Japan is escalating its dispute with Canada over the domestic content requirements introduced in Ontario by the Green Energy Act, which Japan submits are a prohibited form of trade discrimination. In September 2010, Japan requested formal consultations with Canada. Canada subsequently agreed to allow the US and the EU to join the consultations. The results of the consultations appear to have been unsatisfactory to Japan. According to Nikkei.com, Japan has asked the World Trade Organization on Wednesday to convene a formal dispute resolution panel to resolve the complaint.
Japan believes that the domestic content requirements violate the principle of "national treatment" in the General Agreement on Tariffs and Trade and constitute a form of trade-distorting subsidy for Ontario-based manufacturers. Specifically, Japan's position is that, when viewed in the context of the Feed-in Tariff program, the domestic content requirements:
- accord less favourable treatment to imported equipment than that accorded to like products originating in Ontario, in violation of Article III.4 of the General Agreement on Tariffs and Trade 1994 ("GATT");
- constitute "quantitative regulation" that favours domestic suppliers., in violation of Article III.5 of GATT; and
- appear to be trade-related investment measures that violated Article III of GATT, in violation of Article 2.1 of the Agreement on Trade-Related Investment Measures
- offer financial contribution or a form of income or price support that is contingent upon the use of domestic over imported goods, in violation of Article 3.1(b) and 3.2 of the Agreement on Subsidies and Countervailing Measures
Canada does not yet appear to have publicly articulated its response to Japan's concerns.
Assuming the WTO convenes a panel, it will likely be several months before the hearing is concluded and a decision is rendered. In the interim, Japan will likely continue to apply diplomatic pressure in parallel to the WTO proceedings.
In the event that the WTO panel finds in favour of Japan, and the decision of the panel is adopted by the WTO's Dispute Settlement Body, and Canada does not appeal the decision (or loses an appeal), Canada will be compelled to adjust its policies and/or provide some form of compensation to Japan. If it fails to do so, Japan may ask the WTO for permission to impose countervailing trade sanctions. Such sanctions should in principle be targeted at the renewable industry. However, aggrieved countries sometime choose to target other industries (particularly those who have a strong lobbying voice with the federal government).
Managing the dispute may prove to be politically challenging. Canada is the WTO member and GATT signatory, meaning that the federal government will have carriage of the dispute. However, the domestic content rules are a matter of provincial legislation. Any resolution of the Japan's concerns will therefore require a significant degree of cooperation between politicians in Ottawa and at Queen's Park.
It is likely, however, that the issue is more important to the provincial Liberal government, which is facing an election this fall, than it is to the federal Conservatives, who recently secured a majority for the next four years. When it introduced the Green Energy Act, the provincial government promised up to 50,000 green collar jobs in the province. By forcing manufacturers to open up shop in Ontario, the domestic content requirements are critical to enabling the government to follow through on this promise. Creating these jobs is even more important now as a means of countering pre-election claims by the provincial opposition parties that the Green Energy Act is only driving up electricity prices. The province will also have to reassure those manufacturers who have invested (or are considering investing) in the province that their domestic products will not be pushed aside by cheaper imports in the coming years. The provincial Liberals will therefore be very motivated to ensure that Japan's dispute does not have any adverse impacts in the province this year.