This development is especially problematic in the case of developed economies that are more fully integrated in the global economy. These non-tariff localization barriers to trade (LBTs) negatively affect not only the global economy but also the domestic economies in which they are implemented. Alternative policy approaches exist that can more effectively enhance the competitiveness of countries.
There is a growing trend of implementing LBTs in an attempt to create domestic jobs and to promote domestic enterprises by “systematically disadvantaging foreign competitors.” Local governments generally implement policies leading to forced localization for foreign investors and businesses as measures with the nominal intention of:
- protecting or promoting local industries and service suppliers,
- strengthening and maintaining national regulatory supervision over industries, data and banking, and
- providing enhanced confidentiality and security for consumers’ information.
Protectionism can manifest itself in areas as disparate and broad as forced local ownership; forced local employment; forced local data storage and restrictions on e-commerce; forced use of a certain percentage of local content; forced local production as a condition of market access and of preferential investment and tax policies; discriminatory customs requirements and prejudice against foreign direct investment.
These measures run counter to the current global trading system, which since the acceleration of globalization and the explosion of information technology products and services, functions through global supply and value chains. Underlying global value chains is the ability to make decisions about investment and sourcing, and the ability to move data across borders. As various stages of production have moved outside of national borders, multinational production systems and the need for cross-border trade have increased. Trade has changed in recent decades, making cross-border enterprises more prevalent. Global value chains need smooth trade facilitation, open markets, and opportunities for foreign direct investment.
LBTs negatively affect imports and, because they are intended to insulate domestic markets from foreign trade and investment, effectively render global value chains less efficient. According to the WTO, nontariff measures are nearly twice as trade-restrictive as tariffs, causing a loss of almost $100 billion in world trade and affecting 3.8 million jobs.5 Businesses of all sizes and across all sectors rely on the Internet and open data flows to operate efficiently and on a global scale in ways not possible a generation ago. However, LBTs intentionally restrict cross-border data flows, impeding trade and the ability of business and consumers to communicate. Specific types of non-tariff localization barrier to trade, local content requirements (LCRS), are often opaque and complex, making them difficult to analyze and dispute. LCRs create delays, raise costs, and are “susceptible to corruption and playing favorites”.
While governments believe these requirements will ultimately help their domestic economy, localization policies fundamentally distort the global trade system. LBTs and LCRs negatively affect the countries at which the policies are directed and the countries implementing them. Localizing policies are detrimental to domestic economies in that they often:
- increase firm cost structure and complexity of doing business in the country,
- raise costs of key capital goods, especially information and communication technologies, but also important raw materials and equipment,
- reduce choices for businesses and consumers,
- discourage innovation by reducing intellectual property protection,
- affect the implementing country’s reputation and investment attractiveness, and
- isolate the country from the global economy
Forcing production in one country reduces production in other countries, which may encourage third countries to pursue their own localization policies.