Andrew Shoyerand Rajib Pal of Sidley Austin look at the impact of the appellate body's findings in regards to two WTO disputes.
"The findings in DS412 and DS426 are important for global industries not only because of their direct implications for the design and implementation of government support for green energy, but also for their implications more broadly for 'buy local' requirements in government contracts."
On 6 May 2013, the appellate body of the World Trade Organization (WTO) circulated two reports: Canada – Certain Measures Affecting the Renewable Energy Generation Section (WT/DS412/AB/R); and Canada – Measures Relating to the Feed-in Tariff Program (WT/DS426/AB/R). These disputes were the first in which the appellate body was called upon to assess the consistency with the WTO Agreements of government support for green energy. They were also the first disputes in which the appellate body was asked to interpret Article III:8(a) of the General Agreement on Tariffs and Trade 1994 (GATT 1994) providing for the exemption of government procurement from the GATT 1994 national treatment obligation. We explore below the appellate body’s findings in this regard, and conclude that those findings may have implications for government support programmes beyond green energy programmes.
In these disputes, Japan and the European Union challenged the WTO-consistency of the feed-in tariff programme (FIT programme) administered by the Canadian Province of Ontario. Under Ontario’s FIT programme, generators of wind and solar electricity could enter into a contract with the Ontario Power Authority to receive a 20-year guaranteed price for the electricity they delivered to the Ontario grid above the market price of electricity in Ontario, but only if they utilised a specified percentage of domestically produced equipment (eg, wind turbines, solar panels) in their facilities. This domestic content requirement naturally operated to the detriment of imports of “renewable energy generation equipment” from countries such as Japan and the European Union.
But Ontario was not the only market in which Japanese and European producers of green energy equipment faced local content requirements. Similar requirements threatened to lock foreign producers out of green energy programmes in markets in Asia and elsewhere in North America that were much larger than that of Ontario. The requirements in Ontario were particularly burdensome and well documented, which might have made Ontario an appealing target for a test case.
Japan and the European Union pursued the case against Canada and alleged, among other things, that the FIT programme’s domestic content requirement was inconsistent with the national treatment obligation of GATT 1994 Article III:4, which requires imported products to be “accorded treatment no less favourable than that accorded to like products of national origin”.
Canada defended Ontario’s measures by arguing that the FIT programme should be considered as government procurement within the meaning of GATT 1994 Article III:8(a), and therefore its domestic content requirement should not be subject to the disciplines of Article III:4. Article III:8(a) provides:
The provisions of this Article shall not apply to laws, regulations or requirements governing the procurement by governmental agencies of products purchased for governmental purposes and not with a view to commercial resale or with a view to use in the production of goods for commercial sale.
Canada argued that under the FIT programme, the government of Ontario was purchasing electricity with a view to helping ensure a sufficient and reliable supply of electricity for Ontarians and to protecting the environment, and therefore it should fall within the scope of Article III:8(a).
The appellate body disagreed with Canada’s argument that the FIT programme’s domestic content requirement should be exempt from Article III:4 by virtue of Article III:8(a). Importantly, the appellate body found that in order for the derogation under Article III:8(a) to apply, “the product of foreign origin allegedly being discriminated against must be in a competitive relationship with the product purchased”. However, in the case of Ontario’s FIT programme, the product Ontario claimed to be procuring was electricity, while the product it was discriminating against pursuant to the FIT programme’s domestic content requirement was renewable energy generation equipment. Because electricity is not in a competitive relationship with the equipment used to produce the electricity, the appellate body found that Article III:8(a) did not apply. Then, as even Canada did not dispute that the FIT programme violated the terms of Article III:4 if Article III:8(a) did not apply, the appellate body went on to find that the domestic content requirement of Ontario’s FIT programme was inconsistent with Article III:4.
Government support for green energy programmes, including FIT programmes, are of course becoming more prevalent throughout the world, as governments aim to increase the supply of renewable electricity. However, domestic content requirements embedded within such support schemes work against this laudable goal, as they limit competition and therefore inhibit access to the best available technology. By securing a favourable ruling from the appellate body against Ontario’s discriminatory FIT programme, Japan and the European Union have likely forestalled the ability of other, larger markets to discriminate in a similar fashion in their support schemes for renewable energy.
In this regard, the appellate body’s findings in DS412 and DS426 are likely to have a direct impact on two more recent WTO disputes that have been brought against green energy programmes. In DS452, China has challenged the domestic content requirements of FIT programmes maintained by EU member states, including but not limited to Italy and Greece; and in DS456, the United States has challenged domestic content requirements maintained by India under the Jawaharlal Nehru National Solar Mission for solar cells and solar modules. These disputes have not moved beyond the consultation stage, and thus, the facts have not been developed fully before a dispute settlement panel. If the circumstances of the Indian and European programmes are similar to those presented in the Ontario FIT programme at issue in DS412 and DS426, then India and the European Union would be unlikely to succeed if they were to seek to justify, under the GATT exception for government procurement, requirements in their respective programmes that discriminate against imports of renewable electricity generation equipment.
The appellate body’s findings in DS412 and DS426 also have implications beyond the green energy sector. Specifically, they call into question the WTO-consistency of any government procurement programme that requires local manufacturing of equipment or facilities or anything other than the product actually being procured. Consider, for example, a requirement, imposed as part of a government contract for the procurement of passenger vehicles, that the vehicles be manufactured using domestically produced machines or in facilities constructed from locally produced building materials. Under the appellate body’s jurisprudence from DS412 and DS426, such a programme would not fall within the scope of Article III:8(a), because there is no competitive relationship between the machines used to make the vehicles and the vehicles themselves. Such a programme would therefore likely run afoul of the national treatment obligation of Article III:4.
In summary, the findings in DS412 and DS426 are important for global industries not only because of their direct implications for the design and implementation of government support for green energy, but also for their implications more broadly for “buy local” requirements in government contracts.
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