China Challenges India’s PLI Scheme at WTO

China filed a formal complaint with the World Trade Organization (WTO) against India. The dispute centres on India’s Production-Linked Incentive (PLI) schemes for advanced chemistry cell (ACC) batteries, the auto sector, and electric vehicle (EV) manufacturing. China alleges these schemes violate WTO rules by favouring domestic goods over imports, especially Chinese products. The case marks complex issues of trade law, subsidies, and industrial policy in global commerce.

Background of India’s PLI Scheme

India introduced the PLI scheme in 2020 to boost manufacturing and integrate domestic industries into global value chains. It offers financial incentives based on incremental sales to encourage production in strategic sectors. The PLI schemes under dispute include those promoting giga-scale ACC battery manufacturing, advanced automotive technology products, and EV production. The goal is to strengthen India’s industrial base and attract global investment.

China’s Allegations on Domestic Value Addition

China claims that India’s PLI schemes impose Domestic Value Addition (DVA) requirements that effectively discriminate against imported goods. For example, the auto sector scheme demands 50% DVA, while the ACC battery scheme requires 25%. China argues these conditions incentivise companies to prefer domestic inputs over imports, violating fair trade principles and disadvantaging Chinese exporters.

WTO Law on Subsidies and Domestic Preferences

WTO rules, especially the Subsidies and Countervailing Measures (SCM) Agreement, regulate subsidies to prevent unfair trade advantages. Subsidies contingent on using domestic goods rather than imports are classified as Import Substitution (IS) subsidies and are prohibited. Such subsidies breach the national treatment obligation under GATT Article III.4 and the Trade-Related Investment Measures (TRIMs) Agreement, which forbids local content requirements favouring domestic over foreign products.

Complexities in Defining Domestic Value Addition

India’s DVA criteria do not necessarily mean direct local content requirements. Value addition can come from various activities beyond using domestic goods. Thus, the dispute requires detailed analysis of whether India’s incentives truly amount to prohibited IS subsidies or are legitimate industrial support measures. This complexity makes the case for interpreting WTO subsidy rules.

Dispute Resolution Process at WTO

The WTO dispute settlement begins with consultations between India and China to seek an amicable solution. Failing that, a panel of three experts will adjudicate the case. However, the WTO Appellate Body has been non-functional since 2019, delaying final rulings if appealed. Meanwhile, India can continue implementing its PLI schemes, maintaining the status quo as the dispute unfolds.

Implications for Global Trade and Industrial Policy

This case puts stress on tensions between national industrial policies and international trade rules. It raises questions on how countries can support domestic industries without violating WTO commitments. The outcome may influence future use of incentive schemes globally and the interpretation of DVA in trade law.

Questions for UPSC:

1. Critically discuss the role of the World Trade Organization’s Subsidies and Countervailing Measures Agreement in regulating industrial subsidies and its impact on developing economies.
2. Examine the significance of Domestic Value Addition in manufacturing policies and analyse its compatibility with international trade laws under the General Agreement on Tariffs and Trade.
3. Estimate the challenges faced by the WTO dispute settlement mechanism due to the incapacitation of the Appellate Body and point out its implications for global trade governance.
4. Analyse the strategic importance of electric vehicle manufacturing in national industrial policy and discuss how international trade rules influence such emerging sectors.

Answer Hints:

1. Critically discuss the role of the World Trade Organization’s Subsidies and Countervailing Measures Agreement in regulating industrial subsidies and its impact on developing economies.

1. The SCM Agreement defines and regulates subsidies to prevent unfair trade advantages and trade distortions.
2. It classifies subsidies into prohibited (export and import substitution), actionable, and non-actionable categories.
3. Prohibited subsidies, especially import substitution subsidies, are banned as they discriminate against foreign goods.
4. Developing economies often rely on subsidies to promote industrial growth and competitiveness in global markets.
5. SCM rules can constrain developing countries’ policy space to support nascent industries through local content or export incentives.
6. Disputes under SCM can delay or limit industrial promotion schemes, affecting economic development strategies.

2. Examine the significance of Domestic Value Addition in manufacturing policies and analyse its compatibility with international trade laws under the General Agreement on Tariffs and Trade.

1. Domestic Value Addition (DVA) encourages local production, job creation, and integration of supply chains within a country.
2. DVA can be achieved through various means, not solely by mandating domestic content in products.
3. Under GATT Article III.4, imported goods must receive national treatment and not be discriminated against compared to domestic goods.
4. Local content requirements tied to subsidies violate WTO rules as import substitution subsidies and breach national treatment obligations.
5. Careful design of DVA policies is needed to ensure they do not constitute prohibited subsidies under WTO law.
6. Interpretation of DVA in trade law remains complex and context-dependent, balancing industrial policy and trade commitments.

3. Estimate the challenges faced by the WTO dispute settlement mechanism due to the incapacitation of the Appellate Body and point out its implications for global trade governance.

1. The WTO Appellate Body has been non-functional since December 2019 due to lack of consensus on appointments.
2. Without the Appellate Body, appeals of panel rulings are stalled, delaying final dispute resolutions indefinitely.
3. This undermines the predictability and enforceability of WTO dispute settlement outcomes.
4. Countries may resort to unilateral trade measures, increasing trade tensions and risk of retaliation.
5. The status quo often persists, allowing disputed measures to continue without resolution.
6. The impasse challenges the credibility of the WTO and calls for reform of its dispute settlement system.

4. Analyse the strategic importance of electric vehicle manufacturing in national industrial policy and discuss how international trade rules influence such emerging sectors.

1. EV manufacturing is critical for energy transition, reducing carbon emissions, and future economic competitiveness.
2. Governments use incentives like subsidies and PLI schemes to attract investment and develop EV supply chains domestically.
3. Such policies support innovation, job creation, and reduce dependence on fossil fuels and imports.
4. International trade rules, especially WTO subsidy regulations, limit how countries can design local content or subsidy conditions.
5. Disputes arise when policies are seen as discriminatory or protectionist, affecting cross-border supply chains.
6. Balancing industrial policy goals with WTO compliance is essential to sustain growth in emerging sectors like EVs.