Local content requirements reduce world trade, says OECD
US leads with total number of local content measures, with the practise seen as harmful to host nation's economy, especially in unfinished goods
As much as US$23 billion has been wiped off global trade as a result of just a fraction of the trade barriers mandating the purchase of local goods or services that have grown rapidly since the 2008 financial crisis, the Organisation for Economic Cooperation and Development (OECD) said in a report.
The study ran models involving just 8 per cent of the trade-related local content requirements put in place since the financial crisis that are still in force. It found imports and exports declined in every region as a result, with world imports shrinking by US$12 billion and exports by US$11 billion, and US$5 billion in global welfare losses.
Local content requirements are often seen as putting little strain on a country's fiscal status while promoting domestic industry and employment in the face of challenging economic conditions, and countries have resorted to them vigorously in many cases. The requirements vary in countries and industries, such as electricity supply in India, water transport in Indonesia and electrical equipment in Brazil.
In the six months to May last year, 112 new local trade restrictions were imposed, affecting 0.5 per cent of world imports, according to statistics from the World Trade Organisation, OECD and United Nations.
In contrast to the conventional perception that local content requirements are imposed by traditionally closed economies, the study, which examined 138 such cases, concluded that they tended to be imposed by large economies. The United States sits at the top of the local content requirement league table with 23 measures in place, 20 of them related to government procurement. Indonesia is second with 18 and Brazil third with 17 measures.
The outcome, however, is contrary to the original intention of those implementing such policies. "The use of domestic suppliers has an immediate job effect that can be particularly powerful during economic downturns while over the longer run, undermining industrial competitiveness," the report said.