Local Content Requirements

In our globalized world, the decisions of companies contribute much to societies and countries. International companies’ facilities, products, and stores shape our daily habits of consumption. If you start looking around, you can see them and may be surprised when you realize they are hiding in plain sight. Although we may like their products, nearly every international company may ring the bells of competition for domestic firms. If you were the authority, would you protect the local industries? And if so, how? In this chapter, we are introducing a unique way to protect local industries. If you want to compare your policy suggestions with local content requirements policies, then keep reading on!

Local Content Requirements

Local content requirements (LCR) are a type of protection mechanism that aims to prevent the local industry from the negative outcomes of international trade. On paper, local content requirements depend on restrictions supported by the laws to be applied to international companies.

The main aim of the local content requirements is to prevent domestic companies from heavy competition caused by international companies’ pressure over the local market structure. Compared to other protectionism policies, local content requirements are relatively new trade policies, and they are growing in number in the last few years. The old protection methods like quotas and tariffs are leaving their places for new trade protection methods like forcing local content requirements. Especially after the global economic crisis of 2008, we can see a significant amount of increase in number of local content requirements¹.

Examples of Local Content Requirements

In the contemporary era, examples of local content requirements have become widespread. This is rather the result of the last worldwide recession of 2008. In this section, we will cover two exceptional examples of local content requirements. One example is the Amu Darya Basin and Regional Treaties signed in 2011². This is rather a good example of local content requirements and their effects on the labor market. In addition to this, we will cover the Indonesian Bill on Mineral and Coal Mining of 2008³ in the context of local content requirements. The latter is related to the materials rather than the labor market.

Examples of Local Content Requirements: The Amu Darya Basin and Regional Treaties

The Amu Darya river flows near Turkmenistan, Afghanistan, and Uzbekistan and reaches close to the borders of Pakistan. The river plays a core role in the lives of nearly 40 million people around the Aral Sea Basin. Agriculture is a crucial economic resource for the population around the area, and the river is inseparable from this economic activity. On the other hand, the benefits of the river are not solely related to the agricultural structure, but they offer an exceptional contribution to industrial applications and electricity generation. Therefore, it is one of the life veins of Afghanistan.

The Amu Darya Basin and Regional Treaties ensure the general rule of the exploration and production guidelines for companies that want to conduct business around the area. Nonetheless, unlike local content requirements that force some guidelines for domestic material usage, The Amu Darya Basin and Regional Treaties focus on the improvement of local workers.

According to Article 20 of The Amu Darya Basin and Regional Treaties, the contractor must employ a qualified local workforce with Afghan nationality². This is a local content requirement from two perspectives. The first one is the protect local companies from competition since the workers’ wages must be the same as the local companies. In addition to that, the agreement ensures the structural development of Afghanistan since the number of qualified workers and employment will increase. The Amu Darya Basin and Regional Treaties ensure that Afghan nationals will be hired, and after some amount of training and a constant hiring process, the contractor must replace its expatriate staff with qualified Afghan nationals as they become available.

As you can see, the Amu Darya Basin and Regional Treaties is a local content requirement that focuses on improving the quality of employees and gradually creating job vacancies for Afghan nationals.

Examples of Local Content Requirement: The Indonesian Bill on Mineral and Coal Mining of 2008

Indonesia is one of the World’s richest countries in the context of precious gems and materials. Including copper, tin, gold, coal, and nickel, the country’s underground resources are a basin of attraction for many international companies. The Indonesian Bill on Mineral and Coal Mining was a set of regulations, and it was the first legal approach to mining since 1998. The Indonesian government was expecting a 17% increase in revenue due to the treaty.

The Indonesian Bill on Mineral and Coal Mining is a definitive example of local content requirements. The Indonesian government forced companies to process the extracted materials like gold, copper, and tin locally within the borders of the country³. Thus, if a company wants to extract the resources of Indonesia, it must construct local facilities that can process the raw material after extraction. Like every other local content requirement, constructing new local facilities will increase the costs of the company.

Local Content Requirements USA

The local content requirements in the USA took a critical turn after the financial crisis of 2008. By the year 2018, the United States was the fourth country by the number of implemented local content requirements. Furthermore, in the aftermath of 2020, the number of laws that promotes domestic production increased significantly.

In this section, we will summarize some of the pivotal turns in local content requirements within the last two decades. In the context of the United States, two core examples of local content requirements are The American Recovery and Reinvestment Act (2009) and Infrastructure Investment and Jobs Act (2021).

After the financial crisis of 2008, the United States was struggling under devastating economic pressure like the rest of the world. The American Recovery and Reinvestment Act of 2009 was a Keynesian economic solution to relieve the economy to an extent through fiscal policy.

Although the Recovery Act was widespread and focused on many fields of everyday life, the most important thing for our context is the iron and steel purchases. According to the recovery act, the funds obtained by the act can not be used for any type of construction work unless all the iron, steel, and manufactured goods used in the project were produced in the United States.

The Infrastructure Investment and Jobs Act (IIJA) is an infrastructure package that aims to rebuild the infrastructure of the United States. This includes roads, bridges, and high-speed internet. Without any doubt, a country’s infrastructure is a core element for its logistics and quality of life.

The Infrastructure Investment and Jobs Act can also be investigated from the perspective of local content requirements. According to the Congressional Research Service, to be considered as produced in the United States under IIJA, manufactured goods must contain domestic content at least 55% in their composition. In addition to that, all of the manufacturing processes must occur in the United States⁵.

Local Content Requirements WTO

The restrictions with local content requirements are a fundamental contradiction with the trade policies of the World Trade Organization (WTO). Although assuming WTO as a promoter of free trade is somehow accurate, the main goal of the WTO is to promote free trade with regard to fair and undistorted competition.

Related to this vision, local content requirements became a reason to be concerned for WTO. During the meeting of the Committee on Trade-Related Investment Measures (TRIMS), they shared these concerns with the countries that apply local content requirements in their trade policies.

Many countries, such as Indonesia and Argentina, promote local content requirements that create obstacles in the way of free trade. According to the World Trade Organization, these are not just an obstacle in the way of free trade, but they also encourage unfair trade structures. Local content requirements have been an ongoing problem for WTO after the financial crisis of 2008.

Disadvantages of Local Content Requirements

The disadvantages of local content requirements are impactful on many agents in the economy and the economy itself. In this section, we will cover the disadvantages of local content requirements from three main perspectives.

The first impact of the local content requirements is their impact on the economy itself directly. At first, it may seem a good measure to take for improving a country’s economic structure. Nonetheless, we should keep in mind that an increased amount of local content requirements causes international firms to cease investing. The lack of investment decreases international technology transfer. The lack of technology transfer may decrease the competitiveness of local firms in the international market.

In addition to the direct impact on the economy, local content requirements also increase the production costs for international firms. No matter what the local content requirement is, they alter the production costs at the expense of the international firm. Therefore, they will cause price imbalances and inefficiencies.

Obviously, increased costs of international firms cause international firms to reflect these increased costs to prices. Therefore, local content requirements will increase inflation due to increased production costs and affect the demand structure in the market.