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4 October 2016

WTO Case Summary. India – Solar Cells

APPELLATE BODY REPORT

The WTO dispute "India – Solar Cells" concerns the Jawaharlal Nehru National Solar Mission ("National Mission"), launched in India six years ago. As part of the National Mission, the government of India was purchasing electricity only from the producers that used for its generation solar cells and modules of Indian origin. According to the US, such requirement is inconsistent with the WTO obligations of India, which resulted in the dispute at issue.

SUMMARY

The main purpose of the National Mission was to promote national "ecologically sustainable growth and attainment of energy security in India." Its pragmatic task was to generate 100,000 MW of solar power capacity by 2022. As part of the National Mission, the government of India has undertaken an obligation to purchase electricityfrom solar energy producers at the standard rate, guaranteed for 25 years and to sell it to the downstream distribution utilities, which, in turn, resell it to the ultimate consumers. However, for this purpose, the solar energy producers were required to use a certain percentage of the national solar cells and modules to generate their energy.

The US claimed that the abovementioned requirement of the Indian government violated the principle of national treatment under the General Agreement on Tariffs and Trade 1994 (the "GATT") and the Agreement on Trade-Related Investment Measures (the "TRIMs Agreement").

SIGNIFICANCE OF THE REPORT

This is the first case ever when India sought to justify its violation by relying on the need to secure compliance with its international obligations relating to climate change (Art. XX(d) GATT).

This is also the first case in which India argued that its measures are justified under the general exception of Article XX(j) GATT on the grounds that allow the measures “essential to the acquisition or distribution of products in general or local short supply”. This GATT provision was developed after the World War II to meet the supply constraints. However, nobody relied on this provision so far.

Neither the Panel, nor the Appellate Body supported India's attempt to justify its restrictive measures on the basis of the abovementioned exceptions. The WTO Bodies provided a narrow interpretation of both Art. XX(j) and Art. XX(d) GATT causing doubts as to the application of the abovementioned exceptions by the WTO Members in the future.

VIOLATION OF NATIONAL TREATMENT PRINCIPLE UNDER ARTICLE III:4 GATT AND THE TRIMS AGREEMENT

According to Art. III:4 GATT, the WTO Members shall provide to the goods originating from the territory of any party "treatment no less favorable" than that accorded to the like domestic products (national treatment principle).

According to Art. 2 of the TRIMS Agreement, the WTO Members are prohibited to use any trade-related measures, which contradict to the provisions of Art. III GATT, i.e. violate the principle of national treatment. Accordingly, the measures that are contrary to the national treatment principle under Art. III:4 GATT, include the measures that are mandatory or implemented in accordance with the national legislation and require the purchase or use by an enterprise of domestic products.

The Panel found that the domestic content requirements for solar cells and modules as prerequisite for the sale of the electricity to the government are trade-related investment measures. The Panel agreed with the earlier panel reports in that if the measures contain domestic content requirements, they will necessarily be “trade-related”, because such requirements favor the use of domestic products over imported products and, therefore, affect trade.|1|

Furthermore, the Panel noted that such requirements are mandatory under the Indian law. Therefore, they violate India’s obligation to accord national treatment in accordance with Article III:4 GATT and the TRIMS Agreement. India agreed with such findings of the Panel and did not contest them on appeal.

GOVERNMENT PROCUREMENT DEROGARION

The national treatment principle does not apply to the laws, regulations or requirements governing the procurement of products purchased for governmental purposes by governmental agencies.|2| This is the exception set forth in Article III:8(a) GATT which was invoked by India as justification of its requirements under the National Mission. The US, nonetheless, emphasized that the electricity purchased by the government is not in competitive relationship with the solar cells and modules subject to discrimination at issue.

The Panel agreed with these arguments of the US and pointed out that the domestic content requirements under the National Mission are not covered by the government procurement derogation from the principle of national treatment pursuant to Article III:8(a) GATT.

Such conclusions of the Panel were fully supported by the Appellate Body. As stated in the Appellate Body Report, Art. III:8(a) GATT is applicable if the purchased goods are "like" or "in competitive relationship" with the discriminated goods. However, in this case, the solar cells and modules, not the electricity purchased by the government, were subject to discrimination.

ENERGY SECURITY AND CLIMATE CHANGE EXCEPTIONS

If a WTO Member violates GATT provisions by introducing measures restricting trade but required for the interests of this WTO Member, such measures may be justified underArt. XX GATT. India tried to justify its discriminatory measures based on Art. XX(j)|3| and Art. ХХ(d)|4| GATT.

In particular, India indicated that solar cells and modules are the products "in general or local short supply” within the meaning of Article XX(j) GATT as a result of the lack of domestic production capacity in India. The Panel found that Article XX(j) GATT refers to the situation when the quantity of available product supply from all sources does not meet demand within the relevant geographical area or market, when the demand of the products exceeds its supply. Thus, this situationdoes not cover the shortage of domestic products, but the shortage of the available products as such. In this situation, the attention should be paid to the possibility of the imported products to meet the corresponding demand in the relevant geographical area or market. In other words, all sources of product supply have to be considered: both internal and external. Since India did not provide the respective information on the quantity of the solar cells and modules “from all available sources of supply” but only took into account the domestic ones, the Panel further concluded that there was no ground to justify the measure at issue under Art. XX(j) GATT.

The Appellate Body confirmed that the application of Art. XX(j) GATT should take into account not only the national production capacity, but also the availability of imports, potential price fluctuations in the relevant market, the purchasing power of foreign and domestic consumers, as well as the place of foreign and domestic producers at the relevant market, including the exports of the products by domestic producers.

The relevance of each of the abovementioned factors shall be defined on a case-by-case basis. In this case, the Appellate Body agreed with the Panel that the analysis of the issue could not be limited to the evidence of the shortage of the domestic production of the products.

The other exception invoked by India in order to substantiate the violation of the WTO rules was Art. XX(d) GATT. India argued that domestic content requirements for solar cells and modules,as part of the National Mission, were necessary to secure India's compliance with its national and international obligations requiring the promotion of sustainable development in respect of the energy security of India within the meaning of Art. XX (d) GATT.

In particular, India submitted that its international obligations were embodied in various international instruments including the United Nations Framework Convention on Climate Change; the Rio Declaration on Environment and Development; the United Nations General Assembly Resolution adopting the Rio+20 Document.

However, the Panel and the Appellate Body found that Art. XX (d) GATT refers to the “laws or regulations” which form part of the domestic legal system of the WTO Member. At the same time, none of the aforementioned instruments has direct effect in India to allow the application of Art. XX (d).

Having analyzed the national acts referred to by India, the Appellate Body concluded that some of them are regulations within the meaning of Art. XX (d) GATT. However, they are not aimed at "ensuring the sustainable development … and obligations relating to climate change."In addition, having evaluated the international instruments referred to by India, the Appellate Body concluded that none of them has direct effect in India, and that they are not “laws or regulations” within the meaning of Art. XX(d) GATT.

The Appellate Body emphasized that even if a specific legal instrument (either domestic or international) constitutes a part of the legal system of a WTO Member, this does not mean that it a priori falls within the definition of "law or regulation" under Art. XX(d) GATT. To do so, the assessment of all the relevant factors have to be done, such as: (1) the degree of normativity of the instrument; (2) the degree of its specificity; (3) whether the rule is legally enforceable, e.g. before a court of law; (4) whether the rule is adopted by a competent authority; (5) the form and title of the legal instrument; and (6) the sanctions accompanying the relevant rule.

The Appellate Body, as well as the Panel, came to the conclusion that none of the instruments listed by India met such requirements, and, thus, they do not fall within the scope of "law or regulation" under Art. XX(d) GATT.

CONCLUSIONS

Therefore, the Appellate Body upheld the findings of the Panel, having established that the domestic content requirements for solar cells and modules as a prerequisite for the sale of the electricity to the government, is a violation of the principle of national treatment in accordance with Art. III:4 GATT and the TRIMS Agreement. Furthermore, the Panel and the Appellate Body rejected India's arguments concerning the justification of the aforementioned violations under Art. III:8(a) GATT, as well as Art. XX(j) and Art. XX(d) GATT.

|1|The same conclusion was reached by the panel in Indonesia – Autos and Canada – Renewable Energy / Feed-In Tariff Program.

|2|To apply the exceptions of Article III:8(a) GATT the following requirements have to be considered: (i) the challenged measures are the "laws, regulations or requirements governing the procurement"; (ii) the purchase is carried out by the "government agencies"; (iii) the goods are bought for the "government purposes"; (iv) the goods are purchased "not for commercial resale or use in the production of goods for commercial sale."

|3|Article XX(j) GATT allows for the application of the measures essential to the acquisition or distribution of products in general or local short supply, given that they are consistent with the principle that all contracting parties are entitled to an equitable share of the international supply of such products, and that any such measures, wich are inconsistentwith the other provisions of the Agrement shall be discontinued as soon as the conditions giving rise to them have ceased to exist. 

|4|Article XX(d) GATT allows for the application of the measures necessary to secure complience with laws or regulations wich are not inconsistent with the provisions of this Agreement, including those relating to customs enforcement, the enforcement of monopolies operated under paragraph 4 of the Article II and Article XVII, the protection of patents, trademarks and copyrights, and the prevention of deceptive practices.

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