China has dragged India to WTO for consultation over the PLI Scheme, alleging that certain measures undertaken by the Indian government with respect to EV industries are hinged upon the use of domestic products over imported goods and therefore, it effectively discriminates against the Chinese products.[i] One of the principles of WTO, ‘National Treatment Principle’ mandates for equal treatment of both domestic and imported products of like nature. This principle ensures that imported goods are not unfairly discriminated against in the host country’s domestic market and essentially frowns upon the policy of protectionism. Additionally, another important agreement under WTO, Agreement on Trade Related Investment Measures is premised on recognizing that certain trade measures can have trade restrictive and distorting effects and hence must be avoided by the members. It gives a list of measures that a member country cannot undertake on account of it being against GATT Article III (national treatment) or Article XI (quantitative restrictions).[ii]
Consultation is the means to formally initiate a dispute in WTO and it serves as a mechanism to amicably solve disputes between the countries without heading down the road of litigation. However, after 60 days of initiating consultation, if parties did not come to an amicable solution, either of the parties can request for adjudication by the panel. If India refuses consultation, then China can take up the matter for adjudication by the panels.
WHAT SCHEMES, ACCORDING TO CHINA VIOLATE THE PRINCIPLES ENSHRINED IN GATT AND TRIMS?
China has identified three major schemes, which are implemented under the aegis of Ministry of Heavy Industries, Government of India whose eligibility and conditions for disbursement of incentives they say violate the principles of WTO, especially because to avail incentives the manufacturer must use domestic goods over imported ones. Domestic content requirement or DCR is a policy implemented by the governments that mandates that a certain percentage of the product’s value or its input must be domestically sourced.[iii] DCR is also referred to as a local content requirement. It is a strategic method of imposing conditions on import of goods and services, whereby to be considered eligible under the scheme, a certain percentage of the products’ inputs must be procured from the domestic market.
a) Production Linked Incentive, National Programme on Advanced Chemistry Cell (ACC) Battery Storage (“PLI ACC Scheme”)[iv]
The scheme was introduced in 2021 realising that investment in ACC were negligible in India and that most of the domestic demand for ACC were being met through imports. Only those firms that commit to setting up a minimum of 5 GWh of ACC manufacturing facility are considered a beneficiary under the scheme. Additionally, the beneficiary has to make sure to achieve a domestic value addition of 25% and commit a mandatory investment of rupees 225 crore per GWh. Furthermore, the beneficiary should achieve a domestic value addition of 60% within 5 years. The incentive disbursement shall only commence once the committed DAV and actual sale of ACC begin.
b) PLI Scheme for Automobile and Auto Components (PLI Auto) [v]
This scheme is aimed to increase the manufacturing of advanced automotive technology (AAT) products. It is focused on two types of vehicles- battery electric vehicle and hydrogen fuel cell vehicle. This scheme provides a sales value linked incentive rather than a fixed incentive. This scheme is sub-divided into Champion OEM Incentive Scheme and Component Champion Incentive Scheme. Champion OEM Incentive Scheme is a ‘sales value linked scheme’ applicable on above mentioned categories vehicles of all segments, i.e two-wheelers, four-wheelers etc. What it means is that there is a determined sales value and corresponding incentive that can be claimed, i.e if the manufacturer hits a particular sales value he can claim the corresponding incentive given under the scheme. However, to be eligible under the scheme, a DAV of at least 50% must be achieved. Component Champion Incentive Scheme is also a sales value linked scheme which aims to increase the manufacturing of auto components which are related to advanced automotive technology and again to claim incentive under the scheme, the manufacturer must have achieved at least 50% of DAV. In short, both these schemes are sales value linked incentives, where, to claim them the manufacturer must have achieved at least 50% of DAV.
c) EV Passenger Car Scheme i.e., SCHEME TO PROMOTE MANUFACTURING OF ELECTRIC PASSENGER CARS IN INDIA (SPMEPCI)[vi]
The scheme aims to make India a manufacturing hub of EV passenger vehicles (e-4W) and to attract foreign investments in India in this sector. To avail the benefits of this scheme, the applicant has to achieve 25% DVA (Domestic Value Addition) by the third year of availing the scheme and minimum 50% of DVA by the end of 5 years of availing the benefits under the scheme. Additionally, the applicants’ commitment to building manufacturing facilities and achieving DVA shall be backed by a bank guarantee. Further, the bank guarantee will only be released once the applicant achieves 50% DVA and investment of a stipulated amount is made or to the extent of duty forgone whichever is higher.
These measures, according to China seem contravening the below listed provisions:
i) Article 3.1(b) and Article 3.2 of Subsidy and Countervailing Measures. Article 3 of the Agreement on Subsidy and Countervailing Measures, prohibits subsidies contingent upon the export performance and upon the use of domestic goods over imported goods, regardless if the implementation of the subsidy is by law or in fact. [vii]
ii) Violation of Article III:4 of GATT 1998: The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. [viii]
iii) Article 2.1 of TRIMS “Without prejudice to other rights and obligations under GATT 1994, no Member shall apply any TRIM that is inconsistent with the provisions of Article III or Article XI of GATT 1994.”
iv) And particularly, EV Passenger Car Scheme is contravening Article 1:1 of GATT 1994 which specifically deals with Most Favoured Nations treatment. [ix]
But what is interesting is that China has pushed against not only India, but also USA and Turkiye for allegedly implementing schemes and programmes that could favour the domestic over imported goods particularly in the EV and Renewable energy sectors. China has filed a request for consultation with the USA against the latter’s certain subsidies under the Inflation Reduction Act.[x] Under the Act, eligible applicants will be given a Tax credit bonus. Additionally, North American assembly of the electric vehicle is a pre-condition to availing either critical mineral component or battery component of the Clean Vehicle Credit. To qualify for the former, the extraction or processing of the mineral which is present in the electric vehicle must have occurred in the US or in any country with whom USA has FTA or the recycling of the critical mineral must have happened in North America. Furthermore, if the extraction or processing or recycling is carried out by a “foreign entity of concern” then the Clean Vehicle will not qualify for the tax credit. To qualify for the battery component of Clean Vehicle Tax Credit, a certain percentage of the value of the battery components of the EV must be manufactured or assembled in North America.
Another tax subsidy given under the Inflation Reduction Act is Renewable Energy Tax Credits. Under the bracket of Renewable Energy Tax Credits there are two Investment Tax Credits and two Production Tax Credits. Under these, a bonus subsidy is provided contingent upon the use of domestic goods over imported ones.
In the same line, China has also filed a consultation with Turkiye alleging that their tariff scheme is discriminating against Chinese products.[xi] The measures China argues as against the WTO principles are additional duties on EV, import permit certificate scheme and additional duties on other types of vehicles and investment certificate exemption. China alleges that Turkiye imposes additional duties, i.e 40% ad valorem on the importation of EVs from China that fall under certain tariff lines which is not imposed on the importation of EVs from any other origins. Likewise, to import EVs from China there is a requirement of import permit certificates which again is not required for importing EVs from other countries. The same conditions apply for additional duties on other types of vehicles as well. This consultation is important, even though the challenged schemes are not related to local content requirement, it still restricts the exports from China.
All the three consultations China has requested have not reached a settlement or decision yet, but these will be something to look for in the future as it could potentially shape how nations mould their domestic EV and Renewable energy sector. The Chinese EV industry is heavily subsidized to promote its domestic manufacturing.[xii] Interestingly, with Chinese consumption of EV in its domestic market not sufficient , the international market will be flooded with Chinese EV products. It is interesting to see how the WTO dispute settlement body would balance the member countries’ right to protect its domestic market from dumping and boost its domestic manufacturing capabilities. Further, another aspect is to see how countries adopt policies and schemes to boost their own domestic EV market without violating the WTO framework on subsidies.
It is not the first time that India has come under scrutiny for favouring domestic industry. In 2017, the US had taken India to the WTO for allegedly violating the TRIMS and GATT agreements over the National Solar Mission.[xiii] The National Solar Mission promoted the government procurement of electricity from solar power manufacturers on the condition that they use domestically manufactured solar cells or modules to produce electricity. The US alleged that such a requirement amounted to a domestic content requirement which was prohibited under the TRIMS agreement. The Indian government had taken the following defenses, such as government procurement derogation under Article III(8), global and local supply shortage and compliance of national and international law.
[i] India – Measures Concerning Trade in the Automotive and Renewable Energy Technology Sectors, Request for Consultation by China, docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-DP.aspx? language=E&CatalogueIdList=319200&CurrentCatalogueIdIndex=0&FullTextHash=&HasEnglishRecord=True&HasFrenchRecord=True&HasSpanishRecord=True
[ii] WTO, Agreement on Trade‑Related Investment Measures (TRIMs), https://www.wto.org/english/tratop_e/invest_e/trims_e.htm
[iii] Pranav Narang, Incentive Structure for Domestic Electronic Manufacturing Industry Under the WTO Regime, RMLN L.U. Law Rev. (May 25, 2020), https://rmlnlulawreview.com/2020/05/25/incentive-structure-for-domestic-electronic-manufacturing-industry-under-the-wto-regime/
[iv] Cyril Amarchand Mangaldas, Analysis of PLI ACC Scheme for ACC Battery Storage (Dec. 16, 2021), https://corporate.cyrilamarchandblogs.com/2021/12/analysis-of-pli-acc-scheme-for-acc-battery-storage/
[v] Ministry of Heavy Industries, PLI Auto Scheme (Sept. 2023), https://heavyindustries.gov.in/sites/default/files/2023-09/PLI-Auto-Scheme.pdf
[vi] S.O. 1363(E), Gazette of India No. GI/2024 (1) (Mar. 15, 2024), https://heavyindustries.gov.in/sites/default/files/2024-04/gazette_notification_15.03.2024.pdf
[vii] GATT, 1986, https://www.wto.org/english/docs_e/legal_e/gatt47.pdf
[viii] Id. at 6.
[ix] Id. at 2.
[x]United States- Certain tax Credits under the Inflation Reduction Act, Request for Consulation by China, http://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-DP.aspx?language=E&CatalogueIdList=316220,311873,307789,305356,305145&CurrentCatalogueIdIndex=4&FullTextHash=&HasEnglishRecord=True&HasFrenchRecord=True&HasSpanishRecord=True
[xi] Turkiye- Measures Concerning Electric Vehicles and Other Types of Vehicles from China, Request for Consulation by China, docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-DP.aspx?language=E&CatalogueIdList=319260,317438,314984,312371,309808&CurrentCatalogueIdIndex=4&FullTextHash=&HasEnglishRecord=True&HasFrenchRecord=True&HasSpanishRecord=True
[xii] Bloomberg News, China’s EV Manufacturers Received $231 Billion in Aid Over 15 Years, Finds Study (June 21, 2024), https://www.business-standard.com/world-news/china-s-ev-manufacturers-received-231-bn-in-aid-over-15-years-finds-study-124062100126_1.html
[xiii] India — Certain Measures Relating to Solar Cells and Solar Modules, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds456_e.htm
