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 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 hasa 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.