According to reports, the Jawaharlal Nehru Solar Mission (JNSM) has come under harsh criticism from the US and EU owing to its policy which requires use of local content for the project. The mission is being executed by the Ministry of New and Renewable Energy with the objective of promoting the use of solar energy.
While local content requirement is part of many investment policies, it appears to be against the principles of General Agreement on Tariffs and Trade (GATT) as well as Agreement on Trade Related Investment Measures (TRIMs) as it accords less favourable treatment to foreign investors.
The intent behind TRIMs was to introduce a discipline which tackles investment measures that distort trade by applying GATT principles of national treatment (allowing foreign investors no less favourable treatment than the concerned domestic industry) and Most Favoured Nation (directing equal and non discriminative treatment to sources of investment from all WTO Member States). There is a similar case at the consultation stage before the Dispute Settlement Body (DSB) of the WTO between Canada and EU/Japan.
In this matter, Japan and EU are contending that Canadian backing for Ontario’s environment-related scheme, which guarantees prices for renewable energy generated with Canadian made equipment, is protectionist in nature and violates Canada’s obligation as a WTO member.
Local content requirement is often placed by nations in their policies with the objective of bolstering growth of domestic industry.
The JNSM requires solar mission investors to use Indian manufactured solar modules and source 30% of the inputs from within the country. Such a requirement may have trade-distorting effect and can attract provisions of two key agreements within the structure of the WTO.
Firstly, it appears to violate Article 2.1 of TRIMs as it falls within the category of a trade related investment measure that extends more favourable treatment to domestic products in comparison to imports by stipulating preferred use of products of domestic origin from any domestic source. This may infringe the National Treatment principle.
Secondly, as a prima facie violation of TRIMs it appears to be inconsistent with Article III: 4 of GATT (National Treatment) as it creates a ‘disincentive’ against purchase of imported products, thereby according a less favourable treatment to imported products as compared to like domestic products. Moreover Article III:7 GATT explicitly prohibits any internal quantitative regulation which requires use of products in specified proportion so as to allocate such proportion among external sources of supply.
Thirdly, it may also be argued by our trading partners that the requirement is inconsistent with GATT Article XI: 1 as the local sourcing directive amounts a quantitative restriction on importation.
Some trade lawyers have expressed the view that since the solar power generated by the project will be bought by NTPC, a public sector company; it will fall within the purview of government procurement and since India is not a member of the Government Procurement Agreement, it may not be bound by the plurilateral agreement which sets the rules for purchases made by government agencies. This is not a legally tenable argument as any purchase by NTPC will not be limited to governmental purposes and will involve commercial resale or use in production of goods for commercial sale, thereby attracting the provision of national treatment, pursuant to Article III:8 (a) of GATT.
It is pertinent here to observe that a similar case was brought by US and EU against India (India-Autos) in 2000. In that case both EU and US had expressed concerns over measures under the Indian policy and regulations requiring manufacturing firms in the motor vehicle sector to achieve specified level of local content in order to be eligible for Indian Import licenses for certain motor vehicle parts and components.
The Panel ruled against India for violation of Article III and XI of GATT and Article 2 of TRIMs. India withdrew its appeal before the Appellate Body, thereby justifying the findings of the Panel and brought its measures in line with the same within five months.
During the Uruguay Round of negotiations relating to TRIMs, India was one of the few developing countries which had taken a decision to abolish the local content requirements even before the conclusion of the Uruguay Round. Given this backdrop, India may find it difficult to sustain its policy of local content in the Solar Mission should her trading partners decide to seek to raise a dispute at the WTO and may be required to abandon this requirement and to bring its measures in conformity with its obligations under TRIMs and GATT.