United States: WTO Appellate Body Rules Against India's Domestic Content Requirements For Solar Products

On September 16, 2016, the WTO's Appellate Body released its report in India – Certain Measures Relating to Solar Cells and Solar Modules. The dispute concerned a complaint by the United States against certain domestic content requirements ("DCRs") imposed by India on solar power developers ("SPDs") selling electricity to governmental authorities. The DCR measures required that certain types of solar cells and modules used by SPDs be made in India.

This appeal stemmed from a February 24, 2016, WTO panel decision that struck down the DCRs. India appealed the panel's findings to the Appellate Body but, as detailed below, was unsuccessful. The WTO's Appellate Body continued to find India's DCRs to be WTO inconsistent.

In defense of the DCRs, India made the argument that they were permitted by the derogation under Article III:8(a) of the GATT 1994 (which basically permits DCRs if the items purchased are to be used by a government itself). The panel disagreed. In its examination of the issue, the Appellate Body considered that, to be allowed under Article III:8(a), the product purchased by way of procurement must necessarily be "like," "directly competitive" with or "substitutable" for (i.e., in a "competitive relationship" with) the foreign product subject to discrimination. Although a consideration of inputs and processes of production may inform the question of whether the product purchased was in a competitive relationship with the product being discriminated against, it did not displace the competitive relationship standard. The question of whether the defense of Article III:8(a) may also extend to discrimination relating to inputs and processes of production used in respect of products purchased arises only after the product purchased has been found to be in a competitive relationship with the product subject to discrimination.

Thus, the Appellate Body upheld the panel's finding that the DCR measures were not covered by the derogation under Article III:8(a) of the GATT 1994 and that, therefore, the DCR measures were inconsistent with Article 2.1 of the Agreement on Trade-Related Investment Measures ("TRIMs Agreement") and Article III:4 of the GATT 1994.

In defense of its DCRs, India also made the argument that they were permitted under Article XX(j) of the GATT 1994 (which basically permits DCRs if the items are in "short supply"). Again, the panel disagreed. In its examination of the issue, the Appellate Body stated that in assessing whether products were "in general or local short supply" within the meaning of Article XX(j), a panel should examine the extent to which a particular product is "available" for purchase in a particular geographical area or market and whether this is sufficient to meet demand in the relevant area or market. Such analysis may, in appropriate cases, take into account not only the level of domestic production of a particular product and the nature of the products that are alleged to be "in general or local short supply" but also such factors as the relevant product and geographic market, potential price fluctuations in the relevant market, the purchasing power of foreign and domestic consumers and the role that foreign and domestic producers play in a particular market, including the extent to which domestic producers sell their production abroad. Due regard should be given, the Appellate Body said, to the total quantity of imports that may be "available" to meet demand in a particular geographical area or market. It may thus be relevant to consider the extent to which international supply of a product is stable and accessible, including by examining factors such as the distance between a particular geographical area or market and production sites as well as the reliability of local or transnational supply chains. Just as there may be factors that have a bearing on "availability" of imports in a particular case, the Appellate Body declared that it is also possible that despite the existence of manufacturing capacity, domestic products are not "available" in all parts of a particular country or are not "available" in sufficient quantities to meet demand. In all cases, the responding party has the burden of demonstrating that the quantity of "available" supply from both domestic and international sources in the relevant geographical market is insufficient to meet demand.

Thus, the Appellate Body disagreed with India to the extent that it argued that "short supply" can be determined without regard to whether supply from all sources is sufficient to meet demand in the relevant market. Consequently, the Appellate Body upheld the panel's finding that solar cells and modules were not "products in general or local short supply" in India within the meaning of Article XX(j) of the GATT 1994 and the panel's ultimate finding that the DCR measures were not justified under Article XX(j) of the GATT 1994.

In its final defense of the DCRs applicable to solar cells, India also made the argument that they were permitted under Article XX(d) of the GATT 1994 (which basically permits measures such as DCRs when they are necessary for enforcement of other WTO-consistent laws and regulations). The panel disagreed. In its examination of the issue, the Appellate Body stated that in determining whether a responding party had identified a rule that falls within the scope of "laws or regulations" under Article XX(d) of the GATT 1994, a panel should evaluate and give due consideration to all the characteristics of the relevant instrument(s) and should avoid focusing exclusively or unduly on any single characteristic. In particular, it may be relevant for a WTO panel to consider, among others: (i) the normative nature of the instrument and the extent to which the instrument operates to set out a rule of conduct or course of action that is to be observed within the domestic legal system of a WTO Member; (ii) the degree of specificity of the relevant rule; (iii) whether the rule is legally enforceable; (iv) whether the rule has been adopted or recognized by a competent authority possessing the necessary powers under the domestic legal system of a WTO Member; (v) the form and title given to any instrument or instruments containing the rule under the domestic legal system of a WTO Member; and (vi) the penalties or sanctions that may accompany the relevant rule. Importantly, this assessment must always be carried out on a case-by-case basis in light of the specific characteristics and features of the instruments at issue, the rule alleged to exist, as well as the domestic legal system of the WTO Member concerned.

The Appellate Body found that India had not demonstrated that the passages and provisions of the domestic instruments identified by India, when read together, set out the rule "to ensure ecologically sustainable growth while addressing India's energy security challenge, and ensuring compliance with its obligations relating to climate change," as alleged by India. Consequently, it upheld the panel's finding that India had not demonstrated that the DCR measures were measures "to secure compliance with laws or regulations which were not inconsistent with" GATT 1994 and the panel's ultimate finding that the DCR measures were not justified under Article XX(d) of the GATT 1994.

Finally, this Appellate Body decision is also noteworthy due to a separate opinion by an undisclosed Appellate Body member that addresses the adjudicatory function of the Appellate Body. The member stated that the Understanding on Rules and Procedures Governing the Settlement of Disputes ("DSU") "describes the Appellate Body's function in broad terms: to 'hear appeals from panel cases.'" The member went on to explain that it is up to the Appellate Body to determine how to address issues on appeal, giving consideration to the overarching principles of "prompt settlement" and arriving at a "positive solution" to disputes. Most importantly, the member asserted that it is the Appellate Body's duty to clarify the WTO agreements by offering interpretive guidance and that this function cannot be carried out "in an abstract manner." Additionally, the member noted that WTO Members have a systemic interest in receiving guidance from Appellate Body reports that are applicable beyond the particular dispute at hand. It is widely believed that this separate opinion comes in response to recent criticism by various WTO Members – particularly the United States – that the Appellate Body overreaches its mandate when it delivers legal opinions that offer interpretations of the WTO agreements that go beyond the specific arguments before it. These criticisms recently led the United States to block the appointment of South Korea's Seung Wha Chang to a second term on the Appellate Body.

Learn more about our International Trade, Government Relations and World Trade Organization practices.

Originally published on 23 September 2016

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