As was widely reported in the news media earlier this month, the World Trade Organization (WTO) ruled in favor of the United States on the latter's complaint against the Indian government's insistence on domestic / local content requirements (DCR / LCR) for its Jawaharlal Nehru National Solar Mission (NSM) for solar cells and solar modules. A WTO panel has ruled that India's National Solar Mission's DCR breaches trade rules and directed that India remove its subsidies for solar power or face sanctions. WTO's dispute settlement case DS456 documents in detail the work of Dispute Settlement Body (DSB) since 2013, pursuant to USA's first complaint on this issue. For the record, Indian subsidies under the NSM program is approximately $150K / MW capability of solar power, about $0.15/W.
The ruling comes nearly three years after the initial complaint. The United States of America approached the WTO on February 6, 2013 after the previous Indian Government under the leadership of then Prime Minister Dr. Manmohan Singh had earlier announced the DCR requirement for solar cells and solar modules. USA had argued that the DCR violated Article III: 4 of the GATT 1994, Article 2.1 of the Trade-Related Investment Measures (TRIMs) Agreement; and, Articles 3.1(b), 3.2, 5(c), 6.3(a) and (c), and 25 of the Subsidies and Countervailing Measures (SCM) Agreement.
India's NSM Solar Initiative is aimed at adding 100 Gigawatts of solar power capacity by 2022, roughly more than the current solar capacity of the world's top five solar-producing countries combined, as the BBC article cites. The domestic content requirement stipulated by the Indian government was for the most part an anti-dumping measure against China, Taiwan and even the US. Another aspect of LCR/DCR is that India plans to reduce the cost of solar power generation through R&D as well as domestic production of critical raw materials, components and complete systems of solar power. As this author has witnessed the presence of Indian Solar fabs at the Semicon / InterSolar tradeshows in the last five years, India has gone from having no homegrown solar capacity to one of the world's fastest-growing solar industries. However, cheaper imports have threatened India's solar industry, some are even bankrupt.
What is ironic is that India as the lone holdout at the last Climate Change talks at Paris in December 2015 was coerced into signing the climate agreement. How ever, India did not commit to a limit on CO2 emissions. Just for comparison, India's carbon emissions are 1.7 tons per capita each year whereas that of the U.S. is 17 tons per capita, according to World Bank 2011. Consider this, each US citizen's annual carbon footprint is equivalent to that of 10 Indian citizens. This latest move by the WTO at the behest of U.S. clearly indicates that trade trumps real action when it comes to climate change.
Making matters more skewed, more than half of U.S. states have subsidies for renewables and include “buy-local” rules for creating local jobs and encourage solar entrepreneurs. India could approach the WTO in a move against the U.S. and may even win. But that comes with the risk of an even heavier price to pay –India needs investments to the tune of $100 billion to realize its green energy goals, of which, U.S. has pledged to provide India with $4B in loan guarantees. More than 50% of the $100 billion needed is expected to come from overseas sources, France being one of the countries recently expressing interest. If economic neoliberalism has its way, it may force other developing economies to move the WTO, as some have argued that it is time to change the outdated trade models that prevail over climate change
The DCR for the first phase of NSM covers Silicon-based solar cells and modules, a market which U.S. has already ceded to China, Taiwan, and others. When it comes to domestic solar installations, the United States is indeed a victim like India with the aggressive dumping of Silicon solar cells and modules by China. In fact, India's firm stand on DCR originated to prevent the dumping of Solar cells and modules by China. Instead of what would have been a lucrative local market for Indian solar fabs, the cheaper imports forced several solar upstarts into bankruptcy.
Asian geopolitics not withstanding, there are other factors that also influenced DCR, such as the currency manipulations by China as well as currency fluctuations with other countries exporting to India, US being one of them. The Indian Rupee has lost ground against the dollar, losing more 12% of its value in 2015, making US imports to India more expensive.
The DCR for the second phase of India's NSM was extended to include thin film solar technologies. U.S. exports most of the thin film solar to India and has dominated the Indian market. In 2012, to ease the market entry of U.S.-made thin film solar cells in to India, the Ministry of New and Renewable Energy (MNRE) did not stipulate domestic sourcing requirement for thin-film solar modules. As a result, thin film solar imports from China and US flourished in India, accounting for more than 60% of the solar projects in India. Even though the efficiency of thin film solar cells is far below that of polycrystalline solar cells, advances in manufacturing automation have driven the cost of thin film solar cells to the point where U.S. can compete with China.
However, with currency fluctuations, this may not hold true always and may force US manufacturers to seek government subsidies to offset below cost sales of solar products. Nevertheless, Indian solar power developers so far have taken advantage of the very low interest loans from the U.S. Export-Import bank, rates as low as 3.1% where as the prevailing business loans are nearly at 14%. China solar makers such as LDK and Trina are equally competitive, allegedly selling below cost in India and also offering finance terms.
What is at stake for the US & the road ahead?
India will once again appeal against the earlier WTO ruling, causing further delays in its NSM Solar Initiative. This impacts negatively on all parties in the dispute, costing revenue, jobs, etc. on all sides while also denying electric power to 400 million Indians. Of the remaining Indian population, the existing power supply is very intermittent, scheduled blackouts accepted as routine. Affordable and reliable source of power is a dire need for that country's growth.
In addition to its appeal and its outcome yet to be determined, the WTO decision has other implications for India. For one, it could to push India to open up more solar products for imports, creating grounds for a price war on thin film products between China and the U.S. This has far reaching effects beyond commerce for both U.S. and India, the latter definitely not looking forward to an expanded China hegemony in South Asia. With recent assertions and territorial claims of China in South China Sea and its ambitions to gain a foothold in the Indian Ocean, the U.S. should not allow the price tag of solar modules as a detractor for its long-term strategy in the subcontinent. Recent years have seen drastic improvements in relations between the US and India. It is to the full advantage of U.S. to find a common ground where parts of LCR/DCR could be allowed to stay, third party observers (of DS456) challenges not withstanding. More over, it is likely that U.S.' lead on modifications to DS256 in congruence with India will not elicit more challenges from other third party observers at the WTO.
Second, based on cost vs. energy output tradeoffs, the Indian solar developers may be forced to choose polycrystalline cells and modules, a market already dominated by China through aggressive and often below cost pricing. Though a bigger challenge than the thin film solar products, the US, along with EU, can alleviate some of the investment capital hurdles and provide the needed capital equipment and R&D to India in a phased manner lasting several years to meet LCR/DCR requirements. In fact, defense contractors and aviation companies like Boeing are already rolling out similar models.
As a third implication of last week's WTO ruling, it is plausible expect the Indian government to take a second look at the LCR/DCR policies. Instituted primarily to encourage domestic industries and R&D, its effects are far more complex and are invariably linked with politics of trade imbalances on all sides. Upgrading its manufacturing infrastructure and R&D to 21st century standards and beyond has been the topmost priority of the current and previous Indian governments. LCR/DCR could be positioned to achieve a path to local R&D and manufacturing on a longer scale than what is currently proposed, perhaps segment the products for sliding time scales. In the end, the return on investment for both parties should create an attractive value proposition for US and India.
A fourth topic to address would be in the area of professional education. India has made great strides in its educational standards but still lags when it comes to curriculum on alternative energy and the so-called Greentech. Increased cooperation between U.S., EU and India to establish technology centers within universities as well as Technoparks could replicate the successful models of IITs.
A fifth recourse to the imbroglio would be for both sides of the WTO complaint to revisit the complete ecosystem of green energy and consider an increased scope for engagement and mutual cooperation for research and development and manufacturing. This may take much longer than the time India currently has at its disposal with its pending WTO appeal as its priority.
It makes sense for U.S. and India to have more dialogs and engage the professional communities and NGOs on all sides to provide inputs. Though a difficult challenge to overcome, I think the economics of a cooperative settlement benefitting both sides far outweigh the outcomes of a unilateral and politically appealing solution on either side. Let us know your thoughts in the comments section below.