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  October 6th, 2016 | Written by

Localization Barriers to Trade

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  • Governments are choosing the wrong tools to help local firms innovate and compete.
  • Forced localization is growing, not decreasing.
  • Policymakers should look at what is actually holding back their county’s ability to compete in global markets.

Localization barriers are a pernicious form of trade protectionism that are rapidly proliferating throughout the global economy, as more and more countries misguidedly try to capture economic and innovation activity by forcing foreign companies to locate operations or assets inside their borders as a condition of market access.

These “localization barriers to trade”—such as forcing a company to build a local factory, store data locally, or transfer ownership of valuable technology or intellectual property—are cropping up across a wide range of countries, such as China, India, Brazil, and Indonesia. These discriminatory and distortionary policies afflict a wide range of innovation-based industries, including life sciences, information technology, digital content, advanced manufacturing, and renewable energy.

The Information Technology and Innovation Foundation (ITIF) held a panel discussion a couple of weeks ago in Washington on the spread of these protectionist policies, how they fail to achieve their intended results, and how policymakers can respond to this growing threat to the global innovation economy. The panel members emphasized that countries’ efforts to build and support domestic manufacturing sectors are perfectly legitimate.

However, as Ryan Ong, the director of international business policy at the National Association of Manufacturers, made clear, the problem is that governments choose the wrong tools to help local firms innovate and compete. Instead of addressing the underlying issues that help build local firms’ capacity to compete against the world’s best, such as through better education and infrastructure, these countries look for a short-cut by opting for localization policies that discriminate against foreign firms and distort trade.

Ong emphasized that the desire to support indigenous manufacturing is understandable, particularly in terms of encouraging local economic development, but without a broader understanding about how global trade, innovation, and investment works, many localization policies simply promote stagnation rather than growth.

Jonas Nahm, an assistant professor at the Johns Hopkins School of Advanced International Studies, agreed that the temptation to create local jobs in the renewable energy sector has led to similarly counterproductive policies that disrupt global innovation networks and do not lead to many jobs being created, while passing on considerable costs to users, both consumers and other businesses, who have to pay more for electricity.

Another panelist, Meir Pugatch, an IPKM professor at Maastricht University, provided data from his latest report—“Separating Fact from Fiction: How Localization Barriers Fail Where Positive Non-Discriminatory Incentives Succeed”—showing that countries which have the most severe compulsive localization policies in the life sciences sector are the least globally competitive across the board, while countries that have more open approaches to trade tend to be far more competitive.

The head of global trade policy at Google, David Weller, pointed out that the global marketplace is still adjusting to the widespread reliance on digital data brought on by the advent of internet-based trade and trade policy. Governments and policymakers need to remember that if they hinder data flows through localization policies, they will lose a large amount of economic and innovation value made possible by modern technologies and the global digital economy. “The value of data,” Weller said, “is what is done with it.” Forcing companies to build or use local data centers through data localization measures is not going to help other countries develop their own Silicon Valley.

In terms of what countries, firms, and global institutions should do about localization measures, Pugatch noted that “forced localization is only growing—it is not decreasing,” so this is a pressing issue that needs greater policy attention. Weller agreed that the issue needed to be a higher priority trade issue.

Overall, the discussion emphasized the need for greater focus on the issues as these localization barriers threaten some of the world’s most innovative sectors. Policymakers need to take a broader perspective and consider the impact on global innovation when considering locally focused economic and trade policies. Instead, they should look at what is actually holding back their county’s ability to participate in global innovation networks and compete in global markets.