China’s Complaint Against India at WTO

Syllabus: GS3/Economy

Context

• China has filed a complaint with the World Trade Organization (WTO) against India. 

About

• The three specific PLI schemes that China has challenged are:
  • the PLI scheme which aims to incentivise the establishment of giga-scale manufacturing capabilities of ACC batteries in India; 
  • the scheme for the auto industry, which seeks to buttress the manufacturing of Advanced Automotive Technology (AAT) products in India, encompassing both vehicles and their components; 
  • and third, a scheme to promote EV manufacturing by attracting global EV manufacturers to the country.
• Domestic Value Addition (DVA): Under the PLI scheme for the auto sector, one of the conditions for eligibility to get financial benefits is that there must be a 50% DVA. 
  • Likewise, one of the salient features of the PLI scheme for ACC batteries is that the beneficiary must ensure a DVA of 25%. 
  • The Chinese argue that the DVA requirements incentivise companies to use domestic goods rather than imported goods, discriminating against Chinese goods in the Indian market.

Law on subsidies in WTO

• Legal Framework: Governed by the Agreement on Subsidies and Countervailing Measures (SCM Agreement) under the WTO.
• Sovereign Right vs. Fair Trade: While nations have the sovereign right to grant industrial subsidies to boost domestic industries, WTO law ensures these do not distort international trade or create unfair competition.
• Unfair Competition: Arises when subsidies artificially enhance competitiveness of domestic industries in exports or against imports.
• Article 1 (Definition of Subsidy): A subsidy exists when there is a financial contribution by a government or public body, and it confers a benefit on the recipient.
  • The subsidy must also be specific to an enterprise, industry, or group of industries.
• The SCM agreement divides subsidies into three categories — prohibited subsidies, actionable subsidies, and non-actionable subsidies. 
  • Prohibited subsidies are forbidden by definition and are generally of two types: export subsidies and Import Substitution (IS) subsidies. 
  • Export subsidies are contingent on export performance, and IS subsidies, as defined in Article 3.1(b) of the SCM agreement, refer to subsidies contingent upon the use of domestic goods over imported goods. 
  • Thus, if a country promises a financial contribution to a specific industry on the condition that it uses domestic goods or goods produced locally, rather than imported goods, it would constitute a prohibited subsidy.
• The SCM Agreement balances a country’s right to support domestic industry with the need to prevent trade distortions, maintain a level playing field, and uphold fairness in global trade.

Do Import Substitution (IS) subsidies violate other laws?

• National Treatment Rule (GATT Article III.4): Every country must treat imported goods and domestic goods equally.
  • So, a country cannot make laws that give better treatment to local products than to imported ones.
• TRIMs Agreement (Article 2.1): This rule says countries cannot make investment policies that go against the national treatment rule of GATT.
  • The TRIMs Agreement even gives an example — local content requirements, which force or encourage companies to use local goods instead of imports.
• Because an IS subsidy gives special benefits only when local goods are used, it is treated as a banned (prohibited) measure under WTO law.

WTO Dispute Settlement Process

• Consultations: India and China must first engage in consultations to resolve the issue amicably.
• Adjudication by WTO Panel: If consultations fail, a three-member ad hoc WTO panel is constituted to adjudicate.
• Appeal to Appellate Body: However, the WTO Appellate Body has been non-functional since 2019 (due to U.S. opposition to new appointments).
  • If either party appeals the panel’s ruling, the dispute enters a “legal limbo” until the Appellate Body is revived.
• Thus, if the WTO panel’s decision is appealed, it would mean postponing the adjudication of the dispute till the time the Appellate Body is resurrected. 
• The practical implication is that the status quo remains, and a country can continue with its impugned measures.

Source: TH