Local Content Requirements: Back-door Protectionism?

© Thomas Perkins, Fotolia

While not new, local content requirements (LCRs) in foreign markets are a growing problem for German companies. They are a new form of covert protectionism. The EU tries to counter this trend with provisions in free trade agreements.

Some of the goals of LCRs are to promote local production or the use of particular technologies, or to channel state funds (contracts and subsidies) primarily to local companies. Research shows, however, that they hinder investment in innovative branches. The WTO now intends to take action against this type of protectionism.

According to the OECD this problem especially affects the renewable energy sector. LCRs typically demand that companies developing solar and wind power source a certain proportion of their labour, components, or costs locally if they wish to qualify for public contracts or subsidies. According to an OECD report from mid-2015, LCRs were planned or in effect in at least 21 countries, 16 of which were OECD members. The International Centre for Trade and Sustainable Development (ICTSD) estimated in 2013 that LCRs in the area of renewables alone influenced a global trade volume of $100 billion. Recently, LCRs have been increasingly discussed in connection with data storage, with the most affected business circles already warning against digital protectionism. WTO Rules Prohibit Trade-distorting LCRs  WTO rules fundamentally prohibit trade-distorting LCRs. The same applies to deviations from the principle of national treatment and specific forms of subsidy. In the past two years Japan and the United States have repeatedly brought successful WTO dispute settlement cases against LCRs (for example DS 412 against Canada, DS 456 against India). The European Commission intends to introduce provisions against LCRs into its new trade agreements like the Transatlantic Trade and Investment Partnership. However, this endeavour regularly meets resistance of negotiation partners. Even the United States wants to preserve its freedom to introduce certain localisation obligations, e.g. residence requirements for the board of directors of certain companies. The European Commission regards LCRs as a new type of covert protectionism. This is confirmed by a comprehensive OECD study in 2015, which concluded that LCRs have a negative effect on international trade both in the local economy and in affected third states. Other consequences for national economies include loss of prosperity, reduced international competitiveness, less economic diversification, and diminished innovation capacity. The OECD and ICTSD both come to the conclusion that LCRs generally fail to achieve their political objectives and that alternative means should be applied (such as improving the economic circumstances, infrastructure investment, addressing information asymmetries).