" with "laws or regulations" that are not themselves WTO-inconsistent.

The Panel and Appellate Body found that - with the exception of a single instrument - none of the domestic or international instruments identified by India constituted "laws or regulations" with which India must "secure compliance" within the meaning of Article XX(d).

The Panel and Appellate Body also found that none of the domestic instruments identified by India set out a legal obligation to promote sustainable development.

The US further said having upheld the Panel's findings under Article III: 8(a), Article XX(j), and Article XX(d), the Appellate Body properly did "not consider it necessary" to examine India's claims under other legal elements under those provisions, as reaching those issues was not necessary to resolve the dispute.

The US also noted that the report contains a separate opinion. "In general, we consider it a positive step for the members of a Division to explore and explain where they have not been able to come to one view on a particular legal issue," said the US.

"In the case of this particular opinion, however, we do not see how it relates to an issue raised in this appeal. Accordingly, it would appear to be another example of obiter dicta, a problem to which we have drawn the attention of the DSB in the recent past," the US added.

"As we have also expressed in the past, particularly at a time when workload issues are increasingly affecting the timetable for the resolution of disputes, including appeals, a focus on those legal issues necessary to resolve the dispute would enhance the efficient functioning of the dispute settlement system."

According to trade officials, the European Union said that these were within the rights of AB members, and that it did not share the concerns raised by the US over the substance of this separate opinion.

In its statement at the DSB, India noted that the US challenge was with regard to the domestic content requirements in certain schemes of the National Solar Mission (Phase I, Batches 1 and 2, and Phase II, Batch 1) that were undertaken by two government agencies.

India underlined that the dispute involved the scope of policy space available to WTO Members for undertaking government procurement as a derogation from the National Treatment Principle of GATT 1994.

The Appellate Body's ruling, confirming the Panel ruling, is that in order for Article III: 8(a) of the GATT 1994 to apply, the foreign product discriminated against must necessarily be in a competitive relationship with the product purchased by way of procurement (paras 5.24 and 5.36, AB report).

In India's view, such a narrow reasoning of Article III: 8(a) would mean that in order to be able to potentially justify discrimination against imported solar cells and modules as ‘government procurement' under Article III: 8(a), a WTO Member would need to necessarily purchase those solar cells and modules, and not simply the electricity generated from those products even when those cells and modules are exclusively used for the electricity generated for supplies to the Government.

India said it is deeply disappointed that the Appellate Body chose to simply reiterate its reasoning in Canada-Renewable Energy/Feed-in Tariff dispute, without adequate consideration of the unique nature and role of solar cells and modules in solar power generation.

It noted that during the Appellate Body proceedings, the Appellate Body engaged with both the parties and other participants on various scenarios, ranging from measures mandating use of domestically manufactured ink in pens that are purchased by the government, to domestically manufactured paper in notebooks purchased by the government as well as to domestically manufactured cloth in army uniforms that are purchased by the government.

However, with the Appellate Body's reiteration of the Panel's ruling, it appears that there is effectively no room for the government procurement exception under Article III: 8(a), unless there is purchase by the government through procurement, of the very product that is discriminated against despite the uniqueness of the product.

India also noted that neither the Panel nor the Appellate Body delved beyond this threshold issue of ‘competitive relationship', and did not decide on the remaining elements of Article III: 8(a), i. e. whether the procurement was for government purposes and not with a view to commercial re-sale.

However, India said that it would like to highlight that the Panel noted that it is undisputed that the government agencies (NVVN and SECI) administer schemes that are designed to enable the sale of electricity at reduced cost to downstream intermediaries and final consumers.

India made some general observations on the Panel and Appellate Body findings in relation to the interpretation of Article XX(j) and Article XX(d) of the GATT 1994.

Noting that Article XX(j) was interpreted for the very first time in WTO jurisprudence, India acknowledged that each of the General Exceptions under Article XX is meant to be used in clear and well-defined circumstances, and by carefully weighing and balancing the trade restrictiveness of a measure.

However, India said it is disappointed that the Appellate Body's interpretation of the standards for applicability of Article XX(j) effectively confines any meaningful use of this provision only for export restraints, and not for import restraints.

The Appellate Body acknowledged the distinction pointed out by India in the text of Article XX(j), as compared to Article XX(i) and Article XI: 2(a), the text of both which specifically reference export restraints, but concluded that these textual differences are not sufficient to conclude the use of the provision for export or import restraints or both.

The failure to specifically address the circumstances in which Article XX(j) can be used as an effective and legitimate tool of import restraint, will remain a significant limitation in any possible future use of the Article XX(j) exception, said India.

India said it is disappointed that like the Panel, the Appellate Body too did not deem it relevant to give meaning and effect to the terms "general" and "local" as qualifiers to the term "short supply" under Article XX(j).

Instead, the Appellate Body concluded that the relevant test for applicability of Article XX(j) is whether the quantity of "available" supply from both domestic and international sources in a relevant geographical market is sufficient to meet the general or local "demand" in the market.

The Panel's reasoning, as upheld by the Appellate Body, was that an assessment of whether there is a situation of "products in general or local short supply" should not focus exclusively on supply that is "general" or "local", but on availability of a product to meet the "general" or "local" demand in a market (paras 5.69 and 5.71, AB report).

According to India, the Appellate Body appears to acknowledge that lack of domestic production, especially in developing countries, may increase their vulnerability to supply disruptions, as compared to developed countries, and that such factors may be relevant in assessing the availability of a product when assessing whether a product is in "general or local short supply" (para 5.72).

However, the Appellate Body subsequently recalled the Panel's finding that such vulnerability needs to be demonstrated through actual disruptions in the supply of imported cells and modules (para 5.76, AB report).

This effectively means that any policy measure under Article XX(j) can only be an after-thought, and not one that can prevent the rise of situations of general or local short supply, India pointed out.

The other general exception invoked by India was Article XX(d).

It said that while prior jurisprudence on Article XX(d) exists, the Appellate Body enunciated several tests that would be relevant for a panel to consider.

But the enunciation of these principles, in India's view, is not without ambiguity.

On the one hand, the Appellate Body noted that it does not consider that the scope of "laws or regulations" is limited to instruments that are legally enforceable (including, e. g. before a court of law), or that they need to be accompanied by penalties and sanctions to be applied in situations of non-compliance (para 5.109, AB report).

However, said India, the Appellate Body also noted in the same paragraph that a panel should consider the degree to which an instrument containing the alleged rule is normative in nature, and that therefore it is relevant "for a panel to examine whether a rule is legally enforceable, as this may demonstrate the extent to which it sets out a rule of conduct or course of action that is to be observed within the domestic legal system of a Member. It also may be relevant for a panel to examine whether the instrument provides for penalties or sanctions to be applied in situations of non-compliance."

According to India, the Appellate Body, while laying down the six criteria for assessing applicability of Article XX(d), specifies in criteria (iii), the legal enforceability of a rule, for example, before a court, in effect suggesting that non-binding soft law approaches may not be sufficient for establishing a defence under Article XX(d) (para 5.113, AB report).

In the final analysis, the Appellate Body has stated that India's domestic content requirements (DCR) for solar cells and modules, as they are designed currently, are not compatible with WTO norms.

But the report has not questioned the relevance of having domestic manufacturing capacities for achieving India's policy objectives relating to climate change, energy security and sustainable development.

"India is therefore making a close assessment of the WTO ruling, and will ensure careful structuring of future measures in order to achieve our policy objectives in a WTO compatible manner," it said.

India emphasised to the DSB a fact which it has been consistently highlighting throughout the dispute proceedings, that India sees the incentivization of imports of solar cells and modules and development of domestic manufacturing capacities as two sides of the same coin; both developments need to occur in parallel.

India said it is committed to achieving this in a manner that respects rules of international trade.

India said that its continued incentives for import of solar cells and modules, and the investment incentives for attracting foreign direct investment in this sector are well-documented, and play a significant role in India's solar industry.

Having ratified the Paris Climate Change Agreement, India has demonstrated its manifest commitment for ensuring continued efforts to promote renewable energy.

"We look forward to the cooperation of all WTO Members to ensure a sustainable way in which to achieve the targets that we all have committed to."

India said it is evaluating the reports of the Panel and the Appellate Body carefully, and it is committed to frame future design of its solar mission schemes relating to domestic content consistent with the findings of the Panel and the Appellate Body.

Pursuant to Article 21.3 of the DSU, India said that it would within the next 30 days, inform the DSB of its intentions with respect to implementation of the recommendations and rulings that the DSB would adopt at the present meeting.

In other actions, the item of "European Communities and Certain Member States - Measures Affecting Trade in Large Civil Aircraft: Recourse to Article 21.5 of the DSU by the United States" was taken off the agenda of the DSB meeting on 14 October.

On 13 October, the EU filed an appeal of the compliance panel ruling in this dispute. On 22 September, the compliance panel had ruled that the EU and four of its Member States (France, Germany, Spain and the United Kingdom) had failed to comply with an earlier ruling that had called for an end to the illegal subsidies provided to the aircraft manufacturer Airbus (see SUNS #8319 dated 26 September 2016 for details of the panel ruling). +