Door-in-the-Face Trade Restrictions?

After Russia´s invasion in Ukraine, the European Union (EU) aims to “put to an end […] its dependence on Russian fossil fuels” and will place solar energy at the centre of the solution (para. 1). However, the EU is only one of the players competing for the biggest spot under the sun and China currently holds the winning hand (p.7). In its struggle for secure and sustainable supply of technologies, the EU might be in breach of world trade law. After all, is the EU flying too close to the sun?

The EU meets less than 3% of its solar photovoltaic (PV) demand by domestic production, corresponding to 2 GW in 2022 against a non–binding target of 30 GW of yearly domestic production by 2030 (p. 130). The gap is filled by Chinese (over-)production, whose manufacturing capacity may be two times the global demand of solar PV by 2030 (p. 119). The cheaper Chinese panels aid decarbonization but expose EU producers to state–sponsored competition (see details here p. 7, 40). In view of this trade imbalance, Draghi´s Report on the future of European competitiveness holds that “Europe must [now make] fundamental choices about how to pursue its decarbonization path while preserving the competitive position of its industry” (p. 41).

How the EU chooses and whether this choice is in line with World Trade Organization (WTO) law is examined with regard to the recently proposed EU Industrial Accelerator Act (IAA). First, the blog reviews how the IAA amends the Net-Zero Industry Act´s (NZIA) provisions regarding public support for solar PV. Although both public procurement and Union origin requirements may raise WTO issues (p.18), the blog will focus on the latter. It discusses the newly introduced Union origin requirements in view of the WTO´s national treatment obligation and also considers possible carve-outs and justifications. It then argues that the IAA Union origin requirements are difficult to reconcile with world trade law, sitting uneasily with the EU´s commitment to the rules-based order.

The Net Zero Industry Act: Insufficiently Leveraging Public Support Schemes for Solar PV 

The Net-Zero Industry Act aims to enable a secure and sustainable supply of technologies like solar PV (Art. 1 (1), Art. 4 (1) (a)). It introduced sustainability and resilience criteria for public procurement procedures, auctioning and other forms of public support measures to stimulate demand (Arts. 1 (2), 25, 26, 28). Already, the EU Commission decided that the resilience criteria (criticized for world trade law incompatibility (p.6)) were insufficient to boost the “potential of the internal market” and reduce reliance on third countries effectively (Rec. 65). Hence, the IAA amends the Net-Zero Industry Act auction and procurement provisions with targeted restrictions for two elements in the solar PV supply chain: the PV inverters and cells or equivalent.

Shutting the Door on Chinese PV? Origin Requirements Under the IAA

The Industrial Accelerator Act proposes origin requirements. That means public procurement procedures should now also consider the Union origin of the solar PV inverters and cells (Art. 25a (2) amended Net-Zero Industry Act). Public procurement accounts for 16% of EU GDP and is significant for areas such as energy (Rec. 15). Only if the solar PV company´s host country is a party to one of the three international agreements will their PV inverters or cells be considered as ‘content equivalent to Union origin’ (Arts. 25a (2), 28e amended NZIA).

Origin requirements apply to auctions as well. These are public tendering schemes where bidders can compete for public support which is especially important for solar PV (Rec. 15, 68 Industrial Accelerator Act). Auctions which have as “part of their subject matter” the PV inverters and PV cells or equivalent must consider EU origin as an additional third “pre-qualification or award criteria” (Art. 26 (2a); Annex II, Part II (b) amended Net-Zero Industry Act). There is a difference between the Union origin understanding regarding public procurement and auction. Namely, that content originating from countries that are party to the Government Procurement Agreement does not gain access to auctions (Art. 28f amended NZIA).

Practically, origin requirements could influence at minimum 5% of the award decision of auctions. Taken together with the resilience and sustainability criteria even up to 30 % of each decision could be impacted. These criteria may apply to at least 8 GW of auctioned energy in each EU Member State (Art. 26 (4), (7) amended Net-Zero Industry Act). Germany as one of the larger EU Member States projects to auction a total of approximately 26 GW of renewable energy in 2026. Thus, considerable parts of the allocation of renewable energy will be reshaped.

But What About the National Treatment Obligation?

A central pillar to WTO law is the General Agreement on Tariffs and Trade 1994 (GATT) which aims to facilitate non–discriminatory trade. Both the EU and China are members of the WTO and must respect the provisions governing trade set out in the GATT.  One of the core rules of the GATT is that domestic rules should not protect and favour domestic products compared to imported products (national treatment, Art. III).

The Agreement on Trade-Related Investment Measures provides an illustrative list of measures which, following Canada—Renewable Energy (para. 5.103), breach the national treatment obligation. These include trade and related investment measures which require the purchase of “products of domestic origin” (Annex 1 (a)). To the extent that the auction origin requirements qualify as a trade-related investment measure of that character, they would likely be inconsistent with the national treatment requirement.

This provision applies if there is an investment-related aim behind the measure (India—Solar Cells, paras. 7.61 – 7.62). The EU indeed holds that the IAA measures, and thus also the Union origin requirements should create a “strong business case” for industrial competitiveness and decarbonization with net-zero technologies (p.2). The Union origin requirements may be, following the analysis above be considered, “trade-related investment measures”.

Then, the question is whether the requirements mandate the “purchase or use” of domestically produced goods by “an enterprise” (India – Solar Cells, paras. 7.65 – 7.67). The Union origin requirements, indeed, make the purchase of renewable energy in auctions a package deal that comes with a minimum amount of locally produced solar panels, inverters or equivalent.

Moreover, the origin requirements may be also found to confer an advantage onto those companies supplying Union originating solar panels or PV inverters or equivalent during the auction process. Their success of selling their energy will be higher than for non-Union originating energy providers.

Eventually, to obtain the benefits compliance with the origin requirements is necessary (India – Solar Cells, paras. 7.68-7.72). A critical, unresolved question, is how the enforcement mechanisms, specifically the penalties member states adopt under Article 32 of the IAA, will apply to the solar PV origin requirements. If these penalties extend to the NZIA amended provisions, it would make the origin requirements practically enforceable.

These aspects together make the origin requirements in auctions likely a trade-related investment measure. Namely one that is within the scope of the measures set out to be incompatible with the national treatment obligation under the Agreement on Trade-Related Investment Measures.

What Can Be Saved Under the GATT Public Procurement Carve-Out?

The origin requirements in auctions could be saved with the public procurement carve-out under Article III:8 GATT. Yet, two questions may be challenging to answer when trying to apply the carve-out to the auctions: What goods are purchased and whether there was a competitive relationship between the products discriminated by the amended Net-Zero Industry Act and the ones domestically purchased (para. 5.79).

In India—Solar Cells, the procurement was found to focus on electricity as a product which is different from the “inputs and processes of production” of such electricity, like the solar PV cells (para. 7.128). The adjudicators then reasoned that electricity and its inputs compete in different arenas (para. 7.128) and concluded  that the discrimination against solar cells under Indias domestic content requirements was not covered by the carve-out (para. 7.135).

Under the IAA, the content traded in auctions is renewable energy and not exclusively the equipment itself (Annex II, Part II amended NZIA). Therefore, the carve-out may not be the right provision to save discrimination against PV inverters or cells from China in auctions.

Can GATT Justifications Come to Rescue?

Could the EU justify the measure under Article XX instead?  Article XX (j) allows discrimination in situations of general or short supply of products locally. Much like India (para. 5.46), the EU argues vulnerabilities and dependencies in its supply chain may threaten supply security. However, the understanding of ‘supply’ is not limited to local production (para. 5.69). Quite the opposite, a holistic assessment should also consider international supply of PV inverters and cells (paras. 5.69 – 5.71) which, thanks to Chinese overproduction, is currently plentiful.

A dependent supply chain can carry risks which may affect supply (para. 5.76). To make use of that argument, the EU would need to identify (para. 5.77) that the international supply of both PV inverters and cells is not stable and accessible (para. 5.89). Indeed, EU parliamentarians already urged the European Commission to “restrict high–risk vendors” from solar energy systems. So far, however, the Impact Assessment and the Explanatory Memorandum of the Industrial Accelerator Act missed the opportunity of identifying PV cell or inverter related risks or particular ‘unreliable‘ Chinese suppliers (p.5). If the EU wants a more defensible case, it should spell out those risks more clearly in the IAA or implementing measures.

Still, even where the EU had a more defensible justification, the auction origin requirements would still be contrary to WTO rules where they lead to arbitrary or unjustifiable discrimination, or are a disguised restriction of trade. This second step of the analysis inquires whether the IAA measure discussed meets the requirements of the Chapeau under Article XX (GATT).

An important factor for determining arbitrary or unjustifiable discrimination is the rigidity of the measure. The origin requirements appear flexible as they come with exemptions (Art. 26 (5) amended Net-Zero Industry Act). Yet, those exemptions are for the EU Member States to apply, and not for WTO Members to invoke. Meaning, the exemptions cannot be made use of by WTO partners that do not have a Free-Trade Agreement with the EU or are part of the customs union. That makes them harder to square with the logic of US—Shrimp where access remained possible for WTO members upon adopting a programme ‘comparable in effectiveness’ (para. 144).

China could, in principle, obtain ‘Union origin’ status for its goods or avoid the exclusion by entering into a free-trade agreement with the EU under the amended Net-Zero Industry Act (Art. 28 f)). That route, though, seems politically unlikely because it comes with a taste of coercion (Sect. E). This raises doubts whether the EU made good-faith use of the exemptions.

A stronger defence for the auction origin requirements comes from communication and multilateral engagement. Indeed, the EU should engage in the politically more tedious effort of conducting ‘serious across-the-board negotiations’ (para. 166) not just with China but other trade partners too, to prevent in a multilateral manner the weaponization of the PV supply chain. This would make the measures under the amended Net-Zero Industry Act much more defensible under WTO law.

Door Closes On the Rules-based Order?

The IAA´s origin requirements thus sit uncomfortably with at least one of the WTO non-discrimination rules, challenging the core rule of national treatment. The breach may also not be saved under existing carve-outs or justifications. If the auction origin requirements survive the trilogues, the EU will have chosen economic security over adherence to the rules-based order. This could be expensive (p.41), as Chinese panels are currently more cost-competitive. The question then is whether eventually the quest for economic security comes at the cost of decarbonization.

A last note: Whilst this blogpost focusses narrowly on auctions and origin requirements, there is much to be said about public procurement and the specific WTO legal regime applicable to it. Another question concerns subsidies and whether the local content requirements are aligned with the Agreement on Subsidies and Counterveiling Measures (see here for recent case law). These are important avenues for an even more holistic assessment of the IAA.