This presentation describes our work at ECIPE in which we have assessed the economic costs of LCRs in BRICS economies. They are costsly, and see here why!

1. The Economic Impact of Local
Content Requirements: An
Empirical Assessment
World Trade Organization (WTO)
Friday, 16 March 2018
Erik van der Marel
Senior Economist at ECIPE
Univesité Libre de Bruxelles (ULB) - Solvay Brussels School

2. Study
• http://ecipe.org/publications/the-economic-impact-of-local-content-
requirements/
• Hanna Deringer, Fredrik Erixon and Philipp Lamprecht

3. Content
• Global Trends and concept of LCRs
• Case study on economics of LCRs
• Heavy vehicle sector
• Empirical and Quantitative assessment
• Policy context and conclusion

4. Global Trends
0
102030
R
estofthe
W
orld
India
Brazil
SaudiArabia
U
SA
R
ussiaIndonesiaArgentina
C
hina
Turkey
KhazakhstanAustraliaVietnam
South
Africa
N
igeriaC
anada
Source: Global Trade Alert
44 % of global LCRs are from BRICS

5. Global Trends
0
50
100150
NumberofLCRmeasures
India
Brazil
SaudiArabia
U
nited
States
R
ussiaIndonesiaArgentina
C
hina
Turkey
KhazakhstanAustraliaVietnam
South
Africa
N
igeriaC
anada
Automotive Engergy ICT Oil & Gas Other
Source: Global Trade Alert
17 % of global LCRs are in motor vehicles

6. Concept of LCRs (cost dimensions)

7. Concept of LCRs (cost dimensions)
• Literature review Stone et al. (2015)
• Databases: GTA, EC Market Access, USTR, WTO TPR, etc.
• Expert reviews

8. Concept of LCRs (wider definition)
• Public procurement: Mainly preference margins for domestic goods or services
• Example for horizontal measure in Brazil (2011): Introduction of "Buy Brazil"
clause on government procurement (up to 25% preference for local products and
services) under a new Decree establishing an Inter-Ministerial Commission on
public procurement (Impact: medium)
Source: WTO Trade Monitoring Database Decreto 7546/11 (2 August 2011)

9. Concept of LCRs (wider definition)
• Investment: Requirements to produce and invest in a country
• Example for sub-sectoral measure in China (2011): The 12th five year plan for
new-energy vehicles included provisions that could compel foreign auto-makers
that want to produce critical components in China to share critical technologies
by requiring the companies to “present independent R&D capability and
intellectual property rights, with the equity of the Chinese party no less than
51%”. (Impact: low)
Source: EC Tenth Report on Potentially Trade-Restrictive Measures

10. Concept of LCRs (wider definition)
• Financial support & Business operations: Tax exemption
• Example for sectoral measure in Brazil (2013): On 17 May 17 2013, the Government of
Brazil renewed, by Decree 8.015/13, the INOVAR AUTO program. Under this program,
the government raises the Industrial Production Tax (IPI) by 30 percentage points on all
vehicles, whether manufactured domestically or imported. However, under certain
conditions this tax increase may be waived. The conditions include requirements that
discriminate against foreign commercial interests.
The amount of production stages that must be done in Brazil varies by year; ranging from
a minimum of 6 stages 2013 to 8 stages from 2016 and onwards until the end of this
program. For heavy trucks the requirement is a minimum of 9 out of 14 and 7 out of 11
in the case of chassis with motor. (Impact: high)
Source: Global Trade Alert Database

11. Case study
• Heavyduty vehicles for BRICS
• 7 % of global “EXGR_DVA” > South Korea
• Mapping and measuring LCRs
• 72 measures found and put in our database

12. Case study (database)

13. Case study (database)

14. Case study (summary)
27.8%
18.1%
20.8%
27.8%
5.6%
Brazil China India
Russia South Africa
Share (of number) of LCRs

15. Case study (summary)
LCRs by type for BRICS
29.2%
9.7%
18.1%
13.9%
18.1%
11.1%
Government Proc Investment Flows Financial Sup
Market Access Export Measure Other

16. Case study (summary)
LCRs by level of scope for BRICS
65.3%
23.6%
11.1%
Horizontal Sector SubSector

17. Case study (summary)
LCRs by level of impact for BRICS
30.6%
27.8%
41.7%
High Medium Low

18. Estimating economic impact
• Empirical estimations of AVE
• Quantitative assessment of GE

19. Empirical estimations of AVE
• Hufbauer et al. (2013); Stone and Flaig (2017); OECD (2015)
• This study based on Cadot and Gourdon (2015)
• Impact of NTMs generally, here applied to LCRs

20. Empirical estimations of AVE
ln(𝑡𝑢𝑣) 𝑜𝑑𝑠
= 𝜃1LCR 𝑑𝑠 + 𝜃2NTM 𝑑𝑠 + 𝜃3 ln 1 + 𝑡 𝑜𝑑𝑠 + 𝜃4D 𝑜𝑑 + 𝜃5C 𝑑
𝜃1 follows LCRs database by type (dummy)*
𝜃2- 𝜃5 follows Cadot and Gourdon (2015)

21. Empirical estimations of AVE
• ln(𝑡𝑢𝑣) from CEPII trade unit value database at 6-digit HS sector
• LCR from ECIPE database (see above)
• NTM from UNCTAD’s MAST database (SPS, TBT & Other)
• 𝑡 from WITS (unweighted MFN tariff)
• D & C from CEPII gravity dataset & WB WDI

22. Empirical estimations of AVE
(1) (2) (3) (4)
lnUV lnUV lnUV lnUV
LCR Public 0.356**
-0.154
LCR Invest -0.0722
-0.0671
LCR Fin Sup 0.270***
-0.0642
LCR MA 0.0128
-0.057
Gravity Yes
All controls Yes
FE Sector Yes
FE Origin Yes
FE Destination Yes
Observations 11,364 11,364 11,364 11,364
R-squared 0.431 0.432 0.433 0.431
RMSE 0.792 0.792 0.791 0.792

23. Empirical estimations of AVE
• Expected (e) value of significant coefficients
• Multiplied by frequency ratio for each BRIC
• Public procurement and Financial support only

24. Empirical estimations of AVE
15.6
18.2
11.1
3.7
4.5
9.5
3.3
13.0
2.2
9.3
0
5
10
15
20
AdValoremEquivalentsLCRs
Brazil Russia China South Africa India
AVE Tariff (weighted)

25. Quantitative assessment of GE
• General Equilibrium model / GTAP9 results
• Output in heavy vehicles up; other using sectors down

26. Quantitative assessment of GE
10.4
3.8
1.2
0.9
0.20
2
4
6
8
10
Percentagechangeoutput
Russia Brazil India South Africa China
Heavy vehicle sector

27. Quantitative assessment of GE
0
-.01 -.01 -.01 -.01 -.02 -.03 -.03 -.01 -.04 -.05 -.07 -.05 -.08 -.16 -.26 -.08 -.16 -.21 -.37
-.4
-.3
-.2
-.1
0
China India South Africa Russia Brazil
M
anuf.goods
O
thertrans
eq.
O
therM
achinery
Electronics
O
therM
achinery
Electronics
O
thertrans
eq.
M
anuf.goods
M
anuf.goods
O
therM
achinery
Electronics
O
thertrans
eq.
M
anuf.goods
Electronics
O
therM
achinery
O
thertrans
eq.
M
anuf.goods
Electronics
O
thertrans
eq.
O
therM
achinery
Other sectors

28. Quantitative assessment of GE
-3.72 -0.89 -6.01 -1.00 -9.37 -1.76 -12.19 -3.03 -21.41 -4.71
-20
-15
-10
-5
0
Percentagechangetrade
India South Africa China Russia Brazil
Im
ports
Exports
Im
ports
Exports
Im
ports
Exports
Im
ports
Exports
Im
ports
Exports
Impact on trade for Heavy vehicle sectors (BRICS)

29. Quantitative assessment of GE
-0.24 -2.72 -0.77 -6.48 -0.25 -9.18 -3.08 -11.26 -4.68 -18.35
-20
-15
-10
-5
0
Percentagechangetrade
India South Africa China Russia Brazil
Im
ports
Exports
Im
ports
Exports
Im
ports
Exports
Im
ports
Exports
Im
ports
Exports
Impact on trade for Heavy vehicle sectors (EU)

30. Quantitative assessment of GE
-0.02 -0.05 -0.05 -0.05 -0.10 -0.11 -0.18 -0.13 -0.79
0.03
-.8
-.6
-.4
-.2
0
Percentagechangetrade
India China South Africa Russia Brazil
Im
ports
Exports
Im
ports
Exports
Im
ports
Exports
Im
ports
Exports
Im
ports
Exports
Impact on trade for total sectors (BRICS)

31. Conclusion / Policy context
• LCRs rapidly rising globally as murky protectionism
• First empirical assessment shows real impact
• Multilateral options: WTO / coalition of the willing
• Bilateral options: LCRs can also be addressed