On 12 May 2020, the Prime Minister of India raised a clarion call to the nation giving a kick start to the Atmanirbhar Bharat Abhiyaan. One of the fundamental aspects of this initiative was the continued implementation and expansion of Local Content Requirements (LCR). LCRs are economic policy tools used by national governments to encourage domestic production, increase employment, and protect domestic firms. They lead to an overall positive economic impact, especially in the short term, increasing employment and local industrial output. Even though LCRs are technically invalid under World Trade Organization (WTO) law, the national governments can still use them in disguise to achieve similar policy goals and India must alter its Atmanirbhar policy to ensure further WTO law consistency.
A WTO panel ruled against India in a dispute brought by the US regarding LCRs used in India’s solar power programme. Additionally, the appellate body upheld the panel report’s findings on appeal. In 2020, the Indian government increased the LCR requirement for Class I Suppliers to 50% and for Class II Suppliers to 20%. This is significant because Class-I local suppliers will be given preference over Class-II local suppliers and ‘non-local suppliers’ when procuring goods and bidding on global tenders. Such actions are certain to attract WTO scrutiny if a member makes India’s LCR policy a priority. This piece argues that India’s LCRs can be modified in such a way that they accomplish their objective while skirting WTO restrictions. The purpose of this piece is to depict how well-founded policy objectives find legitimacy through channels of practice. In this case, it solidifies grounds for India to utilize LCRs while adhering to WTO law.
Economic Impacts of LCR’s
LCRs stem from the economic theory that assumes a domestic consumer purchases goods from an intermediate sector, either nationally or abroad. Nevertheless, because of inferior technological capability, the domestic cost of intermediate goods is greater than the international price. The market equilibrium would be to have local producers of the consumer goods sourcing from abroad. Concerned with firm survival and learning in the intermediate sector, the government enacts local content requirements. LCRs cause an increase in the output of the domestic components sector. There is very little question that LCRs would still lead to higher prices to the consumer either because of increased costs for the local manufacturer or the reduction of market supply. However, a majority of scholarship concludes that LCRs should be encouraged if Foreign Direct Investment (FDI) has a significant efficiency impact and the trade-off between employment and final goods price is favourable. The effect of LCRs is also heavily determined by competition in the concerned industry at both the intermediate and final market levels. Forcing international companies to source part of their inputs locally increases the market power of upstream companies. Harming the cost (as well as the profit) of the final goods producers, particularly for foreign firms that rely heavily on local inputs. Consumer surplus is also increased, and, as a result, an overall increase in national welfare is likely.
If we look at the ad valorem equivalent (AVE) and the effects on weighted tariffs, we can see that India’s rise of 2.2 and 9.3%, respectively, are relatively lower than those of other countries with similar LCR intensities such as South Africa or China. Thus, maintaining India’s protectionist stance while encouraging local business and manufacturing. This can be seen from the European Centre for International Political Economy estimations for industry output with a 1.2% increase for India and a 0.9 and 0.2% change for China and South Africa, respectively. This can be explained by the fact that the economic atmosphere of India is more conducive to the introduction of LCRs due to its level of infancy and necessity of trade protectionism along with the level of competitiveness. In conclusion, when local content policies are well designed, focused, transparent, adapted to the national context, and linked to other policies and useful long-term targets, they can play a crucial role in domestic industrial development and competitiveness.
Legality within WTO Law
On the surface of WTO law, LCRs appear to be illegal. However, countries can employ implicit LCRs while remaining within the ambit of WTO law. To begin, it is necessary to examine the restrictions imposed on LCRs by WTO law. Although there is no specific provision in the WTO agreements that declares LCRs illegitimate, they allegedly violate particular provisions of these agreements.
Article III of the General Agreement on Tariffs and Trade (GATT) prohibits internal measures that afford domestic production protection. In US – FSC 21.5, the panel held that even imposing conditions to gain an advantage from the government was inconsistent with WTO law (para. 8.139). Additionally, the panel report in the Turkey-Rice dispute concluded that imposing any “domestic purchase requirement” in exchange for favorable treatment violated the GATT (para. 7.214). However, this does not preclude the use of all measures associated with LCRs. Certain measures can be used in a disguised manner to allow India to reap the benefits of LCRs while remaining compliant with WTO law.
Disguised Measures which are compliant with WTO obligations include local training requirements, joint venture requirements (JVRs) and technology transfer requirements (TTRs). JVRs and TTRs are legitimate under the Agreement on Trade-Related Aspects of Intellectual Property (TRIPS) and the GATT. Article 7 of the TRIPS requires measures to protect intellectual property (IP) rights taken in a manner that promotes social and economic welfare. Such measures can be undertaken when the implementing country has a legitimate interest in imposing such a requirement (See here and here). However, in Canada—Patent Protection for Pharmaceutical Products, the panel determined that the concept of “legitimate interests” should not be used to decide a normative policy issue through adjudication (para. 7.82). Article 8 of the TRIPS provides that members may take steps to safeguard the public interest in economic and technological development. In Australia-CMCT, the panel has found that Articles 7 and 8 of the TRIPS express the intention of the drafters of TRIPS to allow countries to pursue measures protecting their societal interests (para. 7.2402). The dispute resolution body must keep such measures in mind as a general goal when examining other measures (See Art. 2 of the DSU and here). These reports are significant because, while the WTO’s dispute resolution process is not predicated on the concept of stare decisis, previous reports foster legitimate expectations among WTO Members and, as such, should be considered in the event of a dispute (ABR, Japan-Alcoholic Beverages II, p. 14). Thus, if pressed, India can argue that it is justified in promoting its economic and social welfare and technological and economic development, and additionally on another tangent that the imposed measures are a normative policy issue.
This essay demonstrates that India can continue its LCR policy while adhering to relevant WTO law. Ideally, the policy should be reworked to emphasize JVRs and TTRs to ensure that India becomes truly atmanirbhar. The legality of LCRs within international trade law continues to be a debate. However, there must be a larger focus on the issue of whether ‘disguised measures’ can constitute a legally justifiable method. Furthermore, there is also a balance of interests that must be accounted for, like social security interests vis-a-vis trade measures and methods that the country chooses to adopt. India is pursuing self-sufficiency, and such measures are necessary to stimulate domestic industry in a justifiable manner. Within this meaning, it is also pertinent to explore the degree of threshold that one seeks to impose to determine the fairness and applicability of the standards India chooses to adopt. If India is to become a truly developed country, it requires a degree of protectionism, which these policies attempt to provide.
Ahan Gadkari is a penultimate year BA LLB candidate at O.P. Jindal Global University.
Sheel Agarwal serves as a Researcher at IJLSA
Image: David G. Klein/New York Times