The Chairman of the Panel in ‘India — Certain Measures Relating to Solar Cells and Solar Modules’ has informed the Dispute Settlement Body (‘DSB’) that the final Panel Report is expected to come out next month.
The United States has challenged certain measures of India relating to domestic content requirements under the Jawaharlal Nehru National Solar Mission (“NSM”) for solar cells and solar modules. Brazil; Canada; China; European Union; Japan; Korea, Republic of; Malaysia; Norway; Russian Federation; Turkey; Ecuador; Saudi Arabia, Kingdom of; Chinese Taipei are third parties to the dispute.
The NSM was launched in 2010 with an ambitious target of deploying 20,000 MW of grid connected solar power by 2022. It aimed at reducing the cost of solar power generation in the country through aggresive Research & Development and domestic production of certain critical components. Therefore, the idea was to encourage domestic production of solar panels and modules.
According to the United States, under NSM, the solar power developers are granted certain benefits such as guaranteed long term tariffs for electricity (in the form of power purchase agreements under NSM or with NTPC Vidyut Vyapar Nigam Limited) if they purchased and used solar cells and solar modules of domestic origin.
The United States’ position is that these domestic content requirements are inconsistent with Article III:4 of the GATT 1994 (National Treatment); Article 2.1 of the TRIMs Agreement( National Treatment and Quantitative Restrictions) and Articles 3.1(b), 3.2, 5(c), 6.3(a) and (c), and 25 of the SCM Agreement (Prohibition on Subsidies, Causing of Adverse Effects through Subsidies, Notification of Subsidies).
(..) In the case of Solar PV Projects selected in First Batch during FY 2010-11, it was mandatory for Projects based on crystalline silicon technology to use the modules manufactured in India. For Solar PV Projects to be selected in second batch during FY 2011-12, it will be mandatory for all the Projects to use cells and modules manufactured in India. PV Modules made from thin film technologies or concentrator PV cells may be sourced from any country, provided the technical qualification criterion is fully met.
A measure to constitute a subsidy under Article 1.1 of SCM, must fulfill these two essential ingredients:
a. There should be a financial contribution or direct transfer of funds or purchase of goods. And
b. A benefit should be conferred.
Srikanth Hariharan argues that this may not be a case of subsidy because
(..) in order to avail the facility of the Bundling scheme, shall sell the electricity to the government appointed nodal agency at prices determined by the market regulator. So, this is a case where there is an independent market regulator sets the prices at which the government can purchase. Hence, India-Solar Cells may not be a case of subsidy. This is so because though there is a purchase of electricity by the government, the government is paying a price determined by market regulator.
The real issue, however, is whether this subsidy, if proven to be one, would be a prohibited subsidy or not.
It could be a prohibited subsidy under Articles 3.1(b) and 3.2 of the SCM Agreement because it appears to be provided “contingent … upon the use of domestic over imported goods”. Further, the grant of this subsidy may be causing “serious prejudice” within the meaning of Article 5(c) of the SCM Agreement. The Panel in US — Upland Cotton took the view that a detrimental impact on a complaining Member’s production of, and/or trade in, the product concerned may fall within the concept of “prejudice” in Article 5(c) of SCM Agreement. This conclusion is cemented by a conjoint reading of Article 6.3(a) and (c). According to these articles, “serious prejudice” within the meaning of Article 5(c) is caused if
(a) the effect of the subsidy is to displace or impede the imports of a like product of another Member into the market of the subsidizing Member;
(c) the effect of the subsidy is a significant price undercutting by the subsidized product as compared with the price of a like product of another Member in the same market or significant price suppression, price depression or lost sales in the same market;
In EC and Certain member States — Large Civil Aircraft, the Appellate Body considered the meaning of the terms “displace” and “impede” and observed that the term displacement connotes that there is a substitution effect between the subsidized product and the like product of the complaining Member. The Appellate Body also observed that the situations where the exports or imports of the like product of the complaining Member would have expanded or materialised had they not been “obstructed” or “hindered” by the subsidized product, would fall in the scope of Article 6.3(a)
An analysis of Article 6.3(c) requires an examination of market statistics. Situations where the prices were either pressed down, prevented or inhibited from rising, or while they did actually increase the degree and magnitude of increase was less than it otherwise would have been, are violative of this article. (Panel in US-Upland Cotton)
In its assessment of whether “price suppression” had taken place, the Panel would consider the following three factors relevant:
(a) the relative magnitude of the United States’ production/exports in power generation;
(b) general price trends; and
(c) the nature of the subsidies at issue, and in particular, whether or not the nature of these subsidies is such as to have discernible price suppressive effects.
I am of the view that the United States Delegation would also have argued “lost sales” in the context of Article 6.3(c). My opinion in this regard is contingent on an examination of actual market statistics.
In EC and Certain Member States — Large Civil Aircraft, the Appellate Body considered the meaning of “lost sales” and stated:
This would involve a comparison of the sales actually made by the competing firm(s) of the complaining Member with a counterfactual scenario in which the firm(s) of the respondent Member would not have received the challenged subsidies. There would be lost sales where the counterfactual scenario shows that sales won by the subsidized firm(s) of the respondent Member would have been made instead by the competing firm(s) of the complaining Member, thus revealing the effect of the challenged subsidies.
WTO, in the past, has dealt with a similar issue in Canada — Certain Measures Affecting the Renewable Energy Generation Sector. In that case, the Appellate Body upheld the Panel’s conclusion that the Minimum Required Domestic Content Levels prescribed under the feed-in tariff program (the “FIT Program”) were inconsistent with TRIMS Agreement Art. 2.1 and GATT Art. III:4.
If the Panel finds measures of India relating to domestic content requirements under NSM inconsistent with the covered agreements in issue, it will recommend the Dispute Settlement Body to request India to bring its measures into conformity with its obligations under the the GATT, TRIMS and SCM Agreement. As a matter of policy, it makes perfect sense for a country to incentivise domestic production. It remains to be seen if the WTO Panel feels the same.