Introduction
On
the 22nd of April 2010, president Goodluck Jonathan signed into law
the Nigerian Oil and Gas Industry Content Development Act, 2010 (“NOGIC Act”)
which puts in place the legal and operational framework for the development of
local content in the oil and gas sector of the country. Indeed, the NOGIC Act
was a piece of regulation that would transform the Nigerian petroleum industry
from being a foreign dominated industry to an industry where indigenous players
could also partake in. The NOGIC Act was the culmination of a journey that had
started in 2001 when the National Petroleum Investment and Management Services
(NAPIMS)
organised a National Workshop on Improvement of Local Content and Indigenous
Participation in the Upstream Sector of the Petroleum Industry. The Workshop
recommended that a National Committee on Local Content Development (NCLCD) be
established. This recommendation was adhered to, and in October of the same
year, the Committee was inaugurated. One of the most crucial recommendations of
the Committee was that a law be drafted for local content development in the
country.
While
the NOGIC Act principally entrenches local content in the Nigerian petroleum
industry, on the other end of the tunnel, Nigeria is a member of the World
Trade Organisation (“WTO”) and a signatory to the WTO Agreements, some of which
prohibit the institution of local content policies by Member States which
discriminate between foreign goods and services and local goods and services in
favour of local goods and services.
This
article sets out to establish that the NOGIC Act runs contrary to Nigeria’s
international trade obligations as created by the various WTO Agreements. In doing
this, it first discusses the various WTO Agreements related to local content
policies before identifying the provisions of the NOGIC Act that runs contrary
to these WTO Agreements. The rationale for this approach is to ensure that the
reader understands the agreements first in order to appreciate the subsequent
discussions on the provisions of the NOGIC Act.
Nigeria
and the WTO
Nigeria
has been a member of the WTO since 1 January 1995 and a member of GATT since 18
November 1960. As
a member of the WTO, Nigeria is a signatory to the Agreement establishing the
WTO and consequently the WTO Agreements.
The enforceability of the WTO
Agreements in Nigeria
In
determining if the WTO Agreements are enforceable in Nigeria, reference would
necessarily be made to the 1999 Constitution of the Federal Republic of
Nigeria. Section 12 of the 1999
Constitution of the FRN provides that no treaty between the Federation and any
other country shall have the force of law except to the extent to which any
such treaty has been enacted into law by the National Assembly. Unfortunately,
the WTO Agreements have not been enacted by the National Assembly. However, section 12 would only apply to treaties
which are sought to be enforced in Nigerian courts and not to treaties which
cannot be enforced in Nigeria courts. The WTO Agreement falls into the category
of treaties which cannot be enforced in Nigerian courts. One reason for this is
that the WTO Agreements is a multilateral agreement involving other countries
over which the Nigerian courts cannot exercise jurisdiction. And in view of the
fact that claims of rights or liabilities under the WTO Agreements can only be
instituted by Member States themselves, the appropriate body with jurisdiction
to entertain such claim would be one established under the multilateral
agreement and which has jurisdiction over the Member States. Consequently, by
being a member of the WTO, Nigeria is bound by the WTO Agreements, even without
ratification of the Agreements by the National Assembly. The only way not to be
bound is by withdrawing from the WTO Agreements. The fear of the consequence of
such withdrawal has successfully operated to ensure compliance with the WTO
Agreements by Member States.
The WTO Agreements and Local
Content
One
of the fundamental objectives of the WTO Agreements is the need to reduce
barrier and eliminate discrimination in international trade. To this end, the
principle of National Treatment (NT) is one of the principles at the heart of
the WTO Agreements. National
treatment has been defined as a principle whereby a host country extends to
foreign investors treatment that is at least as favourable as the treatment
that it accords to its national investors in like circumstances. This
principle of NT exists in the General Agreement of Tariff and Trade (GATT)
1994, the Agreement on Trade-Related Investment Measures (TRIMs) as well as the
General Agreement on Trade in Services (GATS),
which governs trade in goods, investment measures related to trade in goods,
and trade in services respectively. There is also the Agreement on Subsidies
and Countervailing Measures which relate to the payment of subsidies by Member
States. The relevant sections of these Agreements would be considered.
Article
III of GATT 1994 relating
to National Treatment has three sections relevant to our discussion on local
content. They are Articles III (1), (4) and (5).
Article III (1) establishes the general principle
restraining members from applying internal taxes or other internal charges,
laws, regulations and requirements affecting imported or domestic products so
as to afford protection to domestic production. This general principle informs
the rest of Article III and the purpose is to create a guide to the
understanding of the other paragraphs in Article III. While it
doesn’t specifically lay down any restriction, the provisions of the other
paragraphs that have laid down such restrictions must be interpreted in
consonance with the principle it establishes, which is: not applying laws,
regulations and requirements for the purpose of affording protection to
domestic production.
Article III: 4
seek to restrain the implementation of measures that tend to afford a less
favourable treatment to imported goods than that accorded to like domestic
products. The purpose
of Article III:4 is not to protect the interests of the foreign investor but to
ensure that goods originating in any other country benefit from treatment no
less favourable than domestic goods, in respect of the requirements that affect
their purchase in the host country. In Korea — Various Measures on Beef,
the Appellate Body noted that for a violation of Article
III: 4 to be established, three elements must be satisfied:
i.
that the
imported and domestic products at issue are ‘like products’;
ii.
that the
measure at issue is a ‘law, regulation, or requirement affecting their internal
sale, offering for sale, purchase, transportation, distribution, or use’; and
iii.
that the
imported products are accorded ‘less favourable’ treatment.
Article
III:5 restricts the establishment or maintaining
of any internal quantitative regulation requiring that any specified amount or
proportion of any product which is the subject of the regulation must be
supplied from domestic sources. It also restrains the application of internal
quantitative regulations in a manner that affords protection to domestic
production. Thus, Article III:5 establishes two independent obligations. The
first is the obligation not to create internal quantitative regulations
requiring the use of domestically produced goods; the second is the obligation
not to create internal quantitative regulations in a manner that affords
protection to domestic production, irrespective of whether or not it requires
the use of domestically produced goods.
Under
the TRIMs Agreement, the relevant section relating to local content is Article 2. Article 2 of the TRIMs
Agreement restrains all WTO Members from applying any TRIM that is
inconsistent with the provisions of Article III of GATT 1994. In Canada –
Measures Relating to the Feed-in-Tariff Programme,
the Appellate Body found that Article 2.2 refers to the obligation of
national treatment provided for in paragraph 4 of Article III of the GATT 1994.
In
Indonesia – Certain Measures Affecting
the Automobile Industry
the Panel held that when the TRIMs Agreement refers to ‘the provisions of
Article III’, it refers to the substantive aspects of Article III; that is to
say, conceptually, it is the ten paragraphs of Article III that are referred to
in Article 2.1 of the TRIMs. Consequently, the discussions relating to Articles
III: (1), (4) and (5) of GATT 1994 apply to the TRIMs Agreement under Article 2
mutatis mutandis.
While
discussions and decisions emanating from the above provisions are immensely
elaborate,
it would suffice to state that to violate the provisions of the GATT 1994 and
the TRIMs Agreement, two things necessarily need be established. The first is that
the local content policy must tend to afford protection to domestic products or
goods in a way that metes out less favourable treatment to foreign products or
goods, and the second is that the local content policy must require that a
percentage of domestic goods be used.
Exceptions
The
GATT 1994 and the TRIMs Agreement both contain exceptions to the National
Treatment obligation.
These exceptions are as follows:
i.
Government
procurement
Article
III: 8 (a) exempts the application of the provisions of Article III of
GATT 1994 from laws, regulations or requirements governing the procurement by
governmental agencies of products purchased for
governmental purposes and not with a view to commercial resale or with a view
to use in the production of goods for commercial sale.
In Canada
– Measures Relating to the Feed-in Tariff Program, the Panel was faced with
the task of giving a proper interpretation to the term “procurement” as it
relates to Article III:8(a). The Panel held that a proper interpretation of the term
"procurement" in accordance with the customary international law
rules of treaty interpretation reveals that an analysis of whether
"procurement" exists under Article III:8(a) requires consideration of
four general elements, none of which alone may be decisive:
i.
government
payment for the procurement;
ii.
government
use, consumption, or benefit (where "benefit" refers to
the benefit of the use of a product not in the government's possession);
iii.
government
obtainment, acquisition, or possession; and
iv.
government
control over the obtaining of the product.
ii.
Subsidy
payments to domestic producers
By Article
III:8(b), the principle of national treatment shall not prevent the payment of
subsidies exclusively to domestic producers, including payments to domestic
producers derived from the proceeds of internal taxes or charges applied
consistently with the provisions of this Article and subsidies effected through
governmental purchases of domestic products. However, while considering the
exceptions created under this Article, reference necessarily would be had to
the Agreement on Subsidies and Countervailing Measures, which regulates the
payment of subsidies by governments, and the payment must be in accordance with
the provisions of the articles, i.e. not giving less favourable treatments to
foreign goods in favour of domestic goods.
iii.
Article
XX Exceptions
Article XX of the GATT Articles contain
a number of exceptions to the obligations established under GATT, including
national treatment. However, the applicability of the Article XX exceptions is
subject to the requirement
that such measures are not applied in a manner which would constitute a means
of arbitrary or unjustifiable discrimination between countries where the same
conditions prevail, or a disguised restriction on international trade. To the
extent that the ultimate aim of local content laws and policies is to promote
patronage of local goods, services and labour, it is difficult if not
impossible, for them to find shelter under the Article XX exceptions.
Another
agreement to be considered is the Agreement on Subsidy and Countervailing
Measures (“SCM”) which covers the payment of subsidy by Member States. Article
3.1 (b) the SCM Agreement prohibits the payment of subsidies by
Member States which is contingent, whether solely or as one of several other
conditions, upon the use of domestic goods over imported goods. Under Article 1.1, a subsidy shall be deemed
to exist if there is a financial contribution by a government or any public
body within the territory of a Member or
where there is any form of income or price support and which confers a benefit.
In US — Softwood Lumber IV,
the Appellate Body referred to the two distinct elements under Article 1.
According to the body, the concept of subsidy defined in Article 1 of
the SCM Agreement captures
situations in which something of economic value is transferred by a government
to the advantage of a recipient. A subsidy is deemed to exist where two
distinct elements are present. First, there must be a
financial contribution by a government, or income or price support. Secondly,
any financial contribution, or income or price support, must confer a benefit.
A financial contribution will confer a benefit
within the meaning of Article 1.1(b) when it provides an advantage to its
recipient, and that the existence of any such advantage is to be determined by
comparing the position of the recipient in the marketplace with and without the
financial contribution.
This
Agreement would cover instances where there is a form of incentive in the form
of tax reliefs or other forms of incentive given by governments to a person or
body within their territory for compliance with local content requirements.
WTO Local Content Cases
In
a number of cases, the Panel and the Appellate Body of the WTO have had to
resolve complaints on violation of the national treatment obligations of the
GATT and TRIMs Agreement. A few of these cases would be considered.
In Canada – Measures Relating to the Feed-in Tariff Program, Japan and the European Union brought a complaint at the WTO
concerning the discriminatory treatment affecting imports of parts and
equipment utilized in facilities that generate electricity from wind and solar
photovoltaic ("PV") sources (referred to hereafter as "renewable
energy generation equipment") by the Canadian Province of Ontario
("Ontario") pursuant to its feed-in tariff ("FIT") program
(the "FIT Program") established on 24 September 2009. The FIT Program
provides subsidies to generators of renewable energy in Ontario, and it
requires that in order to receive those subsidies, wind and solar PV generators
use renewable energy generation equipment made in Ontario (referred to as the
“domestic content requirement”). For purposes of this dispute, the most
important requirement that a wind or solar PV FIT generator must satisfy is the
domestic content requirement. Pursuant to Section 6.4(b) of the FIT Rules, FIT
generators that do not satisfy the domestic content requirement are in default
under the FIT contracts, while for microFIT generators, an offer of a microFIT
Contract is strictly conditional on compliance with the microFIT domestic
content requirement.
Japan and the European Union, the both
complainants in the case, claimed that the challenged measures are inconsistent
with Article 2.1 of the Agreement on Trade-Related Investment Measures (TRIMs
Agreement), and Article III:4 of the General Agreement on Tariffs and Trade
1994 (GATT 1994).
The
Appellate Body rejected Canada’s argument that the measures at issue are
covered by Article III:8(a) of the GATT 1994 on the premise that Article
III:8(a) does not cover discriminatory treatment of the equipment used to
generate the electricity that is procured by the Government of Ontario. In the light of the
finding that the Minimum Required Domestic Content Levels do not fall within
the ambit of Article III:8(a), and in the light of the fact that Canada did not
appeal the Panel's finding that the FIT Programme and Contracts are
inconsistent with Article III:4 of the GATT 1994 and Article 2.1 of the TRIMs
Agreement, the Panel's conclusion that the Minimum Required Domestic Content
Levels prescribed under the FIT Programme and related FIT and microFIT
Contracts are inconsistent with Article 2.1 of the TRIMs Agreement and Article
III:4 of the GATT 1994 were upheld by the Appellate Body.
In India – Measures Affecting the Automotive
Sector, the United States and the European Communities brought a
complaint against India challenging certain indigenization measures instituted
by the Indian government which require
manufacturing firms in the motor vehicle sector to achieve specified levels of
purchase or use of domestic content contained in an MOU to be signed by them. A
car manufacturer that does not sign the MOU or does not perform the obligations
assumed under the MOU may be denied a license for the importation of SKD/CKD
kits. Subparagraphs 3(i) through (iv) of Public Notice No. 60 which set out the
measures, stated four requirements which an MOU must impose on the
manufacturing company:
i.
Establishment
of actual production facilities for manufacture of cars, and not for mere
assembly.
ii.
A
minimum of foreign equity of US$50 million to be brought in by the foreign
partner within the first three years of the start of operations, if the firm is
a joint venture that involves majority foreign equity ownership.
iii.
Indigenization
(i.e. local content) of components up to a minimum level of 50% in the third
year or earlier from the date of first import consignment of CKD/SKD
kits/components, and 70% in the fifth year or earlier.
The
United States and the European
Communities claimed that the indigenization requirements fell squarely
within the scope of Paragraphs 1(a), 1(b) and 2(a) of the Illustrative List of
the TRIMs Agreement, and for that reason they violated Articles 2.1 and 2.2 of
the TRIMs Agreement. Separately, they also violated Article 2.1 of the TRIMs
Agreement because they were inconsistent with GATT Articles III:4.
The
Panel found that the indigenization measure affects the internal sale, offering
for sale, purchase and use of the imported parts and components in the Indian
market and that, by requiring auto manufacturers to use a certain percentage of
domestic products, it affects the internal sale of like imported products which
affords less favourable treatment to the imported products.
Consequently,
the Panel concluded that:
i. India acted inconsistently with its
obligations under Article III:4 of the GATT 1994 by imposing on automotive
manufacturers, under the terms of Public Notice No. 60 and the MOUs signed
thereunder, an obligation to use a certain proportion of local parts and
components in the manufacture of cars and automotive vehicles
("indigenization" condition); and
ii. India acted inconsistently with its
obligations under Article III:4 of the GATT 1994 by imposing, in the context of
the trade balancing condition under the terms of Public Notice No. 60 and the
MOUs signed thereunder, an obligation to offset the amount of any purchases of
previously imported restricted kits and components on the Indian market, by
exports of equivalent value.
Local Content (Nigerian Content)
under the NOGIC Act
Objective of the Act
The
preamble to the Nigerian Content Act establishes the purpose of the Act, which
is “to provide for the development of Nigerian Content in the Nigerian Oil and
Gas Industry, Nigerian Content Plan, Supervision, Coordination, Monitoring and
Implementation of Nigerian Content; and for related matters”. A community
reading of the Preamble and section 5 of the Nigerian Content Act would seem to
throw more light on the main objectives of the Act. Section 5 imposes on the
Nigerian Content Development and Monitoring Board (“the Board”) the duty to
implement the provisions of the Act with a view to ensuring a measurable and
continuous growth of Nigerian Content in all oil and gas arrangements,
projects, operations, activities or transactions in the Nigerian oil and gas
industry. Thus, the purpose of the Act is to entrench Nigerian content in the
Nigerian oil and gas industry.
Definition of Nigerian Content and
Applicability of the Act
Nigerian
Content is defined in the Act as:
“the
quantum of composite value added to or created in the Nigerian economy by a
systematic development of capacity and capabilities through the deliberate
utilization of Nigerian human, material resources and services in the Nigerian
oil and gas industry”.
From
the above definition, Nigerian content simply means adding value to the
Nigerian economy through the use of domestic material resources (including
goods) and services in the Nigerian oil and gas industry.
The
Act is to apply to all matters pertaining to Nigerian content in respect of all
operations or transactions carried out in or connected with the Nigerian oil
and gas industry.
This is irrespective of anything to the contrary contained in the Petroleum Act
or any other enactment or law.
By ‘Nigerian oil and gas industry’ it is meant all activities connected with
the exploration, development, exploitation, transportation and sale of Nigerian
oil and gas resources including upstream and downstream oil and gas operations.
Nigerian Content as a condition to
participating in the Nigerian Petroleum Industry
The
NOGIC Act establishes compliance with Nigerian content as a criterion for
participating in the Nigerian petroleum industry. To this end, section 7
provides that in bidding for any licence, permit or interest and before
carrying out any project in the Nigerian oil and gas industry, an operator
shall submit a Nigerian Content Plan to the Nigerian Content Development and
Monitoring Board (“NCDMB”) demonstrating compliance with the Nigerian content
requirements of the Act. The Nigerian content requirements to which compliance
must be demonstrated include the requirement to place priority on the use of
domestic goods and services.
Nigerian Content with respect to
purchase of goods and services
In
consonance with its objective and definition of Nigerian content, the Act
requires an operator to submit a Nigerian Content Plan (“NCP”) which shall
contain a detailed plan setting out how the operator and their contractors will
give first consideration to Nigerian goods and services.
The NCP shall also contain detailed plan on how the operator or its alliance
partner intend to ensure the use of locally manufactured goods where such goods
meet the specifications of the industry. The implication of this is that once
locally manufactured goods meet the specification of the industry, they must be
used by operators and their alliance partners.
Other Nigerian content requirements
The
Act requires the Minister to make regulations which shall require an operator
to invest in or set up a facility, factory, production unit or other operations
within Nigeria for the purposes of carrying out any production, manufacturing
or for providing services otherwise imported into Nigeria.
The import of this section is to see that goods or services which otherwise
could be manufactured or carried out in Nigeria, but which hitherto are being
imported, are manufactured and carried out in Nigeria. While this requirement
on its own may seem harmless, its innocence would wane if consideration is
taken of the fact that compliance with the requirements of the Act including
this one, is a condition for ingress and continuing in the Nigerian oil and gas
sector.
Fiscal Incentives
The
Act requires the Minister to consult with the relevant arms of government on an
appropriate fiscal framework and tax incentives for foreign and indigenous
companies which establish facilities, factories, production units or other
operations in Nigeria for purposes of carrying out production, manufacturing or
for providing services and goods otherwise imported into Nigeria.
How do these Nigerian content
provisions breach the WTO AGREEMENTS?
The
underlining point to note under this head of discussion is that the national
treatment obligation as contained in the GATT 1994 and the TRIMS Agreement
prohibits any policy that tends to afford protection to domestic products or
goods, and any policy which requires that a percentage of domestic goods be
used. It proscribes any measure that establishes discrimination against foreign
goods in favour of local goods. In Japan —
Alcoholic Beverages II the
Appellate Body explained that the purpose of Article III
embodies the intention of the drafters of the Agreement which was clearly to
treat the imported products in the same way as the like domestic products once
they had been cleared through customs. Otherwise indirect protection could be
given.
By
placing compliance with the requirements of the NOGIC Act as a condition for bidding
for any licence, permit or interest and carrying out any project in the
Nigerian oil and gas industry, the Act qualifies as a trade related investment
measures (“TRIM”). This is because the purpose of the said requirement is to
encourage investment in local production. In Canada – Feed-in-Tariff, the Panel found that the FIT Programme of
Canada which was
a key factor motivating a number of manufacturers to establish facilities for
the production of renewable energy equipment in Ontario was a TRIM. Having
established that the requirement of the Act amounts to a TRIM, the next point
to be established is if the TRIM violates Article 2.1 of TRIMs and by extension
Article III of GATT, as well as Article 2.2 of TRIMs. This is so because
Article 2:1 provides that no member shall apply any TRIM that is inconsistent
with Article III of GATT 1994.
For ease of reference, it is necessary
to reproduce the relevant provisions of Article III of GATT 1994, i.e. Article
III:4 and Article III:5.
Article III (4)
The products of the territory of any
contracting party imported into the territory of any other contracting party
shall be accorded treatment no less favourable than that accorded to like
products of national origin in respect of all laws, regulations and
requirements affecting their internal sale, offering for sale, purchase,
transportation, distribution or use. The provisions of this paragraph shall not
prevent the application of differential internal transportation charges which
are based exclusively on the economic operation of the means of transport and
not on the nationality of the product.
Article III (5)
No contracting party shall establish or
maintain any internal quantitative regulation relating to the mixture,
processing or use of products in specified amounts or proportions which
requires, directly or indirectly, that any specified amount or proportion of
any product which is the subject of the regulation must be supplied from
domestic sources. Moreover, no contracting party shall otherwise apply internal
quantitative regulations in a manner contrary to the principles set forth in
paragraph 1.
Article 2.2 of the TRIMs Agreement
contains an illustrative list which list TRIMs that are inconsistent with the
obligation of national treatment provided for in paragraph 4 of Article III of
GATT 1994. These include those which are mandatory or enforceable under
domestic law or under administrative rulings, or compliance with which is
necessary to obtain an advantage and which require:
a.
the
purchase or use by an enterprise of products of domestic origin or from any
domestic source, whether specified in terms of particular products, in terms of
volume or value of products, or in terms of a proportion of volume or value of
its local production; or
b. that an enterprise's purchases or use
of imported products be limited to an amount related to the volume or value of
local products that it exports.
By requiring that first consideration be
given to Nigerian goods and services
and the use of locally manufactured goods where such goods meet the
specifications of the industry, the Act qualifies as a law, regulation or
requirement affecting the internal use of goods so as to mete less favourable
treatment to imported goods, and as such is contrary to the GATT and TRIMs
Agreements.
Secondly, by providing for fiscal
incentives to be given to entities who comply with the requirements of the Act,
the Act runs contrary to the SCM Agreement. It might be argued that the fiscal
incentives in the Act are not defined and as such are futuristic. In Brazil — Aircraft the Panel rejected
the argument that a subsidy exists only when the transfer of funds has actually
been effectuated. The Panel found that according to Article 1:1(i) a
subsidy exists if a government practice involves a direct transfer of funds or
a potential direct transfer of funds and not only when a government actually
effectuates such a transfer or potential transfer. As soon as there is such
a practice, a subsidy
exists, and the question whether the practice involves a direct transfer of
funds or a potential direct transfer of funds is not relevant to the existence
of a subsidy.
Can
the available exceptions salvage the Act?
The provisions of the Act cannot find
refuge under the exceptions created in the Agreements. This is because they don’t
qualify as government procurement under Article III:8(a) and (b) of GATT 1994.
Conclusion
Despite the lofty objectives of the
NOGIC Act which is to ensure local participation in the foreign dominated
Nigerian oil and gas industry, the Act is contrary to Nigerian’s international
trade obligations. Already the European Union and the United States said they
had raised issues about Nigeria’s local content measures in the oil and gas
industry in the TRIMS Committee but had not yet received any response from
Nigeria. Australia said it also has questions about these measures.
It is likely consultations would be requested by these countries with Nigeria
which would likely see the dispute referred to the Dispute Settlement Body
(DSB) of the WTO. If that happens, the Act would most likely be found
inconsistent with the WTO Agreements as has been decided in similar cases by
the Panel and the Appellate Body.
Nigeria is left with two options. The
first is to enjoy the benefits of the Act until it is decided upon at the WTO.
The second is to bring the Act into conformity with the WTO Agreements. The
second option would entail reviewing the Act and expunging the sections that
make compliance with the Act a criteria for participating in the Nigerian oil
and gas industry. It would also entail removing the sections that imposes
mandatory purchase of Nigerian goods and services. However, to ensure that
Nigerian content is still being promoted in the Nigerian oil and gas industry,
the Act should insist that all operators and alliance partners shall maintain a
bidding process for acquiring goods and services which shall give full and fair
opportunity to Nigerian indigenous contractors and companies.
NAPIMS is the upstream arm of NNPC that oversees
Nigeria’s investment in the Joint Venture Companies (JVCs,) Production Sharing
Companies (PSCs) and Services Contract Companies (SCs).
‘National Treatment’, UNCTAD Series on Issues in
International Investment Agreements, UNCTAD/ITE/IIT/11 (Vol. IV) (New York & Geneva: United Nations, 1999).
Report of the Appellate Body on European Communities –
Measures Affecting Asbestos and Asbestos-Containing Products,
WT/DS135/AB/R, adopted on 5 April 2001, para. 93.
Under Article 3 of TRIMs Agreement, all
exceptions provided in the GATT 1994 shall apply, as appropriate, to the
provisions of the TRIMs Agreement. It is important to note that the exception
under Article 8:III(a) relating to government procurement also applies as an
exception herein. In Canada – Measures
Relating to the Feed-in-Tariff, Canada had argued that the exception of
government procurement enshrined in Article III:8(a) of GATT does not apply to
Article 2 of TRIMS because Article 2:2 of TRIMS made reference to only Article
III:4 of GATT and not Article III:8(a). Both the Panel and the Appellate Body
rejected this argument.
i.e. where: (i) a government practice
involves a direct transfer of funds (e.g. grants, loans, and equity infusion),
potential direct transfers of funds or liabilities (e.g. loan guarantees); (ii)
government revenue that is otherwise due is foregone or not collected (e.g.
fiscal incentives such as tax credits); (iii) a government provides goods or
services other than general infrastructure, or purchases goods; (iv) a
government makes payments to a funding mechanism, or entrusts or directs a
private body to carry out one or more of the type of functions illustrated in
(i) to (iii) above which would normally be vested in the government and the
practice, in no real sense, differs from practices normally followed by
governments.
Article 14(d) stipulates that a government purchase of goods
will confer a benefit upon a recipient if it is made for "more than adequate
remuneration", and that the adequacy of this remuneration must be
evaluated in relation to the "prevailing market conditions" for the
good in question in the country of purchase, including "price, quality,
availability, marketability, transportation and other conditions of purchase or
sale".
The Appellate
Body Found that the conditions for derogation under Article III:8(a) must be
understood in relation to the obligations stipulated in the other paragraphs of
Article III. This means that the product of foreign origin allegedly being
discriminated against must be in a competitive relationship with the product
purchased. In the instant case, the Appellate Body found that the product being
procured is electricity, whereas the product discriminated against for reason
of its origin is generation equipment. These two products are not in a
competitive relationship. Accordingly, the discrimination relating to
generation equipment contained in the FIT Programme and Contracts is not
covered by the derogation of Article III:8(a) of the GATT 1994. See para. 5.79
of the Appellate Body Report.
Report of the Panel, WT/DS146/AB/R and WT/DS175/AB/R, 21 December 2001. India initially
appealed the Panel’s ruling to the Appellate Body, but subsequently withdrew
the appeal. On 6 November 2002, India
informed the DSB that it had fully complied with the recommendations of the DSB
in this dispute by issuing Public Notice No. 31 on 19 August 2002 terminating
the trade balancing requirement. India also informed that earlier it had
removed the indigenization requirement vide Public Notice No. 30 on 4 September
2001. See summary of the dispute at www.wto.org.
Para. 8.1. Having found that the measures were in violation of Articles
III:4 of the GATT, the Panel applied the principle of judicial economy and
found that it was not necessary to consider separately whether they are also
inconsistent with the provisions of the TRIMs Agreement.
