Abstract
Local content requirements (LCRs) have regularly been used by states as a tool to incentivise the growth of several critical and sunrise industries. Granting of state bounties and subsidies to local enterprises contingent on the fulfilment of LCRs, is also on the rise in recent years. The WTO regime provides, perhaps, the strongest framework for regulating LCR measures. Therefore, any weakening of the WTO regime and its dispute settlement system could see a rampant and indiscriminate use of LCRs.
This article maps the possibility of a rise in LCRs and its consequent impact in a regime where the WTO Agreements may not be enforced, in light of the Appellate Body crisis. Without a strong enforcement mechanism for the obligations under the SCM Agreement or the TRIMS, there is increasing likelihood of a surge in governments imposing LCRs in several critical industries. In short, the chapter highlights a bleak and despondent world where LCRs which have long been under strong scrutiny in the multilateral trade regime would make a comeback in a (post) WTO world. Such a dystopian prognosis is set to undermine the progress the international economic order has achieved in the last 70 years in curbing discriminatory industrial policies.
Respectively Professor and Head; and Senior Research Fellow at the Centre for Trade and Investment Law, Indian Institute of Foreign Trade. All views are personal.
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Notes
- 1.
Pauwelyn (2019), pp. 297–321.
- 2.
WTO Council for Trade in Goods (2002) TRIMs and Other Performance Requirements—Joint Study by the WTO and UNCTAD Secretariats, Part II, Addendum, G/C/W/307/Add.1 para 9.
- 3.
Ibid., para 7.
- 4.
Ibid., paras 10, 8, 6.
- 5.
Ibid., para 4.
- 6.
Ibid., paras 21, 23, 14, 43, 11, 5–25.
- 7.
Canada—Administration of the Foreign Investment Review Act, Report of the panel, L/5504 (7 February 1984).
- 8.
Ibid., pp. 17–19.
- 9.
Hufbauer et al. (2013), p. 7. See also for instance Grossman (1981), p. 548; Kuntze JC, Moerenhout T (2013) Local Content Requirements and the Renewable Energy Industry – A Good Match? International Centre for Trade and Sustainable Development. ISSN 2225-6679.
Rivers N, Wigle R (2011) Domestic Content Requirement and Renewable Energy Legislation. Social Science Research Network; Krishna and Itoh (1988), pp. 107–125; Mussa M (1981) The Economics of Content Protection. National Bureau of Economic Research Working Paper No. 1457.
- 10.
Examined in Section III of this paper in more detail. See also, Shadikhodjaev (2018), pp. 147–193.
- 11.
Hufbauer et al. (2013), p. 8.
- 12.
Grossman (1981).
- 13.
Ibid, p. 602.
- 14.
Mussa (1981).
- 15.
WTO Council for Trade in Goods (2002) TRIMs and Other Performance Requirements – Joint Study by the WTO and UNCTAD Secretariats, Part II, Addendum. G/C/W/307/Add.1.
- 16.
Ibid, p. 64.
- 17.
Ibid, p. 64.
- 18.
Kuntze and Moerenhout (2013), pp. 11–12.
- 19.
Hufbauer et al. (2013), p. 12.
- 20.
WTO Negotiating Group on Trade-Related Investment Measures (1987) Multilateral Trade Negotiations – the Uruguay Round Note by the Secretariat. MTN.GNG/NG12/3.3. [‘TRIMS Negotiation Group’].
- 21.
TRIMS Negotiation Group (1987) MTN.GNG/NG12/2.
- 22.
General Agreement on Tariffs and Trade 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A. 15 April 1994. 1867 U.N.T.S. 187, 33 I.L.M. 1153 [‘GATT 1994’].
- 23.
Agreement on Subsidies and Countervailing Measures, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A. 15 April 15 1994. 1869 U.N.T.S. 14. [‘SCM agreement’].
- 24.
Agreement on Trade-Related Investment Measures, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A. 15 April 1994. 1868 U.N.T.S. 186 [‘TRIMS Agreement’].
- 25.
Brazil—Certain Measures Concerning Taxation and Charges, -Report of the Appellate Body 11 January 2019, WT/DS472/AB/R. [‘Brazil—Taxation’].
- 26.
Indonesia—Certain Measures Affecting the Automobile Industry, Report of the Panel,2 July 1998, WT/DS55/R, [‘Indonesia—Autos’].
- 27.
Canada—Certain Measures Affecting the Automotive Industry, Report of the Appellate Body, 31 May 2000 WT/DS139/AB/R; WT/DS142/AB/R, [‘Canada—Autos’].
- 28.
India—Certain Measures Relating to Solar Cells and Solar Modules, Report of the Panel, 16 September 2016, WT/DS456/R, [‘India—Solar Cells’].
- 29.
India—Measure Affecting the Automotive Sector, Report of the Appellate Body, 19 March 2002 WT/DS146/AB/R, [‘India—Autos’].
- 30.
United States—Certain Measures Relating to the Renewable Energy Sector, Report of the Panel, 27 June 2019, WT/DS510/R, [‘US—Renewable Energy’].
- 31.
See, Canada—Certain Measures Affecting the Renewable Energy Generation Sector, Report of the Appellate Body, 06 May 2013, WT/DS412/R, [‘Canada—Renewable Energy’]; Panel Report, India—Solar Cells; Appellate Body Report, Brazil—Taxation; etc.
- 32.
Cimino et al. (2014), Policy Brief: PB14-6.
- 33.
Ibid.
- 34.
Deringer H et al. (2020) The Economic Impact of Local Content Requirements: A Case Study of Heavy Vehicles, 4. Ecipe.org. https://ecipe.org/publications/the-economic-impact-of-local-content-requirements/.
- 35.
United Nations Conference on Trade and Development (2014) Local Content Requirements and the Green Economy United Nations Publication (2014) UNCTAD/DITC/TED/2013/7, 4. https://unctad.org/en/PublicationsLibrary/ditcted2013d7_en.pdf.
- 36.
Deringer et al. (2020), p. 8.
- 37.
Farrell (2011), p. 8.
- 38.
Lewis and Wiser (2005).
- 39.
Kuntze and Moerenhout (2013), p. 6.
- 40.
Gunnella V, Quaglietti L (2019) The Economic Implications of Rising Protectionism: A Euro Area and Global Perspective. Issue 3, ECB Economic Bulletin https://www.ecb.europa.eu/pub/economic-bulletin/articles/2019/html/ecb.ebart201903_01~e589a502e5.en.html#toc1.
- 41.
Shadikhodjaev (2018), pp. 147–193.
- 42.
Trade and Agriculture Directorate (2015).
- 43.
Ibid., p. 17.
- 44.
Ibid., p. 18.
- 45.
Hufbauer et al. (2013), p. 37.
- 46.
Deringer et al. (2020), p. 8.
- 47.
For instance, the latest Trade Policy Review Report for Saudi Arabia notes that the Saudi Export Programme provides export financing and guarantees to exports with at least 25% local value added—WTO, Trade Policy Review—Kingdom of Saudi Arabia, Report of the Secretariat, 29 February 2016, WT/TPR/S/333.
- 48.
Kuntze and Moerenhout (2013), Table 5, p. 30.
- 49.
Ibid., p. 30.
- 50.
Ibid., p. 30.
- 51.
Spatuzza A (2017) Argentina sets 35% renewable energy local-content by 2020. Recharge News. https://www.rechargenews.com/transition/argentina-sets-35-renewable-energy-local-content-by-2020/2-1-178926.
- 52.
‘Brazil: Recent Oil and gas Reforms. 2019. US Commercial Service. https://www.export.gov/article?id=Brazil-Recent-Changes-to-Brazil-s-Oil-Gas-Sector-May-Attract-More-Business-Opportunities.
- 53.
WTO Trade Policy Review—Brazil, Report by the Secretariat, 12 June 2017, WT/TPR/S/358, 26 & Table 2.3 at 2.35.
- 54.
WTO, Committee on Trade-Related Investment Measures, 06 June 2019, Minutes of the Meeting G/TRIMS/M/46, pp. 1–5.
- 55.
Ibid.
- 56.
Ibid., pp. 8–28.
- 57.
Ibid., pp. 37–44.
- 58.
The European Union has alleged that the measures implemented by Turkey force ‘foreign producers of pharmaceuticals’ to locate their production activities domestically to avail social security reimbursement schemes available to medicines in the Turkish healthcare system. Since this social security reimbursement scheme includes the majority of medicinal products consumed in Turkey, the EU has argued that the exclusion of the foreign pharmaceutical companies creates an ‘anti-competitive barrier’ vis-à-vis domestic Turkish manufacturers of pharmaceuticals.
- 59.
Turkey—Certain Measures concerning the Production, Importation and Marketing of Pharmaceutical Products, Request for Consultation. WT/DS583/1 (2 April 2019) https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds583_e.htm.
- 60.
Department of Industrial Policy and Promotion, Ministry of Commerce and Industry (2017) Public Procurement (Preference to Make in India), Order 17 (P-45021/2/2017-B.E.-II, 2017); See also—Press Trust of India. 2018. Government mandates preference to India-made vehicles in public procurement. Economic Times. https://economictimes.indiatimes.com/news/economy/policy/government-mandates-preference-to-india-made-vehicles-in-public-procurement/articleshow/67009970.cms?from=mdr. Press Trust of India (2018) Providing Local Content percentage made mandatory for Railway procurement process. Economic Times. https://economictimes.indiatimes.com/industry/transportation/railways/providing-local-content-percentage-made-mandatory-for-railways-procurement-process/articleshow/62579507.cms?from=mdr.
- 61.
Ibid.
- 62.
Indonesia—Autos, Panel Report.
- 63.
See Japan—Taxes on Alcoholic Beverages, Report of the Appellate Body, 4 October 1996, WT/DS8/R, [‘Japan—Alcoholic Beverages II’] p. 16.
- 64.
See Article III:4, GATT 1994.
- 65.
See Article III:5, GATT 1994.
- 66.
Panel Report, Indonesia—Autos, para 14.82.
- 67.
Appellate Body Report, Canada—Autos, paras 140–143.
- 68.
LCRs are often implemented in conjunction with subsidies granted by the state, or as a part of government procurement which lead to questions on the interplay of the WTO Agreements.
- 69.
See Appellate Body Report, Canada—Renewable Energy.
- 70.
See Panel Report, India—Solar Cells.
- 71.
See Annex 1 for the list of WTO disputes dealing primarily with LCRs.
- 72.
For example, India notified the WTO on 14 December 2017 that it had withdrawn the LCRs under the Jawaharlal Nehru National Solar Mission which were found as WTO inconsistent in India—Solar Cells.
- 73.
For example, in Brazil—Taxation, the incentive schemes granted benefits only to ‘accredited’ companies. Accreditation required localisation of business or sourcing of local goods. Each of the incentive schemes and the underlying rules had to be individually examined to establish that there was indirect LCR for availing the benefit of the incentives.
- 74.
European Commission Directorate-General for Trade (2013) Eleventh Report on Potentially Trade Restrictive Measures, 27. https://trade.ec.europa.eu/doclib/docs/2014/november/tradoc_152872.pdf.
- 75.
Nedumpara and Raturi (2013), p. 13.
- 76.
Santos (2012), pp. 551–632.
- 77.
Cimino et al. (2014).
- 78.
Ibid.
- 79.
Fennell and Abellard (1993), p. 2002.
- 80.
Ministerial Declaration (1986) General Agreement on Trade and Tariffs Punta Del Este Declaration. http://www.sice.oas.org/trade/Punta_e.asp.
- 81.
Fennel and Abellard (1993), p. 2003.
- 82.
Henkin (1979), pp. 320–321.
- 83.
Shadikhodjaev (2018), pp. 147–193.
- 84.
Crawford JA, Kotschwar B (2018) Investment Provisions in Preferential Trade Agreements: Evolution and Current Trends. Staff working Paper ERSD-2018-14. 18–19 & Fig 3. https://www.semanticscholar.org/paper/Investment-provisions-in-preferential-trade-and-Crawford-Kotschwar/.
- 85.
McDougall R (2018) Regional Trade Agreement Dispute Settlement Mechanisms: Modes Challenges and Options for Effective Dispute Resolution. International Centre for Trade and Sustainable Development (ICTSD). 7. http://e15initiative.org/wp-content/uploads/2015/09/Regional-Dispute-Settlement-Mechanisms-Robert-McDougall-RTA-Exchange-Final.pdf.
- 86.
Crawford and Kotschwar (2018), p. 11.
- 87.
Ibid., p. 18 [Figure 3].
- 88.
Ibid., p. 35 [Table 2].
- 89.
Nikièma SH (2014) Performance Requirements in Investment Treaties, Best Practices Series International Institute for Sustainable Development, p. 7.
- 90.
Yuerong AK et al. (2019) Prohibitions on Performance Requirements in Investment Treaties’ TradeLabs. https://www.tradelab.org/single-post/2019/01/23/Prohibitions-on-Performance-Requirements-in-Investment-Treaties.
- 91.
Ibid., para 68.
- 92.
Article VI of the Canada—Costa Rica BIT, Article 9 of the China—Canada BIT, Article 9(1) of the Canada—Kuwait BIT, Article 6 of the ASEAN Korea Investment Agreement 2009, and Article 7(1) of ASEAN Comprehensive Investment Agreement.
- 93.
Yeurong et al. (2019) para 3.4.1.
- 94.
Yeurong et al. (2019) paras 3.4.2–127.
- 95.
Yeurong et al. (2019) paras 130–131.
- 96.
Joseph Charles Lemire v Ukraine, ICSID Case No. ARB/06/18, (14 January 2010) [‘Lemire v Ukraine’].
- 97.
Ibid, para 510.
- 98.
Ibid, paras 505, 510.
- 99.
Ibid, para 507.
- 100.
Yeurong et al. (2019) para 2.
- 101.
Nikièma (2014) para 3.1.
- 102.
Cimino et al. (2014) para 4.
- 103.
For instance—the development agenda and the enabling clause are at the forefront of WTO reform discussions, Member States are pushing for considering rules on E-Commerce, fisheries subsidies have continued to be an important issue since the Doha round of negotiations etc.
- 104.
See for instance, Santos (2012)—in which he presents ways in which developing countries can utilise the gaps in WTO Agreements to carve out space for policy autonomy. He uses the example of Brazil to highlight how it has successfully managed to implement import substitution industrialisation policies.
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The authors are grateful to Colin B. Picker and another anonymous referee for helpful comments.
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Annexure 1: Tale of Key WTO Disputes on LCRs
Annexure 1: Tale of Key WTO Disputes on LCRs
S. No | DS number | Name of the dispute | Status | WTO agreement provisions |
|---|---|---|---|---|
Appellate Body Report or Panel Report circulated | ||||
1. | DS510 | US—Renewable Energy | Panel Report: 27 June 2019 | GATT: Art III.4, XVI:1 SCM: Art 3.1(b), 3.2, 5(a), 5(c), 6.3(A), 25 TRIMS: Art 2.1 |
2. | DS497/DS472 | Brazil—Certain Measures Concerning Taxation and Charges | Appellate Body Report: 13 December 2018 | SCM: Art 3.1(b), 3.2 TRIMs: Art 2.1, 2.2, Annex GATT: Art I:1, II:1, III:4, III:5 |
3. | DS456 | India—Solar | Appellate Body Report: 16 September 2016 | GATT: III:4, TRIMS: Art 2.1 SCM: 3.1(b), 3.2, 5(c), 6.3(a), 6.3(c), 25 |
4. | DS426/DS412 | Canada—Renewable Energy | Appellate Body Report: 06 May 2013 | GATT: Art III:4, III:5, XXIII:1 SCM: 1.1, 3.1(b), 3.2 TRIMs: Art 2.1 |
5. | DS438/DS444/DS445 | Argentina—Measures affecting the Importation of Goods | Appellate Body Report: 15 January 2015 | GATT: Art III.4, VIII, X:1, X:2, X:3; TRIMs: Art 2, 6.1 And ors |
6. | DS342/DS340/DS339 | China—Measures Affecting Imports of Automobile Parts | Appellate Body Report: 12 December 2008 | GATT: Art III, II, X; SCM: Art 3, 3.1(b), 3.2 TRIMs: Art 2, 2.1 Protocol of Accession |
7. | DS334 | Turkey—Measures Affecting the Importation of Rice | Panel Report: 21 September 2007 | GATT: III, X, XI TRIMs: Art 2.1, Annex 1 And ors |
8. | DS175/DS146 | India—Measures Affecting Trade and Investment in the Motor Vehicle Sector/Measures affecting the Automotive Sector | Appellate Body Report: 19 March 2002 | GATT: Art III, XI TRIMs: Art 2 |
9. | DS142/DS139 | Canada—Autos | Appellate Body Report: 31 May 2010 Article 21.3(c) Arbitration Report: 04 October 2000 | GATS: Art II, VI, XVII GATT: Art I.1, III.4, XXIV SCM: Art 3 3.1(a), 3.2 TRIMs: Art 2 |
10. | DS54/DS55/DS59/DS64 | Indonesia—Autos | Panel Report: 2 July 1998 Article 21.3(c) Arbitration Report: 07 December 1998 | SCM: Art 3.1(b), 28.2 TRIMs: Art 2, 5.4 GATT: Art I:1, III:2, III:4, X:1, X:3(a) |
Under consultation | ||||
1. | DS583 | Turkey—Pharmaceutical Products[EU] | Request for Consultations: 02 April 2019 | GATT: Art III.4, X:1, X:2, X:3, XI:1 SCM: Art 1.1, 3.1(b) TRIMS: Art. 2.1 TRIPS: Art 3.1, 27.1, 28.2, 39.1, 39.2 |
2. | DS563 | United States—Certain Measures Related to Renewable Energy | Request for Consultations: 14 August 2018 | GATT: III:4 TRIMS: Art 2.1, 2.2 SCM: Art 3.1(b), 3.2 |
3. | DS459/DS452 | European Union and Certain Member States—Certain Measures on the Importation and Marketing of Biodiesel and Measures Supporting the Biodiesel Industry | Request for Consultations: 15 May 2013 | GATT: Art I:1, III TRIMs: Art 2.1, 2.2 SCM: Art 3.1(b), 3.2, 5(b), 5(c), 2.3, 1.1, 6.3(a) And ors |
4. | DS195 | Philippines—Measures Affecting Trade and Investment in the Motor Vehicle Sector | Request for Consultations: 23 May 2000 | SCM: Art 3.1(b) TRIMs: Art 2.1, 2.2, 5.2, 5.5 GATT: Art III:4, III:5, XI:1 |
Settled or Terminated | ||||
1. | DS359/DS358 | China—Certain Measures granting Refunds, Reductions or Exemptions from Taxes and other Payments | Settled or terminated (withdrawn, mutually agreed solution): 07 February 2008 | GATT: Art III:4 SCM: Art 3, 3.1(b), 3.2 TRIMs: Art 2, 2.1, Annex 1 Protocol of Accession |
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Nedumpara, J.J., Venkataraman, A. (2020). The Rise of Import Substitution Subsidies and Local Content Requirements in a Dystopian WTO 2.0 Regime. In: Lewis, M.K., Nakagawa, J., Neuwirth, R.J., Picker, C.B., Stoll, PT. (eds) A Post-WTO International Legal Order. Springer, Cham. https://doi.org/10.1007/978-3-030-45428-9_13
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