Column: US double standards

Written by Biswajit Dhar | Updated: Mar 21 2014, 08:22am hrs
Last month, the US complained to the dispute settlement body of the WTOthe second complaint it has registered within a yearthat India requires solar power developers to use solar cells and solar modules of domestic origin to enter into and maintain power purchase agreements under the National Solar Mission (NSM) or with National Thermal Power Corporation, Vidyut Vyapar Nigam Limited or the Solar Energy Corporation of India. The US has further stated in the complaint that solar power developers in India receive certain benefits and advantages, such as long-term tariffs for electricity, contingent on their purchase and use of solar cells and solar modules of domestic origin. According to the US, these measures appear to be inconsistent with the rules of the multilateral trading system on two counts. First, they provide less favourable treatment to imported solar cells and solar modules than that accorded to similar products of Indian origin and are hence in violation of Article III:4 of the General Agreement on Tariffs and Trade (GATT). Secondly, they violate the WTO Agreement on Trade Related Investment Measures (TRIMS), which prohibits the imposition of local content requirements, also known as the domestic content rule. The US Trade Representative (USTR), Mike Froman, has held that domestic content requirements not only are an unfair barrier to US exports, but also raise the cost of solar energy, hindering deployment of solar energy around the world, including in India.

There are at least two grounds on which the legitimacy of this dispute can be questioned. First, the contention of discrimination against firms from the US in the award of solar projects, seems rather tenuous. This is clear, not only from the implementation of phase 1 of the NSM, but also from the recent award of projects for the phase 2. Secondly, the US imposes stringent local content rules while implementing infrastructural projects using federal funds, including those involving solar energy, especially since the Obama administration undertook the task of rescuing the worlds largest economy from the downturn.

Contrary to the USTR position, the first phase of NSM (ended in 2012) witnessed a significant participation by foreign players, including those from the US. According to the Ministry of New and Renewable Energy, during 2010-12, 148 grid-connected solar power plants, having a total installed capacity of 551 megawatts, were commissioned under the NSM. Of these, 77 projects with a combined installed capacity of 391 megawattsor roughly 70% of the total installed capacityhad used foreign solar cells or modules. Several of these projects received support from the Export-Import Bank (Ex-Im Bank) of the US . The role of the Bank, as described by one of its senior officials responsible for renewable energy and environmental exports financing, is to provide the most cost-effective source of financing for international customers to purchase US-made technology.

What should be a source of concern for

India is that the US-made technology, being promoted by the Ex-Im Bank, has already become obsolete in the global market. Major producers of solar panels in the US have been using thin-film modules whose market share steadily declined from about 30% in the closing years of the previous decade, to just around 11% in 2011. The decline in the market for thin-film modules comes on the back of a steep decline in crystalline silicon prices, resulting in a long list of suppliers shutting down their manufacturing units. In contrast to the global trend, photovoltaic (PV) installations in India were overwhelmingly dependent on thin-filmestimates show that nearly 70% of these installations set up during the phase 1 of the NSM are based on thin- film. This situation arose, as manufacturers of thin-film in the US were ready to supply cheap thin-film modules utilising the long-term loans at low interest rates provided by Ex-Im Bank. The developers of solar projects cashed-in on this attractive offering and chose to source their supplies from more established suppliers in the US rather than the domestic manufacturers. As a result, the NSM faces a double jeopardy; one, the domestic content rule that was introduced in the guidelines of the NSM to promote the domestic industry became a non-starter, and two, it has resulted in reliance on a technology that is being squeezed out of the market. These shortcomings could have been corrected in phase 2 of the NSM, which has recently been launched, although firms, including SunEdison and Azure, that are heavily dependent on the thin-film technology from the US have recently received official endorsement to set up 100-megawatt projects in India.

Interestingly, one of the most prominent environmental groups in the US, the Sierra Club, has come out in support of Indias policy to implement the domestic content rule in the projects under the NSM. Sierra Club has argued that all governments must have the ability to develop domestic renewable energy industries in order to fight climate change and the entrenched fossil fuel industry behind the crisis. Observing that one of the key objectives of the NSM is to establish India as a leader in solar energy, Sierra Club has emphasised that these efforts should be supported and that neither the US nor global trade rules should stand in the way.

The action initiated by the USTR against India is further evidence of the US's duplicity. The Buy American Act, which has been on the US statute books since 1933, attempts to protect domestic enterprises by providing a required preference for American goods in direct government purchases. These local content requirements are extensively used by the US in the development of infrastructure, among others. The Federal Highway Administrations Buy American policies require a domestic manufacturing process for all steel or iron products that are permanently incorporated in a Federal-aid highway construction project. Manufacturing begins with the initial melting and mixing, and continues through the coating stage. Any process, which modifies the chemical makeup, physical shape or finish, is considered a manufacturing process and as such must be performed in the US. The Buy American requirements apply to the entire federal aid project even if some steel or iron products are purchased with non-federal funds. All steel/iron must be manufactured in the US. Likewise, the Department of Transportations Buy American provisions ensure that transportation infrastructure projects are built with American-made products. This means that Department of Transportation investments are able to support an entire supply chain of American companies and their employees.

In December 2013, the US Department of Defense issued a new set of rules defining the operability of the Buy American Act in case of photovoltaic devices. These rules effectively limit the purchases to solar panels assembled in the US or economies with which US has free trade agreements, including countries that have joined the Government Procurement Agreement of the WTO. Countries outside this ambit therefore face an explicit denial of opportunities to sell to the US solar panels that are assembled in their jurisdictions. Clearly, the US believes that it has the sole right to protect and promote their domestic industries and to ensure that their workers keep their jobs.

The author is director general, Research and Information System for Developing Countries (RIS), New Delhi