WTO Appellate Body Report: India – Solar Cells

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SUMMARY:

Decision:

The WTO Appellate Body has affirmed that local content requirements maintained by India for solar cells and modules violate India's obligations under the General Agreement on Tariffs and Trade (GATT) 1994 and the WTO Agreement on Trade-Related Investment Measures (TRIMs).

This is one of a series of reports on WTO Panel or Appellate Body decisions.

Significance of Decision:

This decision is consistent with a long line of prior cases that have ruled that local content requirements are inconsistent with the national treatment obligations of the GATT and the TRIMs Agreement. The United States was widely expected to win on all points in this appeal, and it did.

One notable aspect of this case was India's attempt to invoke principles of international environmental law, including the United Nations Conventions on Climate Change (UNFCCC), to seek to justify its measures.

GATT Article XX(d) allows WTO Members to adopt or enforce measures "necessary to secure compliance" with GATT-consistent "laws or regulations". India had argued before the Panel that its local content requirements for solar cells and modules were justified under Article XX(d) because they were "integral to its compliance with both domestic and international law obligations to ensure ecologically sustainable growth while addressing India's energy security challenge, and ensuring compliance with its obligations relating to climate change". India pointed to its international legal obligations, including under the UNFCCC. India argued that it had "an obligation to take steps to achieve energy security, mitigate climate change, and achieve sustainable development, and that this includes steps to ensure the adequate supply of clean electricity, generated from solar power, at reasonable prices". Both the Panel and the Appellate Body rejected this defence.

India's argument faltered over the threshold issue of whether the domestic environmental policies and international environmental agreements it cited could be considered as "laws or regulations" for the purposes of Article XX(d). The Appellate Body provided guidance on when measures could meet the definition of "laws or regulations", based on factors such as specificity, enforceability, and sanctions.

The Appellate Body rejected the notion that the domestic environmental policies cited by India could constitute "a 'rule' to ensure ecologically sustainable growth". It agreed with the Panel that such provisions were "hortatory, aspirational, declaratory, and at times solely descriptive". It similarly dismissed the argument that the UNFCCC and the other international instruments cited by India were "laws or regulations", as they were neither incorporated into domestic law nor given direct effect in India.

It would be wrong to conclude that this decision shows an unwillingness of the WTO to address environmental issues. Rather, the Appellate Body's mandate in this appeal was much narrower, as it needed to decide when policies or treaties could be considered as "laws or regulations" that could qualify under the exception. The Appellate Body's decision is consistent with the strict interpretation of Article XX(d) that has been established in the jurisprudence.

Even if international agreements did have direct effect in India, this defence would still have likely failed, as it would be very difficult to establish that local content requirements are "necessary to secure compliance" with the UNFCCC. The UNFCCC imposes relatively few hard commitments, particularly on developing countries. Indeed, the UNFCCC provisions cited by India in its Article XX(d) defence include commitments by all Parties to formulate "national and, where appropriate, regional programmes containing measures to mitigate climate change by addressing …emissions" of greenhouse gases, and to "[t]ake climate change considerations into account, to the extent feasible, in their relevant social, economic and environmental policies and actions…." It would be virtually impossible to establish that local content requirements are necessary to "secure compliance" with such general provisions.

REPORT:

Factual Background: India's National Solar Mission and the local content requirements

This dispute arose from certain local content requirements imposed by India under the Jawaharlal Nehru National Solar Mission, which was established by the Indian government in 2010. The objective of the National Solar Mission is to "establish India as a global leader in solar energy, by creating the policy conditions for its diffusion across the country as quickly as possible". It also seeks to make a "major contribution by India to the global effort to meet the challenges of climate change".

In order to promote solar power capacity, the Indian government enters into long-term power purchase agreements with solar power developers, providing a guaranteed rate for a 25-year term. The power developers are in turn subject to mandatory domestic content requirements, obligating them to use certain Indian-manufactured cells and modules.

National treatment: violations of the GATT and the TRIMs Agreement

GATT Article III:4 provides in part that imported products must be accorded "treatment no less favourable" than that accorded to "like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use".

Article 2 of the TRIMs Agreement provides that "no Member shall apply any TRIM that is inconsistent with the provisions of Article III… of GATT 1994". The TRIMs Agreement includes an "illustrative list" of measures that are inconsistent with GATT Article III:4, including "those which are mandatory or enforceable under domestic law or under administrative rulings, or compliance with which is necessary to obtain an advantage, and which require…the purchase or use by an enterprise of products of domestic origin or from any domestic source…".

GATT Article III:8(a) provides an exception to the national treatment disciplines that would otherwise apply. It states that “[t]he provisions of this Article shall not apply to laws, regulations or requirements governing the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale or with a view to use in the production of goods for commercial sale".

In the current case, the U.S. argued strongly that this exception did not apply. Relying on the 2013 decision of the Appellate Body in Canada – Renewable Energy/Feed-In Tariff Program, the U.S. argued that "the product procured (electricity) is not in a competitive relationship with the product being discriminated against (solar cells and modules), and… such discrimination is therefore not covered by the derogation of Article III:8(a)". The Panel agreed.

The Appellate Body upheld this finding, ruling that "a competitive relationship between the product discriminated against and the product purchased must be established in all cases". It reasoned that "under Article III:8(a), the product purchased by way of procurement must necessarily be 'like', or 'directly competitive' with or 'substitutable' for – in other words, in a 'competitive relationship' with – the foreign product subject to discrimination". It recognized that "a consideration of inputs and processes of production may inform the question of whether the product purchased is in a competitive relationship with the product being discriminated against", but that "it does not displace the competitive relationship standard".

The Appellate Body thus affirmed that the local content requirements violated India's obligations under both the GATT Article III:4 and the TRIMs Agreement.

GATT Article XX(j): "short supply" not limited to products manufactured domestically

India sought to invoke the exception of GATT Article XX(j), which provides in part that WTO Members may maintain measures "essential to the acquisition or distribution of products in general or local short supply". India had argued before the Panel that “solar cells and modules are 'products in general or local short supply' in India on account of its lack of domestic manufacturing capacity". The Panel rejected this defence.

This was the first time that the Appellate Body has interpreted GATT Article XX(j). The Appellate Body disagreed with India's position that "'short supply' can be determined without regard to whether supply from both domestic and international sources is sufficient to meet demand in the relevant market". It noted that "[b]y its terms, Article XX(j) does not limit the scope of potential sources of supply to 'domestic' products manufactured in a particular country that may be 'available' for purchase in a given market".

The Appellate Body found that "an assessment of whether a Member has identified ‘products in general or local short supply’ requires a case-by-case analysis of the relationship between supply and demand based on a holistic consideration of all relevant factors". It rejected India's argument that "a lack of 'sufficient' domestic manufacturing ‘capacity’ will necessarily constitute a product 'shortage' in a particular market…"

The Appellate Body therefore dismissed India’s defence under Article XX(j).

GATT Article XX(d): no "rule" to ensure "ecologically sustainable growth"

The Appellate Body noted that in determining whether a responding party had identified a rule that falls within the scope of 'laws or regulations' under GATT Article XX(d), a panel should consider factors such as "(i) the degree of normativity of the instrument and the extent to which the instrument operates to set out a rule of conduct or course of action that is to be observed within the domestic legal system of a Member; (ii) the degree of specificity of the relevant rule; (iii) whether the rule is legally enforceable, including, e.g. before a court of law; (iv) whether the rule has been adopted or recognized by a competent authority possessing the necessary powers under the domestic legal system of a Member; (v) the form and title given to any instrument or instruments containing the rule under the domestic legal system of a Member; and (vi) the penalties or sanctions that may accompany the relevant rule".

The Appellate Body examined the provisions of India's domestic National Electricity Policy, the National Electricity Plan, and the National Action Plan on Climate Change. It concluded that "we fail to see how these instruments, taken together, could be read to set out a 'rule' to ensure ecologically sustainable growth that India alleges". It reasoned that "the relevant texts of these instruments, whether seen in isolation or read together, do not set out, with a sufficient degree of normativity and specificity, a 'rule' to ensure ecologically sustainable growth", as argued by India. The Appellate Body agreed with the Panel that these provisions were "hortatory, aspirational, declaratory, and at times solely descriptive".

It similarly ruled that the international instruments cited by India could not be considered as "laws or regulations" for the purposes of Article XX(d). Relying in its earlier ruling in Mexico – Taxes on Soft Drinks, the Appellate Body noted that rules deriving from international agreements may become part of the domestic legal system of a WTO Member in at least two ways: "Members may incorporate such rules, including through domestic legislative or executive acts intended to implement an international agreement", and "certain international rules may have direct effect within the domestic legal systems of some Members without specific domestic action to implement such rules" [original emphasis].

India argued that “the very fact that the executive branch can take action to 'execute' the international instruments at issue, e.g. by enacting the [domestic content] measures, shows that these international instruments and rules are already a part of its domestic legal system and therefore may be acted upon by the executive branch". More specifically, India argued that that the "direct effect" of the international instruments under its domestic legal system was established by the fact that "the principles of sustainable development under international environmental law have been recognized by the Supreme Court of India to be part of the environmental and developmental governance in India".

The Appellate Body found that while the decisions of the Indian Supreme Court "may serve to highlight the relevance of the international instruments and rules identified by India for purposes of interpreting provisions of India's domestic law, as well as for guiding the exercise of the decision-making power of the executive branch of the Central Government, we do not consider that this is sufficient to demonstrate that the international instruments India identified are rules that form part of its domestic legal system and fall within the scope of 'laws or regulations’ under Article XX(d)". The Appellate Body therefore dismissed India's position that the domestic content requirements for solar were justified under this exception.

The Report of the WTO Appellate Body in India – Certain Measures Relating to Solar Cells and Solar Modules (DS456) was released on September 16, 2016.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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