Canada: WTO Likely To Deem Domestic Content Requirements Illegal

Last Updated: November 5 2012
Article by Sven Walker

In my article on "The End of Domestic Content Requirements May be Near" from September 24, 2012, I reported that the domestic content requirements under the Ontario Power Authority's ("OPA") Feed-in Tariff ("FIT") Program were being challenged at the World Trade Organization ("WTO") by Japan and the European Union on the basis that the domestic content requirements are contrary to Canada's free trade obligations under the General Agreement on Tariffs and Trade, 1994 ("GATT").

After months of waiting for a panel report from the WTO's Dispute Settlement Body ("DSB"), the International Centre for Trade and Sustainable Development ("ICTSD"), citing a confidential interim WTO dispute settlement report, has confirmed that the panel has ruled against Canada and the OPA's domestic content requirements.

Interim Report

Prior to the final decision of the DSB, which is expected to be released in November 2012, the panel circulated an interim report to the parties on September 20. Interim reports are confidential and preliminary rulings are sent to the parties to the dispute a few weeks before the final report is released. The parties then have a chance to comment on the report. However, the final report is normally broadly in line with the interim report.

Currently, the OPA's FIT Contract requires a minimum quota of goods and services to be sourced from Ontario (either 25% or 50% in the case of wind projects and 60% in the case of solar projects). Japan argued before the panel in March of 2012 that these domestic content requirements were discriminatory because they are "... designed to promote the production of renewable energy generation equipment in Ontario rather than to promote the generation of renewable energy."

According to the ICTSD, the report circulated to the parties in September confirms this argument that the OPA's domestic content requirements violate the WTO's non-discrimination principles established in GATT and the WTO Agreement on Trade-Related Investment Measures (TRIMS) because they discriminate against foreign suppliers. Yet, the ruling is supposedly not entirely in favour of the European Union and Japan. The panel did not agree with the allegation of the European Union and Japan that the OPA's domestic content requirements amounted to illegal subsidies.

Ruling in Favour of Challenging Parties

Once the official report is released and finds Ontario in violation of Canada's obligations under the GATT and TRIMS, the OPA may be forced to eliminate the domestic content requirements from its FIT contracts. The process associated with eliminating the domestic content requirements would force Canada to bring the OPA FIT Program and its related contracts into conformity with its WTO obligations as required by Article 19.1 of the WTO's Dispute Settlement Understanding.

Options Open to Canada:

When the official report is released, Canada can pursue one of two options with the findings:

  1. Achieve compliance with its WTO obligations by withdrawing the WTO-inconsistent measures or by issuing a revised set of requirements that modifies, amends or replaces the current requirements; or
  2. Appeal the Panel's ruling to the WTO Appellate Body ("AB").

Appeal Process

  1. Once the Panel releases its decision in November, the report needs to be circulated to the DSB of the WTO. The DSB has 60 days to adopt or reject the report (which must be done by consensus of the Members). However, the DSB will wait on adoption or rejection if they receive notice of one of the parties' intentions to appeal the report to the AB.
  2. If there is an appeal to the AB, the process of providing submissions, having an oral hearing, and the AB providing a report must be completed within 60-90 days. If the AB cannot provide the report within this time frame, they can receive an extension. The AB may uphold, modify or reverse the legal findings and conclusions of the Panel.
  3. The AB report will go back to the DSB for review and then it must be adopted or rejected. The AB report must be unconditionally accepted by the parties in the dispute as well. This must be accomplished within 30 days of the report going to the DSB.
  4. After a report is adopted (whether it is the initial panel decision in Point 1 or the AB report from Point 3), Canada would have to notify the DSB of its intentions to implement the adopted recommendations.
  5. If it is impractical to comply immediately, Canada will be given a reasonable period of time to comply. There are various ways to determine what a 'reasonable period of time to comply' is but a suggested WTO guideline is 15 months. However, the time frame could be earlier or later.

(For further information on the WTO's Appeal Procedures see Article 17: Appellate Review from the WTO's Understanding on Rules and Procedures Governing the Settlement of Disputes.)

Future of the FIT Program

It is unlikely that the domestic content requirements of OPA's FIT Program will be at an end once the WTO panel releases its final report in November. Canada can still appeal the decision to the WTO. It will also take the province of Ontario some time to become compliant with any final decision. If the domestic content requirements are removed completely from the FIT Program, equipment suppliers in Ontario's renewable energy sector may face sharpened competition from foreign competitors. We will need to wait and see what the panel report states when it is released and then see how the province of Ontario reacts. I also anticipate that it is unlikely that the any ruling will apply retroactively to existing OPA FIT Contracts as feed-in tariff rates were specifically established with a view to covering the higher than usual capital costs for domestic content compliant renewable energy generation equipment. In our experience, the cost of domestic content compliant renewable energy generation equipment is generally 25% to 50% more than the market price for such equipment in non-protectionist markets. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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