Local Content Requirements

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  Local Content Requirements

  A Global Problem

  • Gary Clyde Hufbauer, Jeffrey J. Schott, Cathleen Cimino-Isaacs, Martin Vieiro, Erika Wada(Authors)
  • 2013(Publication Date)
  • Peterson Institute for International Economics

    (Publisher)

  2 Alternatives to Local Content Requirements

  Almost by definition, once a local content requirement (LCR) is enacted, it satisfies two primary objectives: It creates identifiable jobs and gives local firms a better shot at targeted markets. The jury is still out as to whether LCRs enacted since the Great Recession have launched any infant industries to world-class performance. Whether or not an LCR does so, the jobs created often come at high costs—in terms of jobs destroyed elsewhere in the economy, distorted investment, delays in implementation, and wasteful expenditure of public funds. Moreover, although LCRs offer instant political gratification—the economic equivalent of cotton candy—they rank very low among paths to development. In fact, most LCRs probably retard development.

  Six alternatives to LCRs could deliver more job creation, impose fewer costs on the economy, and generate more economic growth:

    creating a business-friendly environment,

    encouraging corporate social responsibility,

    expanding training,

    improving logistics,

    increasing investment in infrastructure, and

    imposing tariffs and subsidies.

  Creating a Business-Friendly Environment

  LCRs usually target specific projects or sectors. A better way to create jobs and stimulate investment is to upgrade the national environment for doing business. Multinational corporations are concerned about corruption, bureaucratic delays, investor protection, contract enforcement, and other aspects of normal business operations. International firms accept a certain amount of risk and delay in starting a new venture in a foreign country, but anything a host government can do to reduce the costs and delays will improve business prospects and encourage investment.

  Quantifying these obvious points, table 2.1 summarizes rankings from the World Bank’s Doing Business 2012 report for the LCR-using countries identified in table 1.1 (World Bank and IFC 2011

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  The Law and Economics of a Sustainable Energy Trade Agreement

  • Gary C. Hufbauer, Ricardo Meléndez-Ortiz, Richard Samans(Authors)
  • 2016(Publication Date)
  • Cambridge University Press

    (Publisher)

  7 Addressing Local Content Requirements in a Sustainable Energy Trade Agreement: June 2013 Sherry M. Stephenson 1 Introduction The financial crisis of 2008 heralded a more discrete, yet more pernicious form of protectionist trade policies: Local Content Requirements (LCRs). At the same time, governments are placing greater importance on green policies to achieve sustainable economic growth. The global shift to green industrial growth was the overarching issue at the Rio + 20 summit in June 2012. However, stalled international climate negotiations and Doha trade talks within the World Trade Organization (WTO) are not fostering a transition to green growth. As noted by Joachim Monkelbaan, ‘trade preferences for climate-related goods are supposed to increase exports of . . . products from developing countries and at the same time contribute to their dissemination in targeted developing countries due to building up or strengthening local environmental industries as well as cost and effi- ciency gains arising from economies of scale’. 1 Such anticipated effects both domestically and abroad are steps toward greener economies. However, the combination of the financial crisis and inadequate interna- tional policy momentum is contributing to the popularity of LCRs devised at the national level as green growth policy tools. LCRs are policy measures that typically require a certain percentage of intermediate goods used in the production processes to be sourced from domestic manufacturers. 2 Such requirements in renewable energy (RE) policy tend to take one of two forms: a precondition to receive govern- ment support, such as tariff rebates; or an eligibility requirement for government procurement in RE projects. LCRs are usually coupled with other policy measures to encourage green growth. Despite agreed WTO disciplines to promote freer trade, developed and developing countries increasingly use LCRs in their RE policies.

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  Overcoming Barriers to International Investment in Clean Energy

  • OECD(Author)
  • 2015(Publication Date)
  • OECD

    (Publisher)

  Chapter 3 Local-content requirements in the solar- and wind-energy global value chains 48 – 3. LOCAL-CONTENT REQUIREMENTS IN THE SOLAR- AND WIND-ENERGY GLOBAL VALUE CHAINS This chapter provides new empirical evidence to assess the arguments often raised in favour or against the use of LCRs in green industrial policies. As previously explained, LCRs are a type of localisation barrier to trade that requires solar- or wind-energy investors to source a certain share of inputs locally to be eligible for public support. Policy makers often claim that LCRs can help develop a domestic manufacturing base, create local jobs and promote technology transfer, in order to create local industrial clusters. Beyond the alleged or perceived economic benefits of LCRs, creating local content can help broaden the base of support for renewable energy incentive programmes. The political economy of support to renewable energy thus helps explain the prominence of LCRs in solar PV and wind energy. The benefits of LCRs, however, are heavily debated. Local-content requirements directly distort trade and may have some unintended effects on investment across value chains. Policies that favour some firms over others involve a cost, and can result in reduced competition and efficiency losses, thereby damaging the investment environment. Table 3.1 summarises the arguments on the possible impacts of LCRs. This chapter uses evidence-based analysis to assess whether LCRs are effective in achieving their intended policy goals. It also assesses the unintended impacts of LCRs, e.g. on international investment and competitiveness of solar and wind energy vis-à-vis fossil-fuel sources. Key findings are summarised at the end of the chapter. This chapter builds on new empirical evidence, as well as existing studies and relevant OECD work (Cárdenas Rodríguez, M., et al. , 2014; Bahar et al., 2013, OECD, 2013a, c).

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  Industrial Policy and the World Trade Organization

  Between Legal Constraints and Flexibilities

  • Sherzod Shadikhodjaev(Author)
  • 2018(Publication Date)
  • Cambridge University Press

    (Publisher)

  5.6 Concluding Remarks Many LCRs intend to stimulate domestic input manufacturing and consumption, but they actually limit producers’ option of using cost- efficient and quality inputs to be competitive in the marketplace. In line with the mainstream economic findings, WTO law maintains generally a negative attitude toward localization measures. The past GATT/WTO jurisprudence delegitimized even government-directed “voluntary” com- mitments to utilizing local content. This prevents circumvention of trade disciplines by disguised public LCRs. Critics may accuse the WTO regime of working against genuine efforts of countries to boost domestic industries with business opportunities kept within the borders. But without such multilateral strictures, those industries themselves will be vulnerable to LCRs abroad.      177 In any event, the current WTO rule book does not completely block localization. More specifically, trade regulation of government procurement and services leaves enough space for operating relevant LCR programs legally. Properly designed rules of origin under RTAs can contribute to localizing some parts of the supply chain. Subsidies may not be considered prohibited local content subsidies if the associated localization rate is sufficiently low and can be met by multiple cost components, including service costs. Finally, subsidies given to input suppliers directly are more tolerated in the WTO than local content subsidies granted to input users. 178        Annex 5.1 LCRs Discussed in the WTO Committee on TRIMs (1995–2015) Applying Member Agenda Item Measure Description Target Sector WTO Source WTO Dispute Argentina Notifications under Article 5.1 of the TRIMs Agreement Decree No 33/1996 increased the level of local content from 60 to at least 67.5 percent in car industry and expanded the coverage of LCRs to include auto parts manufacturers.

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  Building Innovation Capabilities for Sustainable Industrialisation

  Renewable Electrification in Developing Economies

  • Rasmus Lema, Margrethe Holm Andersen, Rebecca Hanlin, Charles Nzila, Rasmus Lema, Margrethe Holm Andersen, Rebecca Hanlin, Charles Nzila(Authors)
  • 2021(Publication Date)
  • Routledge

    (Publisher)

  According to Johnson (2015), the main motivation for LCRs in developed countries is job creation. In developing countries, including sub-Saharan Africa (SSA), the motivation is mainly related to protection of nascent industries and creation of opportunities for local companies to benefit from local and foreign firms’ large-scale investments (ibid). Other motivations include technology transfer, creation of new industries, and providing jobs for local people. LCRs aim to provide protection to local young firms while they accumulate capabilities to a level where they can compete with local and international firms (Hansen et al., 2015). In the RE sector, countries have used LCRs to support domestic industries. However, politics, market failures, and weak institutions are perceived to be barriers to promotion of local content (Johnson, 2015; Hansen et al., 2015). LCRs may also not create a level playing ground for global trade due to manipulation and may also lead to global trade conflicts (Ettmayr and Lloyd, 2017). When applying the LCRs’ elements to specific technological innovations, Rodrik (2004) note the importance of paying attention to incentivising the very activities that allow for an expansion of the economy by generating new areas of comparative advantage. He further adds that focusing on activities across sectors has the potential to enhance interactive learning or what he refers to as cross-cutting opportunities.

  Policies to promote local capabilities may vary across contexts. In South Africa, the energy regulatory framework has provided an enabling environment for creation of technological capability to independent power producers. Consequently, this has enabled many local communities to have an equity share in the renewable energy projects as well as making sure that the LCRs are followed (Baker and Sovacool, 2017). In this regard, LCRs are – in many cases – becoming an important industrial policy tool that have the potential to enhance domestic capabilities of local manufacturing (Johnson, 2015).

  Qualitative data is used in this chapter to understand how LCRs are incorporated into RE policy instruments. Further, stakeholder views have been sought, specifically to receive more detail on the policy process and examples of policy windows to affect policy change.

  Policy process and policy windows

  A policy process entails policy making and policy implementation and both have multiple elements that influence the ultimate efficiency of a policy instrument (Richardson, 1982). Policy making refers to the procedures and institutional arrangements that shape the policy process (Nilsson et al., 2012). It covers all stages of the policy cycle including problem identification, agenda setting, policy formulation, evaluation or assessment, and policy adaptation (Rogge and Reichardt, 2013). Policy implementation is where responsible authorities devise strategies to ensure efficient enforcement of specific policy instruments (Nilsson et al., 2012). It also entails actual implementation and how this is influenced by actors, for instance public service workers or street level bureaucrats who have discretion and power in policy implementation (Gilson, 2015). Efficiency may entail collaboration amongst different value chain stakeholders, provision of resources, and capacity building. Further, because of the functional dynamism of a technological system, capabilities-building at different levels including that of policy makers may be necessary (Jacobsson and Bergek, 2011). While the two aspects of the process are important, the style of policy processes is critical as a ‘standard operating procedures for making and implementing policies’ (Richardson, 1982, p. 2). It may provide among other things flexibility in terms of implementation of different aspects of the policy process (Rogge and Reichardt, 2013).

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  Local Content in the Oil and Gas Sector

  • Silvana Tordo, Michael Warner, Osmel E. Manzano, Yahya Anouti(Authors)
  • 2013(Publication Date)
  • World Bank

    (Publisher)

  Furthermore, some countries, such as Oman, Angola, Kazakhstan, Indonesia, and Saudi Arabia, link the attainment of quotas for employment of national citizens to the right of the operator or foreign suppliers to acquire expatriate visas. This practice creates an incentive to further local content for companies that need highly skilled expatriate staff in critical positions in order to operate efficiently. Some countries, including Brazil, Kazakhstan, and Indonesia, impose penal- ties for lack of compliance with LCPs. These range from fines to exclusion from tenders to even the withdrawal of permits and licenses. Local Content Passed Through to Suppliers and Subcontractors Contracts for the procurement of goods and services may stipulate minimum levels of local content to be achieved, either in adherence to agreed tender pro- cedures, or as part of an oil or gas company’s own interpretation of LCPs (and, in some cases, as a means to deliver a company’s corporate social responsibility program). Local content minimum levels may be set by the procuring entity and included in the scope of work or terms of purchase, or they may be proposed by the supplier or contractor as part of a bid and subsequently incorporated into the contract as proposed or in a revised form. Types of Local Content Policies 47 The terms of delivery of an agreed scope of work in a service contract, or the terms and conditions of purchase agreements for the supply of equipment and materials, are binding under contract law. Therefore applicable contract law offers another tool for enforcing LCPs. Reporting and Monitoring Regulation A number of countries do not have mandatory reporting requirements for local content, and leave it to individual companies to report as they deem fit. Chapter 4 discusses some of the issues that arise from this approach.

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  Local Content and Sustainable Development in Global Energy Markets

  • Damilola S. Olawuyi(Author)
  • 2021(Publication Date)
  • Cambridge University Press

    (Publisher)

  The myth that governments had carte blanche to favour domestic producers over foreign ones in government procurement was debunked. 150 As a result, the scope of national treatment obliga- tion has been largely widened. Secondly, the GATT Articles XX(d) and (j) 151 cannot be applied in justifying the use of LCRs, although Article XX 152 is widely perceived to 145 TRIMS, note 29, Articles 2.1 and 2.2 146 SCM, note 30, Articles 3.1(b) and 3.2; Panel Report, United States – Renewable energy, paras. 7.347–7.354 and 7.356–7.372. 147 GATT, note 28, Article III:4; Panel Report, United States – Renewable energy, para. 8.7. 148 R. Steinberg, ‘The Impending Dejudicialization of the WTO Dispute Settlement System?’ (2018) 112American Society of International Law Proceedings 316. 149 J. Pauwelyn and R. J. Hamilton, ‘Exit from International Tribunals’ (2018) 9 Journal of International Economic Law 679 at 683. 150 Yanovich, note 48, p. 434. 151 GATT, note 28, Article XX(d) and (j). 152 Ibid., Article XX. Local Content Measures and the WTO Regime 59 provide wide scope of policy space for Members to protect non-trade values. It is hard to prove LCRs are ‘necessary to secure compliance with laws or regulations which are not inconsistent with the provisions of this Agreement’ within the mean- ing of Article XX(d) 153 or ‘essential to the acquisition or distribution of products in general or local short supply’ within the meaning of Article XX(j). 154 However, the use of LCRs in the renewable energy sector does not come without any merits, as discussed in Section 2. The scenarios are: when the imposition of LCRs is viewed as necessary for the passing of certain renewable energy supportive policies, or when the use of LCRs has the potential to nurture local renewable energy industries to become competitive players in global market.

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