The term “localisation barriers to trade” applies to a range of measures that favour domestic industry at the expense of foreign competitors. While many localisation barriers have been around for a number of years, they are being applied with increasing frequency. This includes recent country-specific 'Made in XX' or 'Buy XX' programmes introduced by many national governments.
The fastest growing of these measures are local content requirements (LCRs), which are policies imposed by governments that require firms to use domestically-manufactured goods or domestically-supplied services in order to operate in an economy. There has been a substantial increase in the use of these measures in recent years, as governments try to achieve a variety of policy objectives that target employment, industrial, and technological development goals.
Despite the long-standing and predominately negative evidence of the impact of LCRs on economic development and trade, they continue to play a significant role in policy today. Since the financial crisis a decade ago, more than 340 localisation measures, including over 145 new local content requirements, have been put in place by governments largely in an effort to improve domestic employment and industrial performance. Analysis by the OECD has shown that for select measures, 80% of disrupted trade is in intermediate goods, disproportionately affecting global value chains.
While LCRs may help governments achieve certain short-term objectives, they undermine long-term competitiveness. Work undertaken by the OECD provides evidence of the detrimental effects that LCRs can have on the imposing country’s own economy. While most studies have focused on the long-run inefficiencies caused by LCRs in the affected sector, a study at the OECD study highlights the subsequent costs imposed on the rest of the economy as well. The inefficiencies arising in other sectors due to the LCR actually reduce job growth and opportunities to achieve economies of scale, undermining the original goals for imposing the LCR.
By analysing a measurable subset of the trade-related LCR measures using the OECD METRO trade model, our work shows that LCRs cause a decline in global imports and exports across not just trading partners, but for the imposing economy as well. Countries imposing the requirements lose international competitiveness, as illustrated by the reduction in exports in sectors not directly targeted by the LCR. In addition, as sectors that benefit from the LCR consume more domestic resources, other sectors are forced to reduce production or increase imports, leading to a concentration of domestic economic activity. This process ultimately undermines the growth and innovation opportunities that come from a diverse, dynamic economy.
The OECD has also done a number of sector-specific studies reviewing the benefits and costs, as well as the effectiveness of LCR policy design for the renewable energy sector, automobile sector, and the oil and gas sector, to name a few. These studies have generally concluded that while LCR policies may achieve certain short-term objectives, they undermine industrial competitiveness and overall employment over the long-run.
This chapter describes the increasing use of local-content requirements in green industrial policies. It discusses the arguments for and against such policies and describes the key findings of recent evidence-based analysis regarding their possible impacts on international investment in different segments of the global value chains.
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