Australia's Experience with Local Content Programs in the Auto Industry : Lessons for India and Other Developing Countries
Local content programs - especially in the auto industry - accompanied many import substitution policies during the 1960s and 1970s, but most were abandoned in countries that liberalized trade in the 1980s, and early 1990s. The high economic costs...
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2014
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| Online Access: | http://documents.worldbank.org/curated/en/2001/06/1490136/australias-experience-local-content-programs-auto-industry-lessons-india-other-developing-countries http://hdl.handle.net/10986/19604 |
| Summary: | Local content programs - especially in
the auto industry - accompanied many import substitution
policies during the 1960s and 1970s, but most were abandoned
in countries that liberalized trade in the 1980s, and early
1990s. The high economic costs of these programs, and their
inherent incompatibility with open, nondiscriminatory
international trade, were recognized in the Uruguay Round
Agreement on Trade-Related Investment Measures (the TRIMS
agreement), which required developing countries to phase
them out over five years. Despite this, a number of
developing countries have introduced new local content
programs, and are currently pressing to relax the TRIMS
rules, and to extend the year 2000 phase-out deadline. A
leader in this effort at the World Trade Organization (WTO)
is India, which in 1995 introduced an
"indigenization" program for its auto industry
that typifies similar programs in other developing
countries. Under India's program, permission to import
auto components for assembly, is contingent on agreements to
reach specified levels of "indigenization", plus
enough commitments to export cars, or components to cover
the foreign exchange cost of imported components. The system
is implemented by a "de facto" ban on the import
of built-up cars, and import licensing of car components.
The United States, and the European Union challenged the
system as a violation of the TRIMS agreement. Since 1996,
similar arrangements in Brazil, Indonesia, Mexico, and the
Philippines have been the subject of WTO disputes. Australia
has a long, well-documented history of local content
programs in the auto industry. Australia's programs
started in 1948, and began to wind down only in 1985.
Australia's strongly counter-competitive programs - the
administering authority was effectively cartellizing the
industry - led to market fragmentation, high costs and
prices, and lower national income. They retarded, rather
than promoted technical change, and reduced, rather than
increased, employment in auto production, distribution, and
repair. Export requirements increased the scheme's
economic costs, which involved bureaucratic micro-management
of the industry, and high transaction costs for the
government, and the private sector. Once the schemes were
established, they were very difficult to remove, owing to
their populist appeal, their lack of transparency, and the
vested interests of the international, and domestic firms
which relied on them, as well as other interest groups,
including the administering bureaucracies, auto industry
trade unions, and politicians in electorate areas in which
car production was concentrated. The Australian experience,
and similar experiences of developing countries with these
programs during the 1960s, and 1970s, suggest that they do
not serve the economic interests of India, and the other
developing countries which are presently seeking to
legitimize them at the WTO. On the contrary, the present
TRIMS agreement is a useful external counterweight to the
influence of domestic lobbies, and populist arguments, which
in Australia, and elsewhere have made local content schemes,
politically difficult to oppose, and once established, even
more difficult to remove. |
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