By Harshit Kumar
Fourth Year Student at Dr. Ram Manohar Lohiya National Law University
Introduction
Perhaps one of the most hotly contested areas in international trade law is the Local Content Requirements (“LCRs”). They are often labelled as a ‘backdoor protectionist’ measure by scholars,[i] industrialists, and several members of the World Trade Organization (“WTO”).[ii] LCRs mandate a certain level of locally sourced content to be present in the final product.[iii] Such measures are mainly substantiated by reasons for developing the ‘domestic industrial base’.[iv]
It is not difficult to infer that LCRs would primarily be employed by Developing and Least Developed Countries (“LDCs”).[v] Such trade measures, however, are challenged on the basis that they violate Article III:4 of the General Agreement on Tariffs and Trade (“GATT”),[vi] Articles 2.1 and 2.2 of Trade-Related Investment Measures (“TRIMS”), and Article 3 of the Agreement on Subsidies and Countervailing Measures (‘SCM”).[vii]
There has been research on the issue of whether LCRs can be helpful in the context of renewable energy,[viii] and on the need for bringing more harmony in international trade and environmental law.[ix] The WTO must also maintain a balance between promoting free trade and the interests of developing countries and LDCs.[x]
Therefore, it appears that a restriction to trade in the form of LCRs will be inconsistent with the trade regime. This article attempts to analyse how such restrictions are treated under international trade law and whether LCRs have succeeded in the WTO so far as renewable energy is concerned. We will also examine if LCRs make sense from sustainable development and economic perspectives. We will focus mainly on the GATT since LCRs are primarily challenged for violating the National Treatment Principle under Article III of GATT.
Current International Trade Law Regime
Restrictions against LCRs in GATT
Article III of the GATT – National Treatment Principle prevents states from adopting measures that result in the protection of domestic products. Article III:4 of the GATT requires that imported products shall not be accorded less favourable treatment than “like” domestic products in non-fiscal regulatory measures. Whether two products are “like” requires a case-to-case analysis based on various factors such as end-use, consumer preferences, physical properties, etc.[xi] Article III:5 of the GATT prohibits quantitative regulation such as policies mandating quotas. Although Article III:5 directly deals with LCRs, it is Article III:4 that is invoked by countries against LCRs. A general prohibition on quantitative regulations is also imposed under Article XI of GATT.
When LCRs may be allowed
Article XX of GATT provides a list of general exceptions under which LCRs may be allowed as long as they don’t constitute “arbitrary or unjustifiable discrimination”.[xii] These include measures necessary to protect human, animal, or plant life or health;[xiii] or to conserve exhaustible natural resources, as long as they are applied to domestic products.[xiv] Article XX(j),though not specific to the environment, allows measures necessary to maintain local supply to prevent scarcity.
Further, LCRs may be permitted under Article III:8 (also called Government Procurement exemption) if a government for “its own purposes” procures such products. However, it has to be directly on the product, not on the source or derivative products. For instance, an LCR on solar cells and procurement of electricity would not be permitted.[xv] However, these exceptions which permit LCRs are narrow and rarely accepted.
LCRs, Renewable Energy, and WTO
There appears to have developed a jurisprudence constante[xvi]about LCRs in light of several decisions, which means that there is a high probability that future disputes will also meet the same fate. It was evident from the start that any LCR would be subject to strict scrutiny, such as in Indonesia – Autos.[xvii]Here, the government came up with a “programme” to import duty on products depending on the percentage of local content – the higher the percentage, the lower will be the burden imposed. The Panel found this inconsistent with Article 2.1 of TRIMS which says that no member can allow a policy in violation of Article III of GATT.
Similar policies in various disputes were also held to be a violation of Article III:4, such as in Canada – Autos[xviii] (local content required for exemptions) and India – Autos[xix] (local content required for import licenses). The trend has continued in disputes concerning renewable energy. The decisions in Canada Renewables[xx] and India – Solar Cells[xxi] have further restricted the space for implementing LCRs. These disputes hold a unique position as the former involves Article III:8(a), and the latter involves Article XX(j), both for the first time.
Canada Renewables Dispute
The Canadian government had employed a measure of LCR, wherein the government was running a Feed-in-Tariff (“FIT”) programme, which provided the generator of renewable energy a guaranteed price for twenty to forty years. The benefits under the FIT programme were conditioned on meeting the minimum LCRs. Japan and the European Union challenged the measure on the ground that it violated Article III of GATT and Article 2.1 of TRIMS. Canada’s only defence was the Government Procurement exemption. Both the Panel and the Appellate Body had decided against Canada but differed in their reasoning.
Article III:8(a) applies to laws under which a government procures products without reselling them for commercial purposes. The Panel found that the government had benefitted from the resale of electricity made in competition with licenced electricity retailers, amounting to “commercial resale”. It thus failed to satisfy the requirement of Article III:8(a). However, the Panel found the purchased product (i.e. electricity) and the discriminated product (i.e. energy generation equipment) to be similar. This may leave room for governments to form LCR policies for products as long as they are closely in relationship with other products.[xxii]
On the other hand, the Appellate Body found that the products discriminated against and the products procured were different. The Panel had essentially put Canada’s LCRs measure against the test under Article III:8(a), but the Appellate Body interpreted Article III:8(a) as part of Article III, underlining the obligations under the Article as a whole resulting in broadening the scope of Article III. It found that the products did not share a “competitive relationship”. Further, the finding of the Panel that they shared a “close relationship” did not satisfy the requirement of Article III:8(a) when read as part of Article III. On this basis, the Appellate Body found Canada’s measures to be inconsistent with GATT. The Appellate Body’s reasoning leaves little space for LCR measures to wiggle around.
India – Solar Cells Dispute
A few years back, the U.S. complained against India’s LCR measures on solar cells and modules as part of its Jawaharlal Nehru National Solar Mission (JNNSM).[xxiii] India lost the dispute and filed a subsequent appeal in September 2016. Under JNNSM, the Indian government would purchase electricity from solar power producers at a preferential rate, and to qualify for the same, the producers had to use a specific type of domestic solar cells. After several consultations, the U.S. complained that India’s LCR measures violated Article III:4 of GATT and Article 2.1 of TRIMS claiming less favourable treatment to foreign solar cells. India took the defence under Article III:8(a) and Article XX(d) and (j) of GATT.
India claimed the Government Procurement exemption under Article III:8(a) and that the present case was different from the one in Canada-Renewables. However, the Panel did not find them distinguishable. The Appellate Body upheld the decision and reiterated the decision in Canada Renewables that the procured product and product discriminated against were not “like”, “directly competitive”, or “substitutable”, so Article III:8(a) did not apply.[xxiv]
Further, India also claimed that the LCR measures were necessary to ensure compliance with its obligation to address sustainable development and climate change, and therefore justified under Article XX(d).[xxv] To succeed, India needed to prove three things:
- The measures were implemented “to secure compliance.”
- The measures were “necessary.”
- The obligation to secure compliance was due to some “laws or regulations” not inconsistent with GATT.
India referenced several international and domestic instruments demonstrating its obligations. However, the Panel reasoned that without legislative sanction, the executive’s action could not be justified as the international obligations did not automatically have a “direct effect” in India. Thus, the test of “laws or regulations” under Article XX(d) was not satisfied. The Appellate Body, by and large, agreed with the decision.
The final defence by India, also a first at the WTO, was based on the argument that the lack of domestic producers of solar cells constituted a “situation of local and general short supply” under Article XX(j). The Panel held that the term “product in general or short supply” referred to a situation where available supply does not meet current demand in the area. The products at such risk should be at “imminent” threat of such shortage. On this basis, the discriminated products did not pass this test.
The Appellate Body took the term “essential” in Article XX(j) to be similar to “necessary” in Article XX(d). It held that there must be “weighing and balancing”[xxvi] of several relevant factors to assess whether the LCR measure was essential to prevent insufficient supply from national and international sources. Thus, only domestic production cannot be the sole reference in determining short supply. Therefore, this defence was also rejected, and the LCR measure was held violative of Article III:4 of GATT and Article 2.1 of TRIMS.
WTO and Sustainable Development
These decisions, especially India-Solar Cells, garnered much criticism.[xxvii]There have been intense debates on these decisions since the issue involves addressal of pressing environmental concerns. The Preamble of the Marrakesh Agreement, which established the WTO, recognises the importance of sustainable development in international trade.[xxviii] As we have seen, WTO also provides ways to prevent conflict with trade treaties through exceptions in GATT, though they are seldom accepted. The chapeau of the article will only allow an exception if the measure at issue is not arbitrary, unjustifiable, or a disguised restriction to trade. This threshold is high, and very few measures have ever succeeded.
The WTO aims to promote amicable settlement between members through consultations, but disputes often have to be decided through the adjudication mechanism. Since few exceptions are permitted to LCRs, even for environmental reasons, no country wants to risk the chance of losing a dispute. If they do not comply with the decision, sanctions can be imposed on them even though sanctions are the last resort for the complaining member. As the decision in India – Solar Cells has restricted the policy space, most members would try to self-regulate to avoid disputes in the WTO.[xxix]
Various environmental agreements such as the Paris Agreement advocate for mitigating climate change and require member nations to push for a transition to clean energy. Developing countries and LDCs find this difficult on account of several factors, one of them being poor domestic production.[xxx] However, since the WTO stands for free trade and removing all barriers to the same, it presents inherent opposition to harmonisation between the present trade regime and sustainable development.[xxxi]
Can LCRs help renewable energy?
An obvious question to confront while discussing LCRs is – are they worth the trouble? Recently, several researchers have explored the issue from an economic, trade, and renewable energy perspective and found that although LCRs may increase production, this is not always the case.[xxxii] It appears that LCRs cannot achieve higher productivity and production simultaneously.[xxxiii] In India’s case, a paper published in the Nature Energy Journal shows that LCRs instead results in higher cost of solar panels and energy production.[xxxiv] Establishing local manufacturing sectors requires something more than just LCRs.[xxxv] In this light, it seems like an onerous task to argue in favour of LCRs.
Conclusion
The world is witnessing the rise of renewable energy, renewing hopes of achieving several climate goals. Countries would want to secure their place in this developing energy situation. The transition to renewable energy is not easy for Developing countries and LDCs. LCR measures seem like an easy way to secure domestic interests for developing countries and LDCs. But looking at the WTO jurisprudence that has developed around LCRs, it is safe to say that defending them would not be easy. The only way for the government to promote renewable energy production domestically seems to be the Government Procurement exemption. However, as we observed in Canada – Renewables, its scope is limited as the government can only use the products for its purposes.
Further, the India – Solar Cells dispute shows that even international obligations with respect to sustainable development may fail to save LCRs if they are inconsistent with GATT. The WTO has to strike a balance between the interests of the developed and the developing world and also between the principles of free trade and sustainable development. It will always prefer the way which causes the least distortion to established trade principles. No matter how sensible LCRs may seem from a national government’s perspective, they do not figure out in the current international trade regime.
[i] Cathleen Cimino-Isaacs and Jan Zilinsky, ‘Local Content Requirements: Backdoor Protectionism Spreading under the Radar’ (PIIE, July 22, 2016) <https://www.piie.com/blogs/trade-and-investment-policy-watch/local-content-requirements-backdoor-protectionism-spreading> accessed 18 October 2022.
[ii] ‘Local Content Measures Scrutinized by WTO Members in Investment Committee’ (WTO, June 6, 2019) <https://www.wto.org/english/news_e/news19_e/trim_06jun19_e.htm> accessed 20 October 2022.
[iii] United Nations Conference on Trade and Development, ‘Local Content Requirements and The Green Economy’ (UNCTAD/DITC/TED/2013/7, 13 June 2013) 3.
[iv] ibid 4.
[v] Mandy Meng Fang, ‘Local Content Measures and the WTO Regime: Addressing Contentions and Trade-Offs’ in Damilola S Olawuyi (ed), Local Content and Sustainable Development in Global Energy Markets (Cambridge University Press 2021) < https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3753334> accessed at 22 October 2022.
[vi] General Agreement on Tariffs and Trade, art III:4, October 30, 1947, 55 U.N.T.S. 194.
[vii] Agreement on Subsidies and Countervailing Measures, 15 April 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1869 U.N.T.S. 14.
[viii] Morgan Bazilian, Victoria Cumming and Thomas Kenyon, ‘Local-Content, Rules for Renewables Projects Don’t Always Work’ (2020) 32 Energy Strategy Rev. < https://doi.org/10.1016/j.esr.2020.100569> accessed 23 October 2022.
[ix] Mukta Batra and Namit Bafna, ‘Renewable Energy: The WTO’s Position on Local Content Requirements’ (2018) 39 The Energy Law J. 401 <https://www.eba-net.org/assets/1/6/18-401-426-Batra_%5BFINAL%5D.pdf > accessed 23 October 2022.
[x] ‘WTO | What is the WTO? – What we stand for’ (World Trade Organization – Home page – Global trade) <www.wto.org/english/thewto_e/whatis_e/what_stand_for_e.htm> accessed 20 November 2022.
[xi] Morgan(n 5).
[xii] The chapeau i.e. the introductory note of Article XX of GATT.
[xiii] GATT (n 6) art XX(b).
[xiv] GATT(n 6) art XX(g).
[xv] Batra (n 9).
[xvi] Umberto Celli Junior, ‘The Impact of WTO Case Law on the Use of Local Content Requirements’ [2019] The WTO Dispute Settlement Mechanism 83 < https://www.researchgate.net/publication/332312462_The_Impact_of_WTO_Case_Law_on_the_Use_of_Local_Content_Requirements> accessed 22 October 2022.
[xvii] WTO, Indonesia — Certain Measures Affecting the Automobile Industry (WT/DS54/R, WT/DS55/R, WT/DS59/R, WT/DS64/R, 2 July 1998).
[xviii] WTO, Canada – Certain Measures Affecting the Automotive Industry (WT/DS124/AB/R, 19 June 2000).
[xix] WTO, India – Measures Affecting the Automotive Sector (WT/DS146/ R, 5 April 2002).
[xx] WTO, Canada — Certain Measures Affecting the Renewable Energy Generation Sector (WT/DS412/AB/R and WT/DS426/AB/R., 6 May 2013)
[xxi] WTO, India – Certain Measures Relating to Solar Cells and Solar Modules (WT/DS456/R, 14 October 2016) as modified by the Appellate Body Report WT/DS456/AB/R.
[xxii] U. C. Junior (n 16) 92.
[xxiii] ibid.
[xxiv] Fang (n 5) 13.
[xxv] GATT (n 6) art XX(d), exception to measure that are “necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement, including those relating to customs enforcement, the enforcement of monopolies operated under paragraph 4 of Article II and Article XVII, the protection of patents, trademarks and copyrights, and the prevention of deceptive practices;”
[xxvi] WTO, WTO Analytical Index GATT 1994 – Article XX (Jurisprudence) <https://www.wto.org/english/res_e/publications_e/ai17_e/gatt1994_art20_jur.pdf> accessed 25 October 2022,48.
[xxvii] Gladwin Issac and Trishna Menon, ‘When Good Intentions Are Not Enough: Revisiting the US-India Solar Panels WTO Dispute’ (2017) 10(2) OIDA IJSD 37 <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2971690> accessed 22 October 2022.
[xxviii] Preamble, Marrakesh Agreement Establishing the World Trade Organization, 15 April 1994, 1867 U.N.T.S.154.
[xxix] ibid 21.
[xxx] ‘Over Half of the People in Least Developed Countries Lack Access to Electricity’ (UNCTAD, July 1, 2021) <https://unctad.org/topic/least-developed-countries/chart-july-2021> accessed 26 November 2022.
[xxxi] Batra(n 9) 18.
[xxxii] Morgan(n 8).
[xxxiii] Shiue-Hung Lin and Yungho Weng, ‘Can strengthening the local content requirements meet a government’s need to raise industrial productivity and production?’ (2020) 23(1) J. Appl. Econ. 316 <http://dx.doi.org/10.1080/15140326.2020.1753468> accessed 8 November 2022.
[xxxiv] Benedict Probst and others, ‘The short-term costs of local content requirements in the Indian solar auctions’ (2020) 5(11) Nature Energy 842 <http://dx.doi.org/10.1038/s41560-020-0677-7> accessed 8 November 2022.
[xxxv] Morgan(n 8).
Indian Journal of International Economic Law 
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