WTO Panel Releases Final Report Domestic Content Requirements

The long-awaited final report[1] regarding the challenged domestic content requirements of Ontario’s Feed-in-Tariff (“FIT”) Program was released by the World Trade Organization’s (“WTO”) Panel established by the WTO’s Dispute Settlement Board on December 19, 2012. (A copy of the Panel’s final report can be found here.)

As was expected, and in line with the interim report circulated in September 2012, the Panel mostly agreed with the complainants, Japan and the European Union (“EU”), concluding in the 160 page report that the “local content requirements” in FIT Contracts are inconsistent with the non-discrimination principles found in the General Agreement on Tariffs and Trade, 1994 (“GATT”) Article III (National Treatment) and the Trade-Related Investment Measures (TRIMs) Agreement Article II (National Treatment).[2] However, a majority of the WTO Panel disagreed with Japan and the EU’s claim that domestic content requirements constitute prohibited subsidies per Article 1.1 of the Subsidies and Countervailing Measures (“SCM”) Agreement and found that Canada did not act inconsistently with Articles 3.1(b) and 3.2 of the SCM Agreement.[3]

Brief Summary of the WTO’s Conclusions and Recommendations

 (1) Inconsistency with GATT Article III:4 and TRIMs Agreement Article II:1

Japan and the EU claim that the FIT Program with its domestic content requirements are:

  1. trade-related investment measures inconsistent with Canada's obligation under Article 2.1 of the TRIMs Agreement because the domestic content requirements “encourage investment in the production of renewable energy and associated equipment in Ontario and ... by definition, favour the use of domestic over imported products (i.e., wind and solar energy generation equipment) and are thereby ‘trade-related’”;[4] and
  2. measures inconsistent with Canada's national treatment obligation under Article III:4 of the GATT “because they impose requirements on renewable energy generators affecting the internal sale, purchase, and use of renewable energy generation equipment, and accord imported equipment treatment less favourable than like products of Ontario origin.”[5]

In response, Canada argued that the FIT Program is not subject to the obligations of Article III:4 of the GATT “because the laws and requirements that create and implement the FIT Programme are laws and requirements that govern the procurement of renewable electricity for the governmental purpose of securing electricity supply for Ontario consumers from clean sources, and not with a view to commercial resale.”[6] Canada also argued that since the FIT Program was not subject to Article III:4 of the GATT, the domestic content requirements could not be inconsistent with Article 2.1 of the TRIMs Agreement.

The Panel ruled in favour of Japan and the EU on this matter. The Panel found that FIT Contracts, to the extent they impose minimum domestic content requirements, constitute TRIMs within the meaning of Article 1 of the TRIMs Agreement.[7] The Panel then stated that Article 2.1 of the TRIMs Agreement imposes an obligation on WTO members not to apply any TRIM that is inconsistent with the provisions of Article III of the GATT (i.e., the national treatment obligations). Thus, any measure found inconsistent with Article III:4 of the GATT is also a TRIM that will be incompatible with Article 2.1 of the TRIMs Agreement.[8]

The Panel ruled that the domestic content requirements were not removed from the obligations under Article III:4 of the GATT because the requirements provide more favourable treatment for products made in Ontario (i.e., by requiring the purchase or use of products from domestic sources – which is prohibited under paragraph 1(a) of the Illustrative List of the TRIMs Agreement). The WTO also ruled that Canada had not established that it was entitled to rely upon Article III:8(a) of the GATT to remove the challenged domestic content requirements from the operation of Article 2.1 of the TRIMs Agreement because Ontario’s procurement for electricity under the FIT Program was undertaken “with a view to commercial resale.”

The Panel concluded that domestic content requirements in FIT Contracts are inconsistent with Article 2.1 of the TRIMs Agreement and Article III:4 of the GATT.[9]

(2) Domestic Content Requirements Not a Prohibited Subsidy under the SCM Agreement Article 1.1

Article 3.1(b) of the SCM Agreement prohibits subsidies contingent, whether solely or as one of several other conditions, upon the use of domestic over imported goods. In a divided ruling, the majority of the Panel dismissed Japan and the EU’s prohibited subsidy claim stating that (i) the FIT Program and FIT Contracts amount to government purchases of goods within the meaning of Article 1.1(a)(1)(iii) of the SCM Agreement; and (ii) that Japan and the EU failed to establish that domestic content requirements confer a ‘benefit’ within the meaning of Article 1.1(b) of the SCM Agreement to electricity generators who participated in the FIT Program.[10]

The dissenting opinion of the Panel found that Japan and the EU had established that domestic content requirements conferred a ‘benefit’ and thus was a prohibited subsidy. The Panel member stated that FIT Contract pricing offers higher costing and less efficient electricity generators to enter the wholesale electricity market when they otherwise would not have been able to without the FIT Program established by Ontario, thus conferring a benefit. .

(3) Recommendations of the WTO

The WTO Panel recommended that Canada bring its domestic content requirements into conformity with its obligations under the GATT and TRIMs Agreement.[11]

Next Steps

If the panel decision is not appealed, the result for Ontario would be that the FIT Program would remain as it is but domestic content requirements would have to be removed. Canada has 60 days from the final report being released to appeal the decision. (For further information on the WTO’s appeal process, see my previous blog posting: WTO Likely to Deem Domestic Content Requirements Illegal.) On December 19, 2012, the Globe and Mail reported that a spokesperson from the federal Department of Foreign Affairs and International Trade said that Canada would appeal the decision.[12]

For reference to the relevant provisions of the GATT, TRIMs Agreement and SCM Agreement utilized by the Panel, please see: General Agreement on Tariffs and Trade 1994; Agreement on Trade-Related Investment Measures; Agreement on Subsidies and Countervailing Measures

 

---

Sven Walker is a Partner at Dale & Lessmann LLP, a Toronto, Ontario, Canada-based full service law firm specializing in renewable energy law and in particular solar, wind and biogas energy law. Sven is a legal counsel to a number of industry equipment and technology manufacturers, suppliers and installers, as well as investors, developers, purchasers, contractors, consultants and financing entities. To speak with Sven, please call 416-369-7848 or email him at swalker@dalelessmann.com.

Prepared with the assistance of Farah Rohoman, student-at-law at Dale & Lessmann LLP.

[1] Panel Report Canada - Certain Measures Affecting the Renewable Energy Generation Sector (Complaint by Japan) (2012), WTO Doc WT/DS412/R (Panel Report), online: WTO <http://docsonline.wto.org> and Panel Report Canada - Measures Relating to the Feed-in Tariff Program (Complaint by the European Union) (2012), WTO Doc WT/DS246/R (Panel Report), online: WTO <http://docsonline.wto.org>.

[2] Ibid at paras 7.167, 8.2, and 8.6.

[3] Ibid at paras 8.3 and 8.7.

[4] Ibid at para 7.72.

[5] Ibid at para 7.73.

[6] Ibid at para 7.86.

[7] Ibid at para 7.112.

[8] Ibid at para 7.117.

[9] Ibid at para 7.167.

[10] Ibid at para 7.328.

[11] Ibid at paras 8.5 and 8.9.

[12] Richard Blackwell, “Canada to appeal WTO ruling on energy program”, The Globe and Mail (19 December 2012) online: The Globe and Mail <http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/canada-to-appeal-wto-ruling-on-energy-program/article6558522/>.