Local Content Requirements: A Global Problem

by Gary Clyde Hufbauer, Jeffrey Schott, Cathleen Cimino-Isaacs, Martin Vieiro, Erika Wada

Overview

In the wake of the Great Recession of 2008–09, economists feared that protectionist policies might sweep the world economy, echoing the wave of tariff escalations during the Great Depression of the 1930s. To some surprise, officials were more restrained and largely avoided traditional forms of protection (tariffs and quotas). As a result, economists underestimated the incidence of new protectionism because policymakers increasingly turned to more opaque behind-the-border nontariff barriers (NTBs).

Using a combination of statistical analysis and case studies, the authors show that local content requirements (LCRs), a form of NTB, have become increasingly popular. How much was global trade actually reduced on account of LCRs? A conservative estimate might be $93 billion. Case studies featured cover the healthcare sector in Brazil, wind turbines in Canada, the automobile industry in China, solar cells and modules in India, oil and gas in Nigeria, and "Buy American" restrictions on government procurement.

Product Details

ISBN-13:	9780881326802
Publisher:	Peterson Institute for International Economics
Publication date:	10/05/2013
Series:	Policy Analyses in International Economics , #102
Pages:	212
Product dimensions:	6.00(w) x 8.90(h) x 0.60(d)
Age Range:	18 Years

About the Author

Gary Clyde Hufbauer, Reginald Jones Senior Fellow since 1992, was formerly the Maurice Greenberg Chair and Director of Studies at the Council on Foreign Relations (1996–98), the Marcus Wallenberg Professor of International Finance Diplomacy at Georgetown University (1985–92), senior fellow at the Institute (1981–85), deputy director of the International Law Institute at Georgetown University (1979–81); deputy assistant secretary for international trade and investment policy of the US Treasury (1977–79); and director of the international tax staff at the Treasury (1974–76).

Jeffrey J. Schott joined the Peterson Institute for International Economics in 1983 and is a senior fellow working on international trade policy and economic sanctions. Durgaing his tenure at the Institute, Schott was also a visiting lecturer at Princeton University (1994) and an adjunct professor at Georgetown University (1986–88). He was a senior associate at the Carnegie Endowment for International Peace (1982–83) and an official of the US Treasury Department (1974–82) in international trade and energy policy. Durgaing the Tokyo Round of multilateral trade negotiations, he was a member of the US delegation that negotiated the GATT Subsidies Code. Since January 2003, he has been a member of the Trade and Environment Policy Advisory Committee of the US government. He is also a member of the State Department's Advisory Committee on International Economic Policy.

Cathleen Cimino-Isaacs, research associate, has been with the Peterson Institute since August 2012. She works with Senior Fellows Gary Clyde Hufbauer and Jeffrey J. Schott on economic issues relating to international trade policy, free trade agreement negotiations, and the future of the World Trade Organization.

Martin Vieiro was a research analyst with the Peterson Institute from June 2011 to March 2013. He worked with Senior Fellows Gary Clyde Hufbauer and Jeffrey J. Schott. His research focused on international trade, economic development, and the future of the World Trade Organization.

Erika Wada, former visiting fellow at the Peterson Institute, is a PhD candidate at Michigan State University. She is coauthor of The Benefits of Price Convergence: Speculative Calculations (2002) and coeditor of Unfinished Business: Telecommunications after the Uruguay Round (1997).

Table of Contents

Preface xi

Acknowledgments xv

Abbreviations xvii

Executive Summary xix

1 Introduction: The LCR Phenomenon 1

Characteristics of LCRs 3

Why LCRs Are Bad Policy 4

Motives behind and Effects of LCRS 7

Pushback against LCRs 13

Plan of the Book 16

2 Alternatives to Local Content Requirements 17

Creating a Business-Friendly Environment 17

Encouraging Corporate Social Responsibility 22

Expanding Training 23

Improving Logistics 25

Increasing Investment in Infrastructure 30

Imposing Tariffs and Subsidies 32

Conclusion 34

3 Survey and Case Studies 35

4 Healthcare Industry in Brazil 41

Healthcare Industry Trade 42

Global Harmonization Movement 53

Cost of LCRs and Related Barriers 54

Alternatives to LCRs 59

5 Wind Turbines in Canada 63

Sources of Energy in Canada 63

Efforts to Reduce Greenhouse Gas Emissions 64

Wind Energy Regulations 67

Wind Power in Ontario 57

Wind Power in Quebec 70

Impact of LCRs in Ontario and Quebec 71

Alternatives to LCRs 73

6 Automobile Industry in China 77

Automobile Production and Role of the State 77

Investment Barriers and Incentives 85

Automobile Prices 88

Effect of Trade Barriers on Productivity 91

Alternatives to LCRs 92

7 Solar Cells and Modules in India 93

Demand for Energy in India 95

Subsidies to the Solar Industry 95

Barriers to Competitiveness 95

Overview of the Jawaharlal Nehru National Solar Mission 99

Effect of LCRs 101

Alternatives to LCRs 108

8 Oil and Gas Industry in Nigeria 109

Human Development and Security Conditions in Nigeria 110

Importance of the Industry and Role of Foreign Firms 110

The Nigerian Oil and Gas Content Development Act 115

Alternatives to LCRs 122

Appendix 8A Industry-Specific Schedule of the Nigerian Oil and Gas Content Development Act 125

9 Not Buying It: Buy American/Buy America 135

History of LCRs in the United States 135

Recent Rhetoric and Proposals 137

The WTO Government Procurement Agreement and Free Trade Agreements 139

Legal Gap for "Stimulus" Measures 139

Transportation and Water Infrastructure 141

Clean Water and Drinking Water State Revolving Funds 142

Steel Costs and Industry Delays 144

Alternatives to LCRs 149

10 Conclusions and Recommendations 151

Advice to Governments 152

Advice to Trade Officials and Negotiators 153

Appendix A Local Content Requirements since 2008 155

References 193

Index 201

Tables

1.1 Comparative statistics for countries that impose LCRs, 2008 to present 5

1.2 Incidence of LCRs in renewable energy 11

1.3 Import penetration ratios for public procurement in selected countries, 1995-2009 12

2.1 Doing Business rankings, LCR countries, 2012 19

2.2 Corporate tax and corruption indicators, LCR countries 21

2.3 Imports and labor market spending of 10 OECD countries, 2003-07 25

2.4 Estimated gains from trade facilitation improvements to merchandise exports 26

2.5 Estimated GDP gains from substantial improvements in trade facilitation 27

2.6 Export growth, LPI ranks, and trade facilitation components of overperforming and underperforming countries 28

2.7 Global infrastructure needed to modernize obsolescent systems and meet growing demand, 2005-30 31

2.8 Bound and MFN applied tariff rates, 2010 33

2.9 Tariff dispersion, 2010 34

3.1 Estimated goods and services trade affected by LCR measures since 2008 37

3.2 Estimated jobs affected by LCR measures since 2008 39

4.1 Pharmaceutical and medical device products by Harmonized System (HS) code 46

4.2 Import value of medical devices, by major countries, 2010 50

4.3 Major foreign pharmaceutical firms operating in Brazil 52

4.4 Medical device market size and trade balance, selected countries, 2011 56

4.5 Pharmaceutical market, selected countries, 2011 58