The Indo-U.S. Solar Dispute: Hardened Trade Ideologies Trump Environmental Concerns

By: ,

Astonfield’s 11.5 MW solar plant in Gujarat, India. Courtesy Citizenmj/Wikimedia.

In 2013, the United States of America brought a claim (India – Solar Cells) before the World Trade Organisation (WTO) against India, challenging several Domestic Content Requirements (DCR) imposed under the Jawaharlal Nehru National Solar Mission (JNNSM). The JNNSM is a program of the Indian government aimed at reducing the cost of domestic solar power generation, while increasing solar capacity, and the DCRs at issue cover solar cells and modules for JNNSM projects. This blog post will describe the background and Panel decision in India – Solar Cells  and then argue the Panel erred in not fully considering the needs of developing countries to ensure their access to renewable energies sources.

Both a WTO panel and the Appellate Body found the DCRs to be inconsistent with Article III:4 of the GATT, (providing that States must accord national treatment to “like products” from other States), and Article 2.1 of the TRIMs Agreement (prohibiting members from according less favourable treatment to other members). India primarily based its defence on GATT Article XX(d) when the impugned measures are necessary to ensure compliance with “domestic laws or regulations” that are not inconsistent with the GATT. The WTO panel and the Appellate Body considering that earlier application found India’s DCRs (related to ecologically sustainable growth) to be inconsistent with the GATT, despite the inclusion of sustainable development in municipal law.

For a DCR to be allowed under Article XX(d) of the GATT, two requirements must be met. First, the challenged measure must be “designed to ‘secure compliance’ with laws or regulations that are not themselves inconsistent with some provision of the GATT 1994.” Second, the measure must be “necessary” for this compliance. For a country, meeting of the aforementioned requirements is sufficient to justify what otherwise would be a violation of Article III:4 of the GATT, 1994 and Article 2.1 of the TRIMs Agreement. Moreover, the WTO’s Appellate Body in the Tax Measures on Soft Drinks case, interpreted the term “laws or regulations” as meaning rules that form part of the domestic legal system of a WTO Member, as well as rules deriving from international agreements incorporated into the domestic legal system of a WTO Member or having direct effect according to that WTO Member’s legal system.

We argue that whilst examining whether the DCR measures were measures to secure compliance with laws and regulations within the meaning of Article XX(d), the WTO Panel may have erred in its understanding of executive and legislative action of India, specifically with regard to the force of international obligations in India’s domestic laws. India has codified provisions from the preamble of the Marrakesh Agreement Establishing the WTO, the United Nations Framework Convention on Climate Change (UNFCCC), the Rio Declaration, and Rio 20+ Document into its national law. The international obligations provided by these conventions have been brought into effect through various forms of domestic legislation. For instance, as has been noted in paragraphs nos. 7.282 and 7.302 of the WTO Panel’s Report, India has amended various provisions of its Electricity Act, its National Electricity Policy, its National Electricity Plan, and its National Action Plan on Climate Change to ensure compliance with the aforementioned international instruments by generating electricity via renewable sources. It is pertinent to note that the gains of renewable energy are lost when critical components that go into its production have to be transported thousands of miles, burning tonnes of fossil fuels (behind paywall). The DCR issue in Certain Measures Relating to Solar Cells and Modules, the National Electricity Policy, the National Electricity Plan, and the National Action Plan on Climate Change are all binding executive actions; these executive actions did not require express legislative sanction, as the Constitution of India which empowers the executive to take certain actions without express authorisation from the legislature.. On one hand, in paragraph no. 7.297 of its ruling, the WTO Panel accepted India’s contention that that the executive branch may take implementing actions without express legislative authorization to secure compliance with India’s international law obligations under international instruments. However, as may be seen in paragraph no. 7.298, the Panel subsequently reversed course and held that the executive branch taking implementing action without express legislative sanction does not speak to the question of whether international obligations are automatically incorporated into domestic law and have a “direct effect” in India.

The ruling of the WTO panel in Certain Measures Relating to Solar Cells and Modules case may have three significant effects. As the WTO Panel itself noted in paragraph no. 7.278,  developing countries have realized that electricity is an essential requirement for all facets of life and is a basic human necessity and that can be achieved through a thorough planning, and must be balanced against the need for sustainable development and a nation’s international obligations relating to climate change. However, India contended that a country cannot hope to sustain both its obligations under international trade law and its environmental commitments, and by virtue of the WTO’s ruling, the environmental programs of developing countries may be detrimentally hindered. Second, India, in its submissions, contended that the WTO Panel’s ruling will be a blow to the individual policies and international obligations at large of not only India but also other developing countries such as Bangladesh and Sri Lanka, whose renewable energy programmes are still at a nascent stage. Last, overproduction and enormous subsidies in developed countries have resulted into dumping of raw materials such as solar cells and modules in developing countries. India’s Ministry of Commerce and Industry recommended the imposition of anti-dumping duties in light of the said dumping of raw materials. However, the Government of India ultimately chose not to impose anti-dumping duties, which were deemed to be too harsh and detrimental to the cost of solar energy in India. Thereby, in our opinion, the last option for these developing countries could be to legislate on anti-dumping duties, which in itself would violate the provisions of the WTO.

In our opinion, the decision of the WTO Panel may have severe ramifications on the developing world trying to build up the renewable energy sector. From an economic perspective, the “necessity” and “essentiality” of having a DCR requirement for developing countries like India, Bangladesh, and Sri Lanka cannot be understated, as incentivising domestic manufacturing through a DCR could prove to be a great boon to the countries’ domestic manufacturing base, thereby generating jobs and providing affordable clean energy. The WTO’s interpretation of the Article XX(d), which was invoked by India as a justification, has, in our opinion, not taken into account environmental concerns of the developing countries.

The way forward for DCR measures after this case is for WTO Members to adopt a liberal approach, keeping in mind the very first recital to the Preamble to the Marrakesh Agreement Establishing the WTO, which recognizes that relations in the field of trade and economic relations should be conducted with a view to raising standards of living, ensuring full employment, and improving the volume of real income and effective demand, as well as expanding the production of and trade in goods and services, while allowing for the optimal use of the world’s resources in accordance with the objective of sustainable development. The policy choices drafted in municipal laws of developing countries through various modes have to take their international obligations into consideration and those in consonance with the approach of sustainable development must be availed under the general exception provided for in Article XX(d). A developing country having a short supply, if not of materials but of indigenous know how, must be allowed to impose DCR for achieving the goal of sustainable development. Not having DCR may result in anti-dumping duties, a harsh measure by any means; one that actually vitiates well-established principles of trade law.

This ruling, if anything, typifies the North-South divide and also the inability of the WTO’s dispute resolution mechanism to appreciate issues relating to mutual inclusiveness of trade and environmental laws. It is pertinent to note that this was the first time in the history of WTO dispute resolution that a country cited its international obligations towards climate change as a ground for deviating from established trade law principles. The WTO Panel’s ruling in this dispute has resulted in crystallized principles of trade law taking precedence over environmental obligations.

Aditya Manubarwala is a penultimate year law student at the Pravin Gandhi College of Law, Mumbai University. In the past, he has been a Law Trainee with Justice F. M. I. Kalifulla, Judge, Supreme Court of India and an Attaché with the Office of the Speaker, Lok Sabha (Lower House), Parliament of India. He is the youngest Indian to have deposed before a committee of Parliament.

Malcolm Katrak is a final year law student at the Pravin Gandhi College of Law, Mumbai University. In the past, he has worked as a Judicial Apprentice under Justice S. J. Kathawalla, Judge, Bombay High Court and as an Intern with Mr. D. J. Khambata, Member, Singapore International Arbitration Centre’s Court of Arbitration.