China’s WTO Complaint against India’s PLI Scheme

Why in News ?

• In October 2025, China filed a complaint at the World Trade Organization (WTO) against India.
• The allegation: India’s Production-Linked Incentive (PLI) schemes for specific sectors violate WTO subsidy rules and discriminate against imported goods, especially from China.

Relevance

• GS Paper 2 – International Relations: WTO dispute mechanism, India–China trade relations.
• GS Paper 3 – Economy: Industrial policy, subsidies, Make in India, Atmanirbhar Bharat, and global trade rules interaction.

What is the PLI Scheme?

• Launched: 2020 (under Aatmanirbhar Bharat).
• Objective: Boost domestic manufacturing, attract global investment, integrate MSMEs, and strengthen India’s role in global value chains.
• Mechanism: Financial incentives (3–13%) on incremental sales of goods produced in India compared to a base year.
• Coverage: 14 strategic sectors (e.g., auto, semiconductors, telecom, pharma, electronics, solar, textiles, batteries).

China’s Complaint: Core Allegation

• China challenges three PLI schemes as violating WTO’s Subsidies and Countervailing Measures (SCM) Agreement and Trade-Related Investment Measures (TRIMs) Agreement.

Challenged PLIs

Sector	Focus	Contested Clause
Advanced Chemistry Cell (ACC) Batteries	Large-scale battery manufacturing	25% Domestic Value Addition (DVA) requirement
Automobile & Auto Components (AAT)	Advanced Automotive Technology products	50% DVA requirement
Electric Vehicles (EVs)	Attracting global EV manufacturers	DVA-linked subsidy condition

China’s Argument

• The DVA requirement effectively rewards companies for using Indian-made goods instead of imported goods.
• Such “local content requirements” distort trade and constitute Import Substitution (IS) subsidies, which are prohibited under WTO law.

WTO Legal Framework

Subsidies and Countervailing Measures (SCM) Agreement

• Article 1: Defines a subsidy as a financial contribution by a government/public body that confers a benefit and is specific to an enterprise or industry.
• Types of Subsidies:
  • Prohibited Subsidies — Contingent upon:
    • (a) Export performance, or
    • (b) Use of domestic goods over imports (Import Substitution subsidies).
  • Actionable Subsidies — May be challenged if they cause adverse effects on trade.
  • Non-actionable Subsidies — Rare; typically for general R&D or regional development (now largely lapsed category).

Related WTO Provisions Violated (as per China)

Agreement	Article	Provision Allegedly Breached
GATT 1994	Article III:4	National Treatment — Imported goods must not be treated less favourably than domestic goods.
TRIMs Agreement	Article 2.1	Prohibits trade-related investment measures inconsistent with GATT Article III (e.g., local content requirements).

India’s Possible Defence

DVA ≠ Local Content Requirement

• The Domestic Value Addition clause focuses on value created within India, not mandatorily on use of Indian-origin goods.
• DVA can be achieved via assembly, design, software, or service inputs, even if raw materials are imported.

Developmental and Environmental Objectives

• PLI schemes aim at green industrialization, EV transition, and energy storage self-reliance, aligning with SDG goals — giving India policy space under Article XX of GATT (General Exceptions).

WTO’s Eroded Enforcement

• With the Appellate Body dysfunctional since 2019, even if a panel rules against India, China cannot enforce the verdict — creating a de facto policy buffer for India.

Dispute Settlement Process at WTO

Step	Description
Step 1: Consultations	60-day period for bilateral discussions.
Step 2: Panel Formation	If unresolved, a 3-member WTO panel examines the complaint.
Step 3: Panel Report	Findings submitted to the Dispute Settlement Body (DSB).
Step 4: Appeal	Normally to the Appellate Body (defunct since Dec 2019).
Step 5: Status Quo	Pending appeal → no binding enforcement; India can continue its PLIs.

Broader Implications

a. Strategic Context

• China’s move may reflect geo-economic rivalry, given India’s:
  • PLI-backed localization of EV and battery supply chains.
  • Exclusion of Chinese firms from certain PLI tenders (e.g., ACC batteries).

b. Industrial Policy vs WTO Rules

• Revives global debate: Can developing countries use industrial subsidies for technology catch-up?
• Highlights policy tension between “free trade” and “strategic autonomy”.

c. Precedent Risk

• If China’s challenge succeeds, it could embolden other WTO members to target India’s PLIs in semiconductors, solar, or telecom.

Theoretical & Legal Perspective

• Amartya Sen (development theory): argues for “capability building” — PLI aligns with structural transformation goals.
• Dani Rodrik (globalization paradox): developing nations need industrial policy space even within global trade rules.
• WTO law (Article XX & development clauses) recognizes this to an extent.

Key Takeaways

• China’s allegation: India’s PLI-linked DVA clauses = prohibited import substitution subsidies.
• India’s stance: DVA ≠ local content; PLIs serve legitimate developmental aims.
• WTO enforcement vacuum: ensures status quo; India faces no immediate penalty.
• Larger trend: Growing friction between industrial policy revival (India, US, EU) and WTO subsidy disciplines.

Types of WTO Subsidies (as per Agreement on Subsidies and Countervailing Measures – SCM Agreement)

Type of Subsidy	Also Known As	Description	Examples	WTO Treatment
1. Prohibited Subsidies	Red Box Subsidies	Directly linked to export performance or use of domestic goods over imports.	Export subsidies, Local content requirement subsidies.	Completely banned under WTO. Must be withdrawn immediately.
2. Actionable Subsidies	Amber Box Subsidies	Not outright banned but can be challenged if they cause: (a) injury to domestic industry, (b) nullify benefits under GATT, or (c) cause serious prejudice to another member.	Financial aid to specific industries causing export displacement or price undercutting.	Allowed unless proven to distort trade; subject to countervailing measures.
3. Non-Actionable Subsidies	Green Box Subsidies	Subsidies permitted as they have minimal or no trade distortion effects.	R&D funding, regional development aid, environmental adaptation subsidies.	Permitted, though the original “non-actionable” category expired in 2000, members still refer to such measures informally.

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