Liberalised trade and protection of domestic industry are not necessarily antithetical to each other.
Trade agreements allow for policy spaces to protect and incentivise domestic manufacturers and service providers.
While rising protectionism has become a worldwide trend, countries continue to selectively use trade agreements for initiating disputes.
Ensuring trade compatibility assessments prior to enacting domestic laws and policies is crucial to avoid protracted disputes.
Rising protectionism in Trump’s USA has been the focus of recent headlines. The US is, however, not alone. Increasing protectionism since the financial crisis of 2008 has become a worldwide phenomenon, and many countries, including India, are both targets as well as architects of protectionist policies. The underlying justification is that protectionism will benefit domestic industry, and trade threatens the same. This simplistic assumption is inaccurate.
A fundamental principle of any trade agreement is that of “comparative advantage”— a country should specialise in producing and exporting only those goods and services which it can produce more efficiently (at lower opportunity cost) than other goods and services (which it should import).
The principle of “national treatment” in trade agreements requires countries to provide like, or identical treatment for domestic and imported goods and services.
At the same time, nurturing the domestic industry is a sovereign function and right. The rules of trade are all about balancing the two in the least trade distortive manner.
Let us take the example of the WTO Agreements. While by no means perfect, they allow for valuable spaces for domestic policy choices for incentivising domestic players. Building in WTO compatibility assessments prior to law and policy formulation, however, is not always an integral consideration.
As a result, WTO disputes challenging preferential treatment have been consistently arising against both developed and developing countries. India lost its first dispute in this regard (India-Autos) in 2002, when a WTO panel held that the requirement maintained by India on automotive manufacturers to use a certain proportion of local parts and components in the manufacture of cars and automotive vehicles (“indigenisation” condition), violated the principle of non-discriminatory treatment of domestic and imported products.
More recently, local content in the renewable energy sector has been the subject matter of two WTO disputes: In 2013, the WTO ruled against domestic content requirements attached to contracts granted under the feed-in tariff programme established by the Canadian Province of Ontario, for certain wind and solar photovoltaic electricity generation projects. This was followed by the India-Solar dispute wherein the mandate for solar power developers to use domestically manufactured solar cells and modules, was held to be inconsistent with India’s WTO obligations.
A study for the International Centre for Trade and Sustainable Development (ICTSD) has noted that domestic content have been used in the renewable energy policies of many other countries including China, Spain, Italy, France, Greece, Croatia, Brazil, South Africa, Turkey and also the US, which had initiated the WTO dispute against India. India too has now sought for the constitution of a WTO panel to examine the US policies and schemes.
Designing WTO Compatible Policies
The WTO ruling against India certainly does not mean that India cannot support its domestic manufacturing sector. What is really needed is the development and design of schemes that can encourage domestic manufacturing in a WTO-compatible manner. A sound WTO compliant measure, for instance, is incentivising investments in manufacturing activities in India — such as investment tax credits applied without any discriminatory conditions. However, even though the foreign direct investment (FDI) regime is fully liberalised for renewable energy manufacturing, Indian solar power developers are predominantly dependent on imported solar cells and modules. WTO compatible schemes to reverse this includes production subsidies directly paid to domestic manufacturers.
Another way in which to insulate Domestic Content Requirement (DCR) measures from WTO action is to incorporate them into government procurement schemes that are intended for a government purpose, and not with a view to commercial resale.
In the renewable energy sphere, for instance, this can be designed by ensuring that renewable energy requirements for a country’s defence establishments, or public transportation systems, or municipal schools and hospitals, are based on power generated from domestically manufactured equipment. These need to be carefully crafted whereby the procurement from domestic manufactures is by the state for a clear identifiable government purpose and not for commercial resale.
Trade compatibility assessment should not be an afterthought
While increasing protectionism does threaten multilateral trading rules, countries are not abandoning the same. The WTO continues to be used selectively — with recent disputes having been initiated by China, US, India, among others. Winning or losing disputes will continue to have consequences. Ensuring adherence to trade rules while formulating laws and policies continues to remain crucial for governments and businesses.
The author is Partner,
Clarus Law Associates, New Delhi, and specialises in international trade and investment laws.