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Localization Barriers to Trade: Threat to the Global Innovation Economy

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Localization Barriers to Trade: Threat to the Global Innovation Economy Localization Barriers to Trade: Threat to the Global Innovation Economy BY STEPHEN J. EZELL, ROBERT D. ATKINSON AND MICHELLE A. WEIN SEPTEMBER 2013 TABLE OF CONTENTS Introduction ................................................................................................ 4 Summary of Policy Recommendations .................................................................... 6 A Framework for Understanding Global Economic Development Policies ............. 7 Localization Barriers to Trade .................................................................................. 8 Indigenous Innovation ............................................................................................ 9 General Mercantilism ............................................................................................ 10 Enterprise Support ................................................................................................ 11 Localization Barriers to Trade....................................................................... 12 Types of Localization Barriers to Trade ................................................................. 12 Local Content Requirements in Private and/or Public Procurement ......... 12 Local Production as a Condition of Market Access ................................... 14 Forced Offsets .......................................................................................... 14 Requirement of Intellectual Property or Technology Transfer as a Condition of Market Access ..................................................................... 15 Countries' Localization Barriers to Trade by Sector ............................................... 18 Information and Communications Technologies ...................................... 18 Energy ...................................................................................................... 24 Other Durable Goods Industries .............................................................. 27 Life Sciences ............................................................................................. 33 Audio-visual Services ................................................................................ 35 Retail ........................................................................................................ 37 Why Localization Barriers to Trade are Harmful .............................................. 37 Localization Barriers to Trade Damage Economies Affected by Them ................... 37 Localization Barriers to Trade Damage the Global Economy ................................. 38 THE INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | SEPTEMBER 2013 PAGE 1 Market Balkanization Prevents Large Markets .......................................... 40 Excess Competition Reduces Innovation .................................................. 40 Weak IP Protections Compromise Innovation .......................................... 41 Localization Barriers to Trade Can Damage the Countries That Use Them ........... 42 Raising Cost of Key Inputs, Including ICTS and Other Capital Goods .... 42 Damaging Countries' Participation in Global Value Chains ..................... 45 Inflicting Broad Economic Inefficiencies .................................................. 47 Damaging National Reputations .............................................................. 48 Isolating Nations from the Global Economy ......................................................... 49 Distracting from Policies That Should be Implemented ........................... 50 Productivity and Innovation-Based Economic Development ............................. 51 Increasing Across-the-Board Productivity Growth ................................................. 51 Transforming Development Economics from a "Shift" to a "Growth" Strategy ..... 54 Key Framework Conditions ................................................................................... 58 Rule of Law .............................................................................................. 58 Robust Intellectual Property Rights Protection ......................................... 59 Domestic Market Competition................................................................. 59 Effective Tax, Trade, and Regulatory Environment ............................................... 60 Supporting Investment in Key Factor Inputs ......................................................... 62 Investing in Physical Infrastructure ........................................................... 62 Deploying Digital Infrastructure .............................................................. 63 Building an Educated and Skilled Workforce ........................................... 63 Spurring Scientific and Engineering Research ........................................... 64 Innovation and Productivity Policies ..................................................................... 65 Developing a National Innovation and Productivity Strategy ................... 65 THE INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | SEPTEMBER 2013 PAGE 2 Spurring Technology Transfer and Commercialization ............................. 65 Tax Incentives to Spur Investment in R&D and Innovation ..................... 66 Fielding Robust E-Transformation Policies .............................................. 67 Helping SMEs Become More Productive and Innovative ......................... 67 Productive Innovation Policies Can Boost Growth ................................................ 68 An Agenda to Roll Back Localization Barriers to Trade ................................ 68 Develop Mechanisms to Track LBTs ..................................................................... 69 Update WTO Rules .............................................................................................. 69 Bring More WTO Cases ....................................................................................... 70 Expand Definition of LBTs ................................................................................... 70 Complete Trade Agreements that Eliminate LBTs ................................................. 71 Remove Preferences for Countries that Systematically Use LBTs ........................... 71 Empower Firms to Fight Back ............................................................................... 73 Reform Global Institutions .................................................................................... 74 Conclusion ................................................................................................. 75 Appendix A ................................................................................................ 76 Endnotes ................................................................................................... 78 Authors Note .............................................................................................. 93 Acknowledgements ..................................................................................... 93 About ITIF ................................................................................................. 93 THE INFORMATION TECHNOLOGY & INNOVATION FOUNDATION | SEPTEMBER 2013 PAGE 3 Countries’ use of localization barriers to trade (LBTs)—policies that seek to explicitly pressure foreign enterprises to localize economic activity in order to compete in a country’s markets—has grown dramatically. But LBTs, such as forced local production or forced technology or intellectual property transfer as a condition of market access harm the global innovation economy, the countries affected by them, and even the very countries that implement them—all while distracting countries from focusing on implementing productivity- and innovation-based policies that could deliver stronger, more sustained economic growth. This report documents the growing global use of LBTs and explains what to do about it. Localization barriers to trade represent one of the INTRODUCTION most rapidly growing As ITIF writes in Innovation Economics: The Race for Global Advantage, as an increasing forms of trade number of countries have come to realize that innovation fundamentally drives economic protectionism and growth, a fierce race for global innovation advantage has emerged. As a result, countries perhaps constitute today’s have begun implementing a range of aggressive policies designed to increase the productivity and innovation capacity of existing enterprises while also seeking to incubate, greatest threat to the grow, or attract companies operating in high-value-added industries such as manufacturing, further liberalization of information and communications technology (ICT), renewable energy, and life sciences.1 the global trading system. But notwithstanding the fact that the best way for nations to cultivate high-growth, innovation-based economies is to get key economic framework conditions right; to create an institutional environment that supports innovation, entrepreneurship, and technical change; and to achieve across-the-board productivity growth, a growing number of countries are resorting to “innovation mercantilism”—using distortive, protectionist trade policies to achieve the innovation-based economic growth they seek. Increasingly, these countries’ economic development strategies consist of two central aims: 1) capturing foreign direct investment (FDI), particularly in the form of establishments of multinational enterprises performing globally mobile research and development (R&D), production, or manufacturing operations; and 2) favoring
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