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Local Content Requirements: Promises and Pitfalls

Posted on: March 4, 2024

Our book explores the potential promises of localization policies, known as Local Content Requirements (LCRs), to create employment opportunities in specific sectors or regions. We highlight how these policies could lead to increased wages, reduced unemployment rates, and greater investments in human capital.

The chapters conduct meticulous analyses at both country-specific and firm-product levels, shedding light on how LCRs can hinder fair competition, leading to reduced trade levels and productivity, ultimately impacting global economic output and overall human welfare. The analyses cover numerous countries across the globe, with a particular focus on key players such as the United States, China, Indonesia, and resource-intensive nations, particularly those reliant on mining. 

The distinctive features of our book are twofold. First, the research utilizes the most current catalogs of Local Content Requirements (LCRs), which have significantly expanded since the Global Financial Crisis of 2008. Second, it complements the analysis of LCRs at the global level with country- and firm-specific exercises. 

Additionally, we delve into the challenges by analyzing the impact of LCRs on firms across various sectors. This analysis categorizes effects into three groups: constrained compliers, unconstrained compliers (firms not bound by the regulations), and non-compliers. Despite observing an increase in local content among compliant firms due to LCRs, our study reveals contrasting pitfalls affecting both non-compliant firms and unconstrained compliers.

Overall, this book presents into a comprehensive examination of strategies and measures implemented to bolster local industries, focusing on the mining sector. It scrutinizes the impact and effectiveness of local content policies, critically assessing China's LCRs and their influence on domestic value added within export markets. Furthermore, the book meticulously evaluates Indonesia's compliance with trade and investment commitments, shedding light on the intricate effects of LCRs on international trade dynamics. Through quantitative analysis, the book emphasizes the far-reaching impacts of these policies on various sectors and economies amid the complex interplay between national regulations and international trade.

It serves as a valuable resource for policymakers, researchers, and advanced undergraduates interested in diverse fields such as international trade, industrial policy, political economy, labor economics, and development economics.


About the authors: 

Lili Yan Ing is a Lead Advisor (Southeast Asia Region) at the Economic Research Institute for ASEAN and East Asia (ERIA). She also serves as Secretary General of the International Economic Association (IEA). She was appointed as Lead Advisor to the Minister of Trade of Indonesia from 2017 to 2019 and Senior Advisor on Trade and Investment at the Executive Office of the President of Indonesia in 2015-2016.

Gene Grossman, a Professor at Princeton University since 1980, holds a joint appointment in the Department of Economics and the School of Public and International Affairs. Renowned for his work on the determinants of international competitiveness in dynamic and research-intensive industries, he has also made significant contributions to the understanding of the nexus between trade and growth.