India – Japan: Local content Requirement (non tariff barrier) for Automobile

India – Japan: Local content Requirement (non tariff barrier) for Automobile

Introduction

           

            India is a third biggest country in the world and it has the population about a thousand million people that is the second most of the world. India is located in South Asian subcontinent near the main Indian Ocean. It set in the south of China. The capital of India is New Delhi, the city of disorder and traffic jam. The most income of this country comes from services. (CIA factbooks)

India is a country that creates trade policies to protect their local industries. The new policies involve Local Content Requirement for automobile and some of electronics devices. The most impacted country from this trade policy is Japan because Japanese is a large producer and supplier for automobiles. How Japanese going to do if it can not have monopoly authority for its products.

            Local content requirement is a trendy policy of the government for developing countries to control foreign direct investment that come to do the business in their countries which require using the most component from domestic country. This policy is using more in developing countries such as Mexico, Indonesia, Malaysia, Pakistan, Peru, Thailand, Uganda, Uruguay, Venezuela, and South Africa.

            Local content requirement is the non- tariff barrier that can help to improve the economy of the country that uses this policy. Because of the most of parts of product must produce from domestic country. Some country requires the local content more than 50% such as Malaysia and India.

             

Background and Problem

The world is rising of reversed between developed countries and developing countries. Because of developed countries has excellent technologies but meet with maturity markets, developing countries has outdated technologies but undiscovered markets. While company from developed countries likes to export their goods to undiscovered markets, developing countries try to tempt foreigners to invest in their market by using multinational enterprises (MNEs) of foreign direct investment. It may help developing country to increase workers and make greater of technologies - transfer benefit.

Developing countries added local content requirement (LCR) of foreign direct investment (FDI) because they want to fulfill their potential employment and profit of transfer technology.

This local content requirement policy asks for multinational companies to use a same ratio of domestic part and components. So employment in domestic component factories will increase. In the order to maintain quality of finished goods, foreign investors need to transfer their technologies into local component factories of developing countries. Thus local content requirement becomes a popular policy of developing countries government for FDI. In the sample of 50 countries, 27 countries or about 57% use local content requirement for FDI in automobile industry. And the most of them are developing countries.

            Who take advantage who loss from this policy? The fact that countries that create this policy will gain about rising of employment and enhancing of technologies transfer and gain more profits. But it will affect the consumer surplus. Consumer will pay more money. The surplus of consumer is the difference part between all amount of money that consumer willing to pay for a product and the potential amount of money were paid. The price of product will increase about 50% - 100%. For example, suppose that without FDI, company 1 will spend money for it cost for component $100 and company 2 will spend $200. When creates the local content requirement policy the company must use at least 50% for local parts which cost $200. In the result, the company 1’s cost become $250 that the cost mark up about 150% and company 2’s cost becomes $300 the cost mark up about 50%.

            How this problem has been formed? The problem occurs when India stated a new automotive policy on 12 December1997 which it calls for producer of the automotive manufacturing and it requires Ministry of Commerce to outline and put a signature on a memorandum of understanding (MOU). That is a new course of action for the manufacturing. In the following, this policy face problem related to the TRIMs (TRADE-RELATED INVESTMENT MEASURES) Agreement. New policy of India contains of first, this policy request 50 percents of local content be accomplished within three years of the date on which the first imported parts are authorization and it will increases to 70 percents within five years of first authorization. Second, the policy asks for that export of vehicles or parts start within three years of beginning, with the potentiality of limitation on the number of parts that can be imported rely on the degree to which the met of export requisition. (Ch7 – TRIMs)

            India had records of creation permit of automobile component import for industries establish working within its limits qualified upon signing MOU including local content requirements and export/import balancing requirements by without consider to any legal basic for its acts. Japan considers a new automotive policy of India violated the TRIMs Agreement. Although the TRIMs Agreement have gone since the TRIMs Agreement took effect for three years. But Japan said it is not fair and the taking of the policies that certainly violate international agreements at this point of time of connection point is a big changing from the rules and norms of manner in the international community. The policy was reviewed through Indo-Japan bilateral trade talks in January 1998, but Japan should take up again at every chance to pressure the India government for the beginning to cancel the policy.

            In addition, India has had export limitations on farming goods and manufacturing products since 1991, and in 1986 created local content requirements for penicillin and other pharmaceuticals. The WTO has been informed of these actions and they are not in violation of the agreement, but Japan have to still gaze that they are not widened and that they are abolished on agenda.

           

What is the outstanding trade problem facing the world? Many countries requested the setting up of a World Trade Organization panel that is United States and EU, on the reason that they should get harmonize balance to India nationals and industries and suspected damages of the TRIM Agreement. Japan joined as a third party country. The panel has let down a decision that mostly allows the U.S. and EU requests and India petitioned decision of the panel in January 2002. Japan will screen how the dispute on this problem advances.

            In the subject of standards and certification, it is greatly probable that for iron and steel goods the responsibility to correspond to Indian domestic prices and the responsibility to record in order to use those prices, as well as the obligation to add labels to cover products, establish unimportant trade restrictions. Japan is cared about how these subjects concern to the TBT Agreement. Japan must review with India goal, important part and details of these strategies, as well as their agreement with the WTO Agreement. (Ch9. India)

            How the problem has an effect on the world? This problem will effect to the market of the world because of the market of developed countries was maturity and growing quite slowly. But when developed countries want to change their purpose to new market that is developing countries market but it has the restriction that is local content requirement.  It can make the surplus products of developed countries can not have the way to go. It is not easy to entry the developing countries, you will meet a big restriction and it will increase your cost of product. You price of product will rising about 50-100%. The consumer will reduce to buy the automobile because of the expensive of car and fuel. The automobile market will grow slowly because the automobile market is not easy to entry. It may effect to automobile company to be stop produce a new model of car for saving the cost of research and development.

Conclusion

Local content requirement is the non- tariff barrier that can help to improve the economy of the country that uses this policy. Because of the most of parts of product must produce from domestic country.

Developing countries added local content requirement (LCR) of foreign direct investment (FDI) because they want to fulfill their potential employment and profit of transfer technology.

            The problem occurs when India stated a new automotive policy on 12 December1997 which it calls for producer of the automotive manufacturing and it requires Ministry of Commerce to outline and put a signature on a memorandum of understanding (MOU).

            Japan considers a new automotive policy of India violated the TRIMs Agreement. Although the TRIMs Agreement have gone since the TRIMs Agreement took effect for three years. But Japan said it is not fair and the taking of the policies that certainly violate international agreements at this point of time of connection point is a big changing from the rules and norms of manner in the international community.

            This problem will effect to the market of the world because of the market of developed countries was maturity and growing quite slowly. The fact that countries that create this policy will gain about rising of employment and enhancing of technologies transfer and gain more profits. But it will affect the consumer surplus.