Recently, US has challenged India’s decision to enforce domestic content requirement in the second phase of the National Solar Mission. India has put a condition in the second phase that half of the capacity being auctioned is to be built with locally made equipment. This translates to 375 megawatts worth of installation, which is about 10 percent of the total capacity India has offered in the past year. The fact that India is trying to protect and nurture its domestic solar manufacturers has not gone down well with Uncle Sam. Infact this is not happening for the first time, even earlier in 2012 US had tried to take India to WTO though it seems to be more determined this time! Before we delve into greater depths PLEASE don’t draw any tangent to the diplomat issue, for heaven’s sake that there are larger things to affect the Indo-US relations than the Devyani Khorbade row!
What USA says
The charge made by USA is essentially that the domestic content requirement (DCR) in India’s national program discriminate against US solar exports. US is visibly miffed that India has extended the DCR to include thin films (which were exempted in the first phase). US claims that India being a signatory to WTO is in violation of the rules under
- The Article III:4 of the General Agreement on Tariffs and Trade (GATT) and
- The Article 2 of the Agreement on Trade-Related Investment Measures (TRIMS)
by allegedly providing more favorable treatment to domestic solar producers and products than to foreign ones. Roughly speaking, the WTO rules prohibits its members from subsidizing their exports, though there are several caveats.
What India says
India has chosen not to be meek and seems ready to battle US if taken to WTO. Even last year India had replied to US, and they decided not to pursue their case. Indian Commerce Secretary Rajeev Kher in an interview to a newspaper said that “Our policy is WTO compliant, (Also) We have clear evidence of 13 odd (U.S.) states which follow equally restrictive policies as they challenge against us. So, we are examining those policies.” He added India would participate in consultations if the U.S. initiates them. In a phone interview to Bloomberg Mr. Tarun Kapoor, Additional Secretary, MNRE said “We will give a reply, Most solar projects in India are allowed to import. We have sufficient quantities open for competition.”
Is this only for First Solar?
US has never been much of a ‘play by the rules’ country (For e.g. read this). The US thin film PV manufacturers (First Solar and others) ended up skewing the Indian PV market thanks to the generous low cost financing from the US Export Import Bank (Ex-Im). Infact experts argue that USA’s current stance of WTO threats is only going to help a single company (First Solar). As of August, First Solar ranked as India’s top panel supplier with 22 percent of the market, which is more than triple the share of the next biggest supplier (Canadian Solar Inc.). According to Bridge to India founder, Tobias Engelmeier “India isn’t a major market for any other U.S. solar cell or module maker. The U.S. complaint only helps one single American company“.
Unsurprisingly the US trade association SEIA has invoked the ‘need to protect the rights of American workers and American companies’ chant and has announced support to the decision by the U.S. government to initiate WTO dispute settlement proceedings. It might seem ironic that all this is being done just for 375 MW worth of capacity, but US is eying the larger projects which are being planned in India and does not want its manufacturers to be left out from the race.
WTO and the rules of the game
The complex rules in force at WTO are another matter altogether. The Agreement recognizes that governments use subsidies to achieve various policy objectives. It also defines different forms of government subsidy that can or cannot be provided in international trade. However for the enlightened ones there are several catches in this arrangement. Lets dig a little into what export credit agencies are to gain a further understanding. As Investopedia explains, Export credit agencies (ECAs) provide financing services such as guarantees, loans and insurance to domestic companies in order to promote exports from their own country. The primary objective of ECAs is to remove the risk and uncertainty of payments to exporters when exporting outside their country.
What has happened is that the US Export Import Bank (Ex-Im Bank in short, the ECA for USA, a federal agency) agreed to provide low cost financing to Indian companies subject to the condition that they necessarily buy US manufactured equipment. This might have been considered as a government supported subsidy to increase exports and hence inappropriate (by WTO), but the WTO rules are weird when it comes to dealing with ECAs. The export credit practices of a country that might otherwise be classed as a prohibited export subsidy, are actually allowed by WTO, provided that they follow the OECD’s rules on interest rate provisions. The weirder thing is that as the OECD Arrangement rules can be negotiated only by OECD member states, non-OECD countries like India are therefore bound by a set of provisions over which they can have no influence!
But not all is against India, Abhijit Das, Head, Centre for WTO Studies at the Indian Institute of Foreign Trade explains “If the procurement is done by the government and it is not for commercial sale, then it is not in violation of WTO rules”. And this is what India has been banking on.
The battle within…
The tussle between India and US has created a divide in the Indian solar industry, the two factions are majorly Indian manufacturers and Indian project developers. The Indian manufacturers are strongly backing the Indian Government. “The case is not justified as this is a government procurement programme and WTO guidelines don’t cover that. Apart from that, more than 80 per cent of the projected demand is there for imported content,” says Ajay Goel, chief executive officer, Tata Power Solar. Vivek Chaturvedi, chief marketing officer, Moser Baer adds, “This is the US pushing its agenda to protect its domestic industry. Government of India is doing the same and is absolutely right in doing so. We do not think it will have any impact whatsoever“.
While the solar cell manufacturers stand by the government’s decision to back the industry, the power project developers with eyes on their balance-sheets are in chorus with the exporters and foreign cells makers citing decreasing cost of solar power as the reason to import cheap cells. “Indian solar industry is new and use archaic technology. Imports are cheaper and of better quality. In case of imports coming from the US, finance is also provided. Any developer looking for low solar power cost would opt for imports. This is in the larger benefit of the nation,” said one of the India’s largest power producers (anonymously) in a statement to the Economic Times. Even though First Solar had admitted that its products are not suitable for hot climates, power producers seem eager to forget that in lieu of the low cost financing available from the Ex-Im bank.
Offense is the best defense
In a complaint to WTO last year, India alleged that the US, both at the federal and state levels, is offering subsidy programmes in the sector for local content requirements, making the entry of Indian companies difficult and breaching global trading rules. India had specifically named four US states – Connecticut, Delaware, Massachusetts and Minnesota – where such a programme was on to promote local firms. The list has currently grown to 13! (On a side note, the number seems to have been carefully chosen to bring bad luck to US).
Tata Power Solar CEO Ajay Goel in an interview to Business Standard said “Preferential treatment is given to US manufacturers. Due to this, we have not been able to make much inroads there. We have a bunch of investments on hold because of this,”. Deepak Puri from Moser Baer adds “Over a period, we realised many US states were promoting schemes providing fiscal or other benefits for RE products, linked to the use of their local content. By giving varied incentives for use of their local content, a large number of the states in the US made it unviable for us to do business there”.
Mexican standoff seems to be the only accurate analogy to describe what is happening in the solar sector, with everyone fighting everyone else. The action deepens a global solar trade spat spanning three continents that has prompted the European Union to curb imports of Chinese panels, China to impose tariffs on U.S. polysilicon, and U.S. to levy duties on Chinese cells. India has said that it is investigating U.S. policies supporting solar panel makers. Others under the purview include China, Malaysia, Europe and Japan. The findings may lead India to impose import tariffs on these systems. Interestingly there are 14 past or current WTO cases between India and the United States, whose bilateral trade in goods measured $63.7 billion last year, excluding the latest case.
What I think…
It is important to note that solar manufacturers in China and the US are receiving substantial state subsidies and loan guarantees from their governments. Since 2007, China’s state-owned banks have given $18 billion in low-rate, preferential loans to domestic solar manufacturers. Consequently, the US had imposed tariffs on solar panels imported from China in an effort to protect its domestic solar manufacturers.
In the US, close to $14 billion in federal loan guarantees have been given to domestic solar projects since 2009, as part of economic-stimulus package. Since 2011, Ex-Im Bank of the US has alone financed 7 Indian solar power projects with a total financing of $256 million. It is ironical, that USA being such a proponent of open market has due to its own tactics actually forced India to employ domestic content requirement. USA’s eagerness to grab the whole market seems to be a ploy to reduce competition in the long run (by elimination).
Open market is all very good but one of the basic goals of the National Solar Mission is to achieve energy security for India, and that is not going to happen unless India allows and nurtures its own manufacturers to grow. India has consistently maintained that the local content clause in the JNNSM is primarily aimed at promoting domestic manufacturing and is fully consistent with its existing obligations under the WTO agreements. According to the Indian government, since JNNSM is essentially procurement of solar power by the government through a state-owned entity, there is no violation of WTO obligations. Additionally India is not a signatory to the Government Procurement Agreement of the WTO and therefore exempted from the procurement procedures of this agreement.
The government has also stated that local content requirement clause is only limited to projects awarded under the JNNSM while a number of upcoming solar power projects in various states do not contain such clauses and are hence open for competition.
And you… ?
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