China’s WTO challenge over EVs shows why India should future-proof its industrial subsidies

Prohibited subsidies: Those that are contingent on: (a) the use of domestic over exported products, or on (b) export performance. These are frowned upon as having a distortive impact on trade and can be challenged as illegal.

Actionable subsidies: These are directed at domestic producers or at incentivizing domestic production but are not linked to requirements for any specific domestic value addition or exports. Such subsidies could, however, be ‘actionable.’ This means that they may be countervailed by duties imposed by an importing country, but only subject to factual demonstration that such subsidies cause injury to its domestic industry.

Measures mandating domestic content requirements (DCRs) are also prohibited under the WTO’s Trade Related Investment Measures (TRIMS) agreement. India’s DCRs for the automobile sector and solar cells and modules have been successfully challenged at the WTO, after which these measures had to be redesigned.

The government has also been phasing out export-contingent subsidies such as tax and duty exemptions after adverse findings in a WTO dispute and redesigning them by de-linking them from export performance.

China has been one of the world’s largest subsidizers. For EVs alone, China is estimated to have provided its industry over $230 billion in subsidies since 2009, benefiting both state and private firms. Its head-start enabled it to dominate the world EV market and it started scaling back its EV subsidies only in 2023.

These have mostly been considered ‘actionable’ subsidies and subject to anti-dumping and countervailing measures on imports into the EU or US. The EU, which recently concluded that battery EVs imported from China are heavily subsidized and cause injury to its own industry, has imposed countervailing duties ranging from 17% to 35% on various Chinese exports.

A key plank of China’s complaint at the WTO is that India’s EV subsidies are in the ‘prohibited’ category. While the outcome of this specific dispute will depend on legal arguments and India’s defence, we need to mitigate legal risks to Indian subsidies by designing them for compatibility with our obligations under the WTO and various FTAs. This needs to be addressed at two levels.

First, since rules under both the WTO and FTAs are similar on prohibited and actionable subsidies, trade-compatibility assessments of subsidies and incentives should be built into the policy design. While production subsidies may be countervailed by importing countries, these are subject to a far more rigorous set of tests for injury analysis, whereas explicit import substitution or export continency requirements make subsidies vulnerable to being struck down as prohibited irrespective of any actual injury.

Studies have also shown that market efficiency, innovation and competition are better promoted by leaving the choice of local value-addition levels to entrepreneurs. Linking incentives to domestic production or investments in R&D, design, innovation and employment, rather than export performance or domestic value addition, therefore, is a legally safer approach.

The second aspect is the need to review multilateral trade rules related to industrial policy (and specifically subsidies). Industrial subsidy reforms have been increasingly discussed among WTO members, particularly since covid. These have focused on (a) policy space for industrialization in both developed and developing nations; (b) a need to fill lacunae related to transnational subsidies (those offered to firms outside a country; and (c) legitimacy for climate-related subsidies.

India has argued for the right of developing countries to implement industrial subsidies, but we must engage more proactively in all discussions.

In particular, the reframing of WTO subsidy rules to enable climate action through fossil-fuel subsidy reforms, state support for decarbonization and other green subsidies is being discussed by a group of 78 WTO members under Trade and Environment Sustainability Structured Discussions. This group includes China, the US, EU, Japan, South Korea and Brazil, among others. India has stayed out, as it has of several other joint WTO initiatives, on the ground that these go against the spirit of multilateral consensus.

As industrial policy gets intertwined with economic security, we should expect closer scrutiny of practices and further contestations. While the WTO may be facing rough weather, the rules it sets have been the blueprint for FTAs. It is important for India to participate in any such discussions and help shape the contours of any regime that may emerge. Given the ramifications, we cannot afford to stay out.

These are the author’s personal views.

The author is a partner at Clarus Law Associates, New Delhi.