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Dr Gift Mugano
Further to last week’s issue which focused on the need to promulgate local content requirement into law, this week’s discussion looks at the institutional framework of the same. By their nature, local content requirements (LCRs) emphasise preferential treatments for local suppliers vis-à-vis foreign goods and services providers and are therefore viewed by many as protectionist measures.

From a development perspective, they can be a tool to achieve certain economic and non-economic goals such as developing local supply chains, expertise, ensuring technological transfer, or achieving better social outcomes. From an international trade perspective, countries, however, need to be prudent to ensure that their measures do not contravene commitments at the bilateral or multilateral level.

The fact that there is no agreed definition of LCRs and that their scope is very broad suggests that measures are likely to be subject to a wide range of disciplines.

Relevant provisions on LCRs in trade and investment agreements

In the multilateral trading system under the World Trade Organisation (WTO), the most relevant agreements on compliance of LCRs are the General Agreement on Tariffs and Trade (GATT), the Agreement on Trade-Related Investment Measures (TRIMs),the General Agreement on Trade in Services (GATS), the Agreement on Subsidies and Countervailing Measures (ASCM), and the Agreement on Government Procurement (GPA).

While the GATT, the TRIMs, and the GATS apply to all WTO members, the GPA is a plurilateral agreement, which binds only its 43 signatory members. However, in many cases, LCRs are not only trade related, but essentially investment related.

Therefore, international and bilateral investment agreements also largely regulate the extent to which signatory countries can use (or not) certain measures to oblige foreigners to use more local content.

The proceeding discussion summarises the various legal provisions contained in trade and investment agreements that could potentially impact the legality of the use of LCRs.

Relevant disciplines in Wto agreements

The national treatment requirement, as provided for in Article III of the GATT, establishes a strong legal basis regarding the treatment accorded to local goods providers compared to foreign producers.

The consistency of LCRs will, therefore, be defined according to the provisions of Article III:4. In addition, Article III:5 of the GATT prohibits quantitative regulations pertaining to the “processing or use of products in specified amounts or proportions which requires, directly or indirectly, that any specified amount or proportion of any product which is the subject of the regulation must be supplied from domestic sources.” Article III:8, however, excludes government procurement from the application of the provision of national treatment, which is subject to the obligations under the GPA for those countries that are parties to it. Article XI.1 of the GATT prohibits the use of quantitative restrictions on imports and exports through quotas, licenses, and other measures.

This article could have been violated by Zimbabwe in the recent ban on imports as enunciated in statutory instrument 64 of 2016: — control of goods (open general import licence) number 2 amendment notice, 2016 (Number 8).

Article XVII of the GATT 1994 relating to State Trading Enterprises requires state-owned enterprises (SOEs) to operate in accordance with the principles of non-discrimination and requires that their purchases and sales be conducted “in accordance with commercial considerations, including price, quality, availability, marketability, transportation and other conditions of purchase or sale, and shall afford the enterprises of the other contracting parties adequate opportunity . . . to compete for participation in such purchases or sales.”

This is particularly relevant because in many resource-rich countries SOEs play a significant role by engaging in commercial operations. A number of LCR provisions affecting the oil sector are relevant to SOEs and are therefore expected to fall within the provisions of Article XVII of GATT 1994.

The TRIMs complements Article III of the GATT regarding treatment accorded to investment. Host countries are required to provide no less favourable treatment to foreign investors compared to what they provide to their national investors.

The TRIMs agreement prohibits the use of LCRs that requires a specific percentage or quantitative target of local goods purchases by companies, and has trade-balancing requirements that restrict the volume or value that a company can import to an amount related to the level of products it exports.

Finally, the TRIMs proscribes any use of export restrictions or bans, such as those adopted by Indonesia in 2012 to implement a 2009 law on unprocessed metals and non-metallic minerals to ensure smelting and downstream beneficiation unless mining companies submit plans for smelter construction. Examples of TRIMs-related measures in place in resource-rich countries include:

Local procurement which compels companies to use certain amount of local inputs in production in Nigeria;

Trade balancing requirements which limit purchase of imported goods per volume or value of local product in Nigeria;

Manufacturing requirements which compels certain products are required to be manufactured locally in Ghana, Indonesia, Nigeria and South Africa;

Technological requirements which specifies required technology to be transferred on non-commercial terms and types of Research and Development (R&D) to be conducted locally;

Licensing requirements — legislation which require investors to give preference to local suppliers in Brazil, Zambia, Mozambique and Nigeria;

Local equity requirements which specifies percentage of a firm’s equity to be held by local investors in Mozambique, Nigeria and Zimbabwe.

The ASCM is relevant to LCRs in two cases (i) if measures to support local content are used as export subsidies; or (ii) if they are subject to the use of local products over imports, as provided by Article 3.1 (b) of the agreement. Government Policies supporting R&D and innovation are, however, considered as non-actionable, as provided by Article 8.2,15 and therefore active industrial policies can be designed to encourage companies to innovate in new products and new production processes.

By permitting subsidies to cover up to 75 percent of industrial research costs, Governments have considerable flexibility to influence the technology development of companies.

LCRs are of concern to service providers. In this regard, the GATS contains provisions regarding market access and national treatment that may affect foreign suppliers (Article XVI). For example, in 2010, in an effort to foster the development of its banking sector, Angola required oil companies operating onshore to use domestic banks to process their transactions.

Other countries require foreign companies to give preference to employment of local staff, to limit employment of foreign staff, or to submit plans on how they intend to increase local labour participation.

Nigeria, for example, requires that junior or intermediate positions be reserved exclusively for Nigerians. Similar to the GATT, government procurement (Article XIII) is excluded from the scope of the GATS. One main limitation of the GATS, however, is that its disciplines only apply to those services sectors that a WTO Member has included in its schedule of commitments. Most developing countries have made few commitments and therefore have more flexibility to apply LCRs to service suppliers.

The GPA entered into force in 1996 and its schedules were revised in 2012. It is a plurilateral agreement that applies only to the 43 signatories that have acceded to it, although all WTO Members are eligible to join. The objective of the GPA was to respond to political pressures to address discriminatory treatment in favour of local suppliers for Government-transacted businesses, in particular in tendering procedures for contracts above a certain financial threshold.

The major cornerstone is non-discrimination between local and foreign suppliers. The use of offsets is explicitly excluded from the GPA but developing countries can benefit from certain flexibilities if they join it.

In their recent reforms, several resource-rich countries have inscribed mandatory LCRs in their contracts or legal frameworks, sometimes in the form of explicit thresholds, or in the form of conditions of operation, or as part of bidding evaluation guidelines with preferential considerations for local suppliers. Countries such as Nigeria, Indonesia, South Africa, or Brazil have enacted such measures, despite varying scope and compliance enforcements.

As I round up this discussion, I found it necessary to showcase countries which has promulgated local content into law:

· Australia: Buy Australia at Home and Abroad scheme: Funding in budget to reinforce local firms competitive position in procurement bids (to maximize returns on the resource boom by linking Australian suppliers to large resource projects).

· Brazil:Buy Brazil Act (2010): clause in government procurement (up to 25 percent preference for goods and services produced in Brazil).

· Ghana: Entities in the petroleum industry must submit local content plans regarding the use of local goods and services and the transfer of advanced technologies and skills to the Ghana National Petroleum Company (GNPC).

· Indonesia: 2008 mining law, promoting local processing of raw materials (mineral, including bauxite and nickel, and coal). Regulation does not prohibit exports of these products. Indonesian regulation requires local and foreign bidders for energy service contracts to use a minimum of 35 percent domestic content in their operations.

For Zimbabwe, in order to address productivity and improve liquidity, the rallying point should be now working on enacting the LCRs. I am very convinced that LCRs can be panacea to our economic challenges as opposed to the current measures of direct import controls. What is clear, from this discussion, is that the LCRs have clear provision within the WTO legal framework as opposed to the import bans. Next week issue will focus on how LCRs can boost production, raise liquidity and counter externalisation of foreign exchange.

· Dr Mugano is an Economic Advisor, Author and Expert in Trade and Competitiveness. He is a Research Associate of Nelson Mandela Metropolitan University. Feedback: +263 772 541 209 or [email protected]