The prevalence and persistence of local content protectionism

Local content measures are government policy tools that usually require businesses to incorporate a specific amount of locally sourced materials in their domestic production. Unlike Rules of Origin (ROOs), which apply to imported or exported goods for preferential treatment, local content measures focus solely on the domestic market. Although local content measures represent only 12.7% (5,504) of the total non-tariff measures recorded by Global Trade Alert in 2024, their distortive trade impact is significant, particularly for intermediary goods. This can have spillover effects on third countries even if they are not directly involved in trade with the imposing country.¹

Once imposed, local content measures can be difficult to remove from the policy framework. These measures enjoy political appeal domestically, often bolstered by promises of increased local employment and higher wages for local workers, making them especially entrenched during economic downturns and around election seasons. As the World Trade Organization (WTO) becomes increasingly moribund, especially after losing its dispute settlement function, challenging such practices on an international level has become increasingly difficult.

Nonetheless, these protectionist strategies, deeply rooted in historical precedence, frequently strain international trade relations.

"Make in India"

India's reliance on local content measures is an extension of its longstanding protectionist economic policies aimed at import substitution for industrialization. Prime Minister Narendra Modi's "Make in India" initiative, introduced after he took office in 2014, epitomizes this approach, focusing on invigorating domestic manufacturing, creating jobs, and enhancing self-reliance. The initiative encompasses 27 key sectors from automotive and aerospace to pharmaceuticals and environmental services. Through Production-Linked Incentive (PLI) schemes, India incentivizes firms to source locally and increase their output and sales. These measures have, to some extent, enabled India to outpace regional competitors to attract foreign investments in critical sectors like electronics, pharmaceutical, and automotive, bolstering India's industrial base.² Yet, its import substitution strategy alongside its high tariffs risk undermining its trade relations, for instance, in its trade negotiations with partners like the European Union (EU).

Indonesia’s Domestic Component Level (TKDN)

Indonesia's short-lived ban on imports of the iPhone 16 in October 2024 exemplifies its strategic trade protectionism aimed at boosting domestic manufacturing and attracting foreign direct investment (FDI), but it has drawn complaints from its trading partners like the US. The country's Domestic Component Level (TKDN) mandates specific industries to use a minimum amount of local inputs as a condition to sell their products in the Indonesian market. It was introduced in 2009 in the aftermath of the Global Financial Crisis and expanded in 2015. In the telecommunications sector, for instance, mobile phone manufacturers are required to achieve a 40% local content threshold, which can be fulfilled through local manufacturing, software development, or innovation.

China’s joint venture requirement and other local content rules

China's auto sector illustrates the longevity of local content measures and the challenges of trying to remove "informal" local content measures, which are not publicly disclosed. Though China in 2022 removed local content requirements for its joint venture (JV) policy on its automotive sector, a rule that had stood since 1994, and ended subsidies for new-energy vehicle producers (which existed from 2009 to 2022) – early regulations mandated the use of locally made batteries – these policies endure in other forms and are compounded by data localization mandates for automobile data introduced in 2021.³

Preferential treatment for domestic companies from administrative guidance and local government procurement bias continue to favor projects utilizing high domestic content, significantly influencing investment and procurement decisions.⁴ The ostensible neutrality of many formal policies masks the state’s underlying encouragement for foreign producers to localize their operations, thereby benefiting indigenous firms disproportionately. The US and European Union have raised concerns about China's local content requirements and data localization mandates through the WTO and in bilateral engagements which has led to some policy reforms in China’s auto sector, but such measures still exist in some informal ways.

For instance, while the "Made in China 2025" initiative drew intense international scrutiny for its heavy state support, the Chinese government merely reduced public mention of this 10-year roadmap and subsumed them under broader strategic plans such as its 14th Five-Year Plan (2021–2025) and Dual Circulation Strategy.

Buy American Act

In the United States, the Buy American Act of 1933 and subsequent domestic preference policies are foundational toolkits for protectionism designed to boost domestic industries and employment. Updated and amended over the years, the Act remains on US statutes and allows the US government to prefer US-made products in its procurement. Though it’s not regarded as more restrictive than similar provisions in other developed economies, the Buy American Act is effectively excluded from the coverage of the WTO Government Procurement Agreement (GPA), allowing local industries to enjoy significant advantages.⁵ Recent administrations have further elevated these measures; the first Trump administration increased the domestic content threshold from 50% to 55% and the Biden administration raised it to 75% over seven years. However, the lack of reciprocal access in this aspect of America’s GPA commitments has drawn scrutiny from other trading partners like Canada that grant higher levels of access to their public procurement programs.

Conclusion

To add to the challenge of identifying local content measures, such policies and other non-tariff measures are frequently embedded within broader regulatory or policy documents seemingly unrelated to trade, which are not always readily accessible to the public or clearly articulated in terms of their impact on trade.⁶ This can lead to inconsistencies in how they are reported and challenged within jurisdictions and internationally.

In the face of economic challenges or to appeal to voters during elections, governments often scale up such protectionist policies to provide a sense of comfort to voters.

However, the repercussions of local content measures should not be underestimated. They inevitably lead to increased production costs and inefficiencies as firms are forced to source locally rather than from the most competitive suppliers globally. This ultimately results in higher prices for consumers and reduced competitiveness of domestic industries internationally. These policies fuel trade tensions and disrupt international supply chains, making them a double-edged sword that must be wielded with caution.

With trade tensions at unprecedented levels among the world's largest economies, global trade is at a pivotal moment where countries need to reassess the wisdom of relying on protectionist measures that increase costs and compromise efficiency. All countries should urgently pursue new opportunities for mutual trade collaboration to mitigate non-tariff measures and restore certainty for businesses.

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[1] Stone, S., J. Messent, & D. Flaig (2015). "Emerging Policy Issues: Localisation Barriers to Trade", OECD Trade Policy Papers, No. 180, OECD Publishing, Paris. https://doi.org/10.1787/5js1m6v5qd5j-en.
[2] India Ministry of Commerce & Industry. https://pib.gov.in/PressReleasePage.aspx?PRID=2114011
[3] Cai, Kun, & Wang (2023). LCR Policies in China and their impacts on domestic value added in exports. 10.4324/9781003415794-5.
[4] Tang, Wang, & Wu (2025). Local favoritism in China's public procurement: Information frictions or incentive distortion?, Journal of Urban Economics, Volume 145, 2025, 103716, ISSN 0094-1190. https://doi.org/10.1016/j.jue.2024.103716.
[5] 13 US states are not covered under the WTO GPA and some states have specific exclusions or limitations in their coverage schedules. See: https://e-gpa.wto.org/en/GPACoverage/Annex2/101
[6] Malouche, Reyes, and Fouad (2013). Making Trade Policy More Transparent: A New Database of Non-Tariff Measures. https://documents1.worldbank.org/curated/en/865071468163171800/pdf/825210BRI0EP1280Box379865B00PUBLIC0.pdf

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