The use of local content requirements (LCRs) has been growing for a long time. Used by developed as well as developing countries, they aim to promote the use of local inputs and serve the purpose of fostering domestic industries. Argentina, Brazil, China, India, Indonesia, Russia, Saudi Arabia and the USA are very frequent users of LCRs. India is by far the most prominent user, followed by Brazil. While LCRs might have perceived benefits related to specific policy goals in the short term, the damaging impacts of LCRs evolve over time and outweigh short term benefits. This study estimates the economic impact of LCRs in a selected sub-sector of motor vehicles, where they are frequently used, i.e. the heavy duty vehicles subsector.
ECIPE collected LCRs which affect the selected subsector in a database, classifying them by three different dimensions: their different types, their scope, and their level of impact. This database is used as a basis for the assessment of the economic costs of these LCRs for BRICS countries. Overall, 72 different LCRs have been identified. Most LCRs were found in Brazil and Russia, which each apply 20 measures, followed by India with 15 and China with 13 measures. Finally, in South Africa there are only 4 measures in place which affect the heavy vehicles sector. The analysis finds that most LCRs are related to government procurement, financial support and business operations, as well as to export measures. In addition, we find that the LCRs that are related to financial support and business operations have generally a high impact. For the purposes of this study, the cost of the collected LCRs has been estimated by translating their negative effects into ad valorem equivalents (AVEs). Brazil and Russia apply the most distortive LCRs for heavy vehicles with an estimated increase of their import price of 15.6 and 11.1 percent in both countries respectively. China and South Africa both show low AVEs of 4.5 and 3.3 percent respectively, and India’s LCRs are least distortive with an estimate of 2.2 percent.
Estimating the impacts of the collected LCRs on the economy in the BRICS countries shows that their impact is at least threefold. First, the LCRs have a negative impact on trade in heavy vehicles in the BRICS countries. The identified LCRs are estimated to restrict imports of heavy vehicles by -21% and -12% in Brazil and Russia, while for the other BRICS countries imports of heavy vehicles are reduced between -9.3% and -3.7%. Although to a much lesser extent, the identified LCRs also reduce BRICS countries’ exports of heavy vehicles. Second, LCRs significantly increase the prices for imported heavy vehicles leading to higher prices for firms as well as consumers. The prices firms have to pay for intermediate goods in the heavy vehicles sector are estimated to increase up to 2.9% and 4.8% in Russia and Brazil. Consumer prices for heavy vehicles are estimated to rise between 0.2% and 5.4%. Third, our estimations show that LCRs increase industry output in the targeted sector, but only at the expense of other closely related industries which decrease their industry production.
For example, while industry output in the heavy vehicles sector increases between 0.2% in China and 10.37% in Russia, the domestic production of other transport equipment and other machinery in Russia and Brazil decreases by -0.16% to -0.37%. While it is only natural that industry output that is subject to protection by LCRs increases, the analysis shows that this effect is outweighed by the detrimental side effects. LCRs raise the price of the product it protects and of the product which requires protected inputs, in this case heavy vehicles. As a result, this raises expenditures for every buyer in the economy, which has a depressing effect on sales and output also in other industries. Final consumers as well as firms have to reallocate resources from other areas in order to pay for more expensive vehicles and vehicle parts. Over time LCRs can therefore lead to lower competition, less innovation, and less product variety in the domestic market, which reinforces the negative effects of LCRs.
The analysis illustrates the detrimental impact of LCRs, highlighting again the need for policymakers to address the growth of LCRs and their significance in modern protectionism more thoroughly. A first multilateral option is an increased use of complaints through the WTOs Dispute Settlement Body (DSB) in order to eliminate them and to have specific LCRs declared incompliant with WTO rules. This would also establish necessary additional jurisprudence covering a wider set of LCRs. A second multilateral option is the start of negotiations in the WTO. The topic of LCRs should indeed be high on the new working agenda in order to clarify current rules on LCRs and to obtain stronger negative rules against their use. If negotiations among the entire WTO membership do not progress, a “coalition of the willing” of member countries could engage in negotiations with the aim of clarifying rules and making them stronger. These negotiations should be supported by a larger body of economic analysis on the full range of existing LCRs. In addition, negotiations on bilateral free trade agreements (FTAs) should lay a stronger focus on LCRs. Current EU negotiations on FTAs offer a good ground for such efforts and LCRs should be front and centre in EU FTA negotiations planned in the future.
The authors gratefully acknowledge the research assistance by Nicolas Botton, Julie Richert and Sebastian Schuhmann.
The Economic Impact of LCRs
LCRs are policy instruments that can have pernicious effects for international trade, productivity and welfare for the country imposing them. LCRs artificially increase the use of input content from domestic suppliers where they apply. This creates inefficiencies in the supply chain for the firm using these inputs, because more competitive inputs are not (internationally) available for the company. More than often domestic input suppliers are not the best ones in terms of price and quality for domestic and international operating firms. LCRs therefore limit the availability of competitive products in the domestic market when the company cannot import better or cheaper inputs from abroad.
As a result, when forcing domestic companies or firms to acquire intermediate inputs from local suppliers rather than importing them, the country that imposes the LCR prevents companies from reaping gains from trade. A final negative economic effect of LCRs is that when countries impose these measures, a firm that is also an investor would be inclined to invest less in the domestic country. This could eventually lead to less technology transfer and process upgrading for the country, preventing the transmission of positive spill-over effects down the supply chain.
Furthermore, LCRs can create amplifying inefficiencies because of the fact that today’s trade patterns are distinctively marked by international supply chains. This means that inputs crisscross international borders many times before becoming a final good, from the source country where the initial input is produced to the last country where it is finally turned into a final good. Any distortion in this process requires great coordination by international firms. Over the last few decades, intermediate input trade has grown significantly and as a trade flow it has become more sensitive to any type of trade policy costs when compared to final goods trade (OECD, 2009). When government impose LCRs, they therefore create additional inefficiencies for multinationals. These firms need to reorganize their complex supply chains and are forced to incur additional coordination costs. In sum, LCRs not only constrain gains from trade, but also lead to higher production costs which can result in higher domestic prices and can even potentially create productivity losses.
Up to date there are very few studies analyzing the inefficiencies associated with LCRs – how to what extent they have a negative impact on the economy as a whole. Moreover, we still don’t know in which ways LCRs are distortive for trade. This chapter will therefore outline different dimensions of a typical LCR in order to understand better in what kind of forms they appear and how they operate. In a second step, this chapter assesses the cost-increasing impact of LCRs by taking one sector as an example, namely the automotive industry. In particular, we take the example of the heavy-duty vehicles industry which includes heavy vehicles like buses and trucks, but excludes passenger cars. The conclusion is that not all types of LCRs are equally distortive and their cost impact depends on how they are designed.
The Cost Dimensions of LCRs
Even though the reasons for why LCRs are distortive in the economy are familiar, the ways in which LCRs operate need to be specified. To assess the channels through which LCRs are cost-enhancing for firms, it is first necessary to understand their characteristics. According to ECIPE’s collection and assessment of LCRs in BRICS countries which affect the heavy vehicles sector and which are listed in Figure 2.1, LCRs can be mapped according to three dimensions: namely their (a) type; (b) scope; and (c) impact. Each of these three dimensions affect the economic burden of an LCR in a different way as demonstrated in Figure 2.1.
The first element of an LCR to consider is the type of measure it can take. Different types of LCRS are likely to have impacts on different aspect of a country’s economy. LCRs can target different policy areas such as investment, trade and import policies or government procurement programs. LCRs can also stipulate how a firm should source inputs and thereby restrict imports indirectly. All these different types of LCRs therefore affect different types of economic activities such as local sales, exports and imports, or the investment of (foreign) companies and sales to foreign governments. Across all measures, our assessment classifies LCRs into six broad groups, namely:
- Public procurement: LCRs as a condition to participate in public tenders and access the local procurement market;
- Investment: Local content requirements as a precondition for investments to take place, e.g. joint stock requirements;
- Market access: LCRs specifically addressed to the tradability of goods and services across borders setting conditions for preferential market access in terms of reduced tariffs, import licensing schemes etc.;
- Business operations as well as financial support: includes measures such as preferential financing schemes and tax schemes based on the use of local goods and services and the finance of production of capital goods destined for exports;
- Export measures: Measures that stipulate export promoting preferences based on the use of local inputs, thereby generating additional trade rather than restricting trade
- Other requirements: Measures that fall outside the scope of these four categories, for example, the local storage of data.
This classification by type is important not only because they differ in terms of the economic area they apply to but they also affect different types of costs for companies. For instance, LCRs related to market access and business operations merely increase the operational cost structure as the producer would be forced to source an (input) product against a higher price from a local provider. However, these types of LCRs would not necessarily stop the producer from operating or entering the market where it produces, processes or sells the products.
On the other hand, however, local content requirements regarding investments or public procurement may result in restricting investments abroad and thus affect a firm’s fixed costs. They could also be so strict that the producer is deterred from undertaking any investment in the local market or to undertake a bid for a procurement project. Such types of LCRs could potentially have larger negative trade impacts than those related to market access and business operations and financial support.
The second dimension of an LCR to consider is its impact. The impact of an LCR is defined in terms of the measure’s restrictiveness for trade and thus the costs of trading. Increasing levels of restrictiveness mean that LCRs have a greater level of distortion regarding the costs for companies facing the policy requirements. Figure 2.1 differentiates between three broad categories of level of impact that ranges from (1) low to (2) medium, and finally (3) high. The impact of an LCR may actually differ according to the industry to which it applies and as a result depends on how the LCR instrument has been precisely formulated.
For instance, an LCR related to the local storage of data, which forces producers to use domestic data service providers, would have a much lower perverse effect for the automotive industry than for firms active in the software sector. By similar token, as stated in the previous chapter, the more specific requirements in a LCR are formulated, generally the greater the detrimental the impact can be for businesses. A very specifically formulated LCR for a sub-set of a larger sector could therefore classify as having a high impact if the design of the LCR is stringent despite being applied only to a small sub-sector. However, this level of restrictiveness only captures the second dimension of the impact of an LCR.
As a final dimension of LCRs we consider their scope or sectoral coverage. Some LCR measures are formulated for a narrow industry only and may therefore have overall a less distortive impact on a country (or industry) than an LCR which applies to the whole industry or even the entire country (i.e. horizontally). Various LCRs in the area of public procurement have a very wide scope in the sense that they apply horizontally across all sectors as defined in their regulatory requirements. Depending on the product coverage, some LCRs cover large industries or even whole services sectors whilst others target specific sub-sectors. For instance, the US Buy American Act, or ARRA, has a wider reach so that infrastructure, education, health and renewable energy were included, but also has provisions aimed at the iron and steel industry.
LCRs in the Heavy Vehicles Sector in BRICS: An Application
To analyze and clarify the detrimental effect of LCRs, this report examines the case of LCRs applied in the heavy vehicles sector. It will do so with a particular focus on the BRICS economies, which are Brazil, Russia, India, China and South Africa. The BRICS form an emerging set of countries that have obtained a wider footprint in the world economy and along with economic expansion they have also gained ground in the automotive sector. The five countries together, for instance, now export domestic value-added in gross exports in automobiles that is around 7 percent of global value-added exports in this sector. As such, it has reached a slightly higher level than what Korea currently exports in terms of value-added in automotives.
An additional significant reason for choosing this set of countries is that the BRICS show a wide-spread use of LCRs. Figure 1.1 showed that many LCR measures currently implemented world-wide originate from the BRICS. Their LCR use takes up a share of around 44 percent of the total amount of LCRs this study finds globally. For the same reason, the automotive sector is chosen as a case study. The data in Figure 1.2 also showed that besides other sectors in which many LCRs are found, the automotive sector is responsible for 17 percent of all LCRs found across all countries in the world.
ECIPE has collected all LCRs affecting the heavy vehicles industry for the BRICS countries and built a database where they can be found. This database is being used as a basis for this case study to assess the economic costs impact of LCRs on these countries. All LCRs in the database are recorded along the lines of the three dimensions of LCRs as found in Figure 2.1. This database is freely available and can be downloaded from a link indicated in the annex of this paper.
Figure 2.2 provides a first impression of the types of LCRs implemented by BRICS countries. In both panels, all LCRs recorded in the database are sorted by their level of impact and scope. The first panel shows the number of LCRs implemented by type and level of impact whereas the second panel shows the number of LCRs implemented by type and level of scope. The sectoral level in our case study is comprised of the entire motor vehicles sector whereas the sub-sector level represents the heavy vehicles sector only, which is a sub-set of the motor vehicle sector. The size of the circles indicates the number of LCRs applied for each of the categories. The two panels show that the LCRs that apply in the five BRICS countries are present across all six types of LCRs as each category has at least more than one measure. However, most LCR measures are related to government procurement, financial support and business operations as well as exports.
However, the spread of these types of LCRs appears to differ along their levels of impact and scope. The panels show that most LCRs on government procurement are having a low impact, although there are many in place. In contrast, most LCR measures that relate to financial support and business operations as well as market access have a high impact. In addition, the second panel illustrates that most of the government procurement LCRs apply horizontally, which is also the case for many LCRs related to exports or market access. Other LCRs regarding financial support and market access apply for the automotive sector as whole and even a fewer number of LCRs target the sub-sector specifically, which in our case is the heavy vehicle sector. LCRs related to investments are less prevalent whilst market access LCRs do not target any specific item in the heavy vehicles sector.
LCRs that affect the automotive industry are more or less equally spread across all BRICS countries, except for South Africa. Figure 2.3 provides the share division of LCRs for each BRICS country. In total 72 different LCRs have been found which are all affecting the automotive sector in one way or another. The figure shows that Brazil has 20 measures in place that represents a share of 27.8 percent. Russia also has 20 measures in place and therefore has an equal share, followed by India with 15 measures which comes down to a share of 20.8 percent. China has 13 LCR measures in place and South Africa only applies a couple of LCR measures, namely 4, which respectively takes up a share of 18.1 percent and 5.6 percent.
Source: ECIPE LCR BRICS database
BRICS LCRs by Type
The split of the different types of LCRs is summarized in Figure 2.4. As said before, this figure makes clear that the LCRs are present in all sorts of forms. Most LCRs are related to government procurement and as such distort the flow of goods and services between importers and exporters. They come in different formats such as outright preference given to local producers as written in legislations to stating explicit preference margins in percentage shares for local industries. Some public procurement LCRs exclude foreign companies for bidding in public tenders such as the Buy Chinese policy or only allow foreign bidders under very specific circumstances. Second in line in Figure 2.4 come LCRs that are related to financial support as well as ones that cover export measures, each with equal shares. LCRs in this category, which also includes LCRs related to business operations, include many and cover for example state-supported preferential leasing schemes for the local car industry or “financial arrangements” given in China to local investors. LCRs related to market access are in a slight minority with a share of roughly 13.9 percent across all LCR measures found. This is an interesting observation in the sense that many LCRs found for our case study do not contain direct border measures and are classified as other than Market Access LCRs. Market access LCRs can refer e.g. to licensing requirements or tariff reductions conditional on the use of local inputs.
Source: ECIPE LCR BRICS database
The two final categories which have a slightly lower appearance in our database are those related to investment flows and other local content requirements. The latter category covers mainly data localization policies. One country that has both types of LCRs in place is China. China has a strong local content conditionality on the opening of its markets to foreign investments, but also shows various strict local requirements regarding data. Russia also holds strong data localization requirements. Across the BRICS countries, government procurement LCRs are the most popular types, except in India and Russia. In India, LCRs related to export measures are far more popular and almost half of all LCRs that India has implemented are related to this category. Russia’s LCRs are most likely to stipulate some form of financial support for companies. In both countries, market access LCRs are also prevalent. An overview can be found in Figure A1 in the Annex.
BRICS LCRs by Impact
Figure 2.5 provides a summary of the LCRs by level of impact that apply across the BRICS countries. The level of impact ranges from low, medium to high and the assessment of the impact for each LCR measure has been done in close corporation with stakeholders from the automotive industry. Figure 2.5 shows that a slight majority of the LCRs have a low impact. The other two categories of medium and high impact are almost equally divided, with 30.6 percent of the measures having a high impact whereas almost 28 percent having a medium impact on trade.
Source: ECIPE LCR BRICS database
Looking at each BRICS country specifically, however, large variations arise. Figure A2 in the annex shows that proportionately Brazil, India and South Africa hold the biggest shares of LCRs with a low impact. Russia has the biggest share of LCR measures that qualified as having a highly distortive impact. Brazil and China both have a share of highly distortive LCR measures that is almost one third. These LCR measures range from the Buy Brazil Act which gives preferences to local products and services up to 25 percent as well as specific tax advantages for the equipment manufacturing industry in China. On the other hand, India only has less than a quarter of its LCRs that classify as having a high impact. Indeed, both India’s and South Africa’s set of LCRs are relatively more comprised of less distortive measures, i.e. which are assessed as having a low impact. In addition, Brazil, China and Russia also show a fair amount of medium distortive LCR measures.
BRICS LCRs by Scope
The division of the third dimension of scope is outlined in Figure 2.6. It shows that most of the measures have an economy-wide reach in the sense that they affect all sectors in a BRICS country. There are about 47 of these measures in place. In addition, 17 LCRs target specifically the automotive sector at large which covers various sub-sectors such as overall motor vehicles and parts and components of this sector as well as the heavy vehicles sectors. Last, there is only a smaller amount of LCRs that target a sub-sector specifically, which in our case is the heavy vehicles sector.
Source: ECIPE LCR BRICS database
A country-specific analysis in Figure A3 shows that indeed across all countries most LCRS are comprised of a horizontal nature. In China, India and South Africa more than three thirds of the LCRs are applied on a horizontal level, while in Brazil more than half of the measures are horizontal and in Russia slightly less than half which are horizontal. These latter two emerging economies have a much higher share of LCRs which are specifically targeted at the automotive industry. Narrowing down to the specific sub-sector of heavy vehicles, our analysis also shows that all BRICS countries have LCR measures in place which specifically target the sub-sector of heavy vehicles.
Estimating the Impact of LCRs in the Heavy Vehicles Sector in BRICS Countries
Estimating the cost of protection can be difficult, especially when the policy measures are not expressed in numerical terms like a tariff. This is the case with LCRs because they describe a policy requirement and they are not expressed in terms of tariffs. As a result, the negative impacts on trade and the economy as such are not always obvious. To examine the impact of LCRs on trade, we have translated their negative effects into a number which measures the price distortions resulting from the LCRs similar to the impacts of tariffs. This process of making an LCR numerical so as to measure their impact is called tariff equivalents, or ad valorem equivalents (AVEs). With the use of econometric techniques, we can therefore estimate the costs of protection resulting from non-tariff barriers such as LCRs, which can be compared with a tariff. Details on the way we estimate these AVEs can be found in Annex III. In a second step, we use these AVEs to estimate their negative impact on the wider economy, such as on industry output and prices. This second part is done through a so-called general equilibrium model.
In our analysis, we are specifically interested in the impact of LCRs in the heavy vehicles sector and aim to single out the negative effects of the LCRs we found for this particular sector. For the purpose of our analysis, the definition of the sector of heavy vehicles refers to the definition of the European Commission, according to which “heavy-duty vehicles” (HDV) comprise trucks, buses and coaches.
Our analysis finds that LCRs related to business operations and financial support as well as the ones covering government procurement have most significant cost-distorting effects for this sector. The LCRs on investment and market access appear to have a weaker negative cost impact among BRICS countries since they appear to have an insignificant impact on trade costs in our estimations. This could be explained by the fact that most LCRs related to market access are of a horizontal kind and therefore do not affect the heavy vehicle sector specifically. Similarly, LCRs related to investment are also mainly horizontally applied and are considered to have a rather low level of impact. Based on the results for the two types of LCRs with significant impact, we computed the tariff equivalents for each BRICS country which are shown in Figure 2.7. The figures show that Brazil and Russia apply the most distortive LCRs for heavy vehicles. The impact of their LCRs is estimated to increase the prices of imported goods by 15.6 and 11.1 percent in both countries respectively, i.e. the impact can be considered to be similar to an import tariff of that level. China and South Africa both show low AVEs. India has least distortive LCRs in place as it has the lowest AVEs. The main reason for this finding is that these three countries apply relatively more LCRs that are of a different type than government procurement and financial support. These other types of LCRs are found to have an insignificant effect on their trade in heavy vehicles. Hence, the ad valorem equivalents for these countries remain modest.
Source: ECIPE calculations, based on ECIPE LCR BRICS database; WITS/UNCTAD TRAINS
Figure 2.7 provides an overview of the ad valorem equivalents of LCRs as well as the weighted average tariffs of BRICS countries in the heavy vehicle sector. It becomes clear that LCRs are indeed a significant barrier to trade in BRICS countries. In the case of Russia, they even by far surpass the protection level of tariffs. Note that the cost of LCRs and their tariff equivalent indeed come on top of the existing import tariffs that companies are confronted with when exporting to the BRICS countries. This illustrates the significance of LCRs as an impediment to international trade with the resulting negative spill-over effects for the economy and business that outlined above.
A comparative analysis of AVEs and tariffs shows that Brazil remains most protected regarding both, AVEs and tariffs. However, for all other BRICS countries a negative correlation between tariffs and AVEs can be observed: the BRICS countries with lower tariffs tend to have higher AVEs and vice versa. Accordingly, with the exception of Brazil, lower tariffs tend to go hand in hand with higher non-tariff barriers (reflected in high AVEs) and those BRICS countries with high tariffs use less LCRs to protect their markets (i.e. low AVEs).
Impacts on Industry Output
Using simulations from the general equilibrium model, we provide an estimate of the impacts of LCRs for the heavy vehicles sector on the wider economy in BRICS countries. A detailed description of this methodology can be found in Annex III. The results for the heavy vehicle industry suggest that the applied LCRs provide an outcome that they were supposed to achieve: industry output in this sector increases in all BRICS countries. Figure 2.8 shows that the applied LCRs increase industry output of the heavy vehicles sector between 0.2 percent in China to even 10.4 percent in Russia. Brazil experiences an industry output increase of 3.8 percent. India and South Africa also have modest increases like China. Because LCRs require firms to source more domestic inputs for production domestically and most inputs are coming from the heavy vehicle sector itself, this result is in line with our expectations as it expands the activities of the domestic vehicle sector.
Source: ECIPE estimations
However, this increased industry output in the heavy vehicle sector has to be put in perspective. It is natural that industry output that is subject to protection by LCRs increases, but at the same time this increase is outweighed by detrimental side effects. This is especially true for a price effect on the entire economy which has stronger consequences for the overall economy than the industry output gain in one sub-sector. As pointed out in chapter one and shown below, the side effects include negative impacts on the wider economy, consumers and trade. The impact of LCRs should therefore not be analyzed by looking at one particular sector in isolation, but by taking into account also their effects on trade, prices and other sectors.
Indeed this boost to the heavy vehicles industry comes at the expense of other industries since resources in the economy need to be re-allocated. In fact, the expanding heavy vehicles industry needs more labour and capital, which is withdrawn from other sectors. Figure 2.9 shows that especially for some of the closely related sectors, which require similar production factors as the heavy vehicles sector, their output decreases because resources are taken away from their industries. This effect is particularly large in Brazil and Russia. Since both countries have the highest AVEs of 15.6 percent and 11.1 percent respectively, which therefore reduces their imports most, they also experience the biggest expansion of their domestic heavy vehicles industry, which in turn draws away many resources from these other sectors. More specifically, in Brazil and Russia the domestic production of other transport equipment decreases with respectively -0.21 and -0.26 percent and of other machinery with respectively -0.37 and -0.16 percent.
Source: ECIPE estimations
Impacts on Trade
Looking at the impact on trade, the results of our simulation show that LCRs not only reduce the imports in the affected sector, but also the exports of the heavy vehicles sector – although to a lesser extent.
The two countries with the highest estimated AVEs, namely Brazil and Russia, also experience the greatest reduction in their imports and exports of motor vehicles as shown in Figure 2.10. On the one hand, imports in the heavy vehicles sector are significantly reduced due to the LCRs affecting the sector. The reduction of heavy vehicles imports for Brazil is 21 percent and for Russia 12 percent. Based on 2016 trade data this corresponds to approximately 1,731 and 1,121 million USD. For the other countries for which the impact of the LCRs is estimated to be less severe, the drop of imports is also estimated to be lower. In India, China and South Africa the estimated reduction of imports of heavy vehicles ranges between 3.7 percent and 9.3 percent. For China, the absolute value of import drop is, however, considerable with approximately 2,977 million USD.
Furthermore, the LCRs also reduce the BRICS countries’ exports in the heavy vehicles sector, most likely because of the supply chain nature of this sector as well as because these countries become less competitive after implementation of the LCRs. Indeed, before BRICS countries are able to export their heavy vehicles, some of their industry output will be demanded by the domestic industry as they suffer from reduced imports in the first place because of the applied LCRs. In addition, our analysis shows that domestic firms cannot produce as effective anymore because intermediate goods in the sector become more expensive due to the LCRs (see also Figure 2.13 below.)
Source: ECIPE estimations
Again, Figure 2.10 shows that the greatest reduction in exports are found in the two countries with the largest impact of LCRs: Brazil and Russia. In Brazil exports of heavy vehicles are estimated to drop by 4.7 percent and in Russia by 3 percent. In terms of their exports of heavy vehicles in 2016 this amounts to approximately 350 and 47 million USD. For the other BRICS countries exports of heavy vehicles are estimated to drop between 0.9 percent and 1.8 percent. In terms of value, the impact is the highest for China for which the export reduction results in a loss of approximately 770 million USD.
If we look at bilateral trade between the BRICS countries and the European Union, the model estimates illustrate a similar pattern of heavy vehicles trade across the BRICS countries. Figure 2.11 shows the results. EU exports in heavy vehicles are reduced by 18.3 percent and 11.3 percent respectively with Brazil and Russia. Whereas, EU imports from these two countries are estimated to diminish by 4.7 percent and 3.1 percent, respectively. When translating these percentage changes into trade values using the year 2016, EU exports are reduced by 579 million USD to China, by 131 million USD to South Africa, and by 129 million USD to Russia. The total reduction in EU imports of heavy vehicles from BRICs countries amounts to approximately 288 million USD.
Source: ECIPE estimations
Beyond the trade impacts on the heavy vehicles sector itself, our results also show that the LCRs have a negative impact on trade in other sectors as well. More importantly, aggregate trade in terms of both exports and imports is affected in the BRICS countries as shown in Figure 2.12. The largest decrease of total imports is experienced in Brazil and Russia with a reduction of 0.79 percent and 0.18 percent respectively, whereas all countries except Brazil also experience a reduction of their total exports. Even though small, in some cases the reduction in exports is even larger than the drop of imports, which for instance is the case for India and South Africa.
Source: ECIPE estimations
The decrease of trade in other sectors can be explained as well by the fact that the LCRs artificially inflate domestic production in the targeted sector, which also comes at the expense of other sectors, a conclusion which was also drawn by OECD (2016). As previously explained, if LCRs inflate the production in the heavy vehicles sector, other industries have fewer domestic resources left for their production. Since the industries also face higher prices for intermediate goods in the heavy vehicles and related sectors, they become less competitive and as a result are able to export less. For example, in all BRICS countries the passenger cars sector as well as the other transport equipment industry, which are closely linked to the production activities in the heavy vehicles sector, experience a reduction of exports of -2.2 percent and -0.4 percent, respectively.
Impacts on Prices
As explained, the LCRs also have an impact on the prices in the domestic market in the implementing countries. This affects all agents in the economy: the ones that consume heavy vehicles and their input parts and intermediates which are consumers as well as firms. An important point to consider here is that the price increase in this case merely results from import restricting measures by the LCRs, but it does not reflect better quality of goods or technological developments.
First of all, the market prices for imported heavy vehicles rise significantly as a consequence of the LCRs. The price impact for imported heavy vehicles is most significant in Brazil and Russia with an estimated increase of 13.7 percent and 9.7 percent, respectively. These results again reflect the high AVEs in these two countries. Since the impact of LCRs is lower in the heavy vehicles industry in China, India and South Africa, the price for imported heavy vehicles rises in these three countries only between 1.9 percent and 3.8 percent.
Second, these price effects carry on and also affect consumer prices as well as the prices paid by firms in the heavy vehicles industry for final and intermediate goods. Consumer prices for heavy vehicles are estimated to rise between 0.2 percent and 0.6 percent in China, India and South Africa, while they rise up to 2.4 percent and 5.4 percent in Brazil and Russia. Prices for intermediate goods paid by firms in the heavy vehicles sector are estimated to increase most in Russia and Brazil, with respectively a 2.9 percent and 4.8 percent rise. China, India and South Africa experience lower impacts and show a price increase for firms of respectively 0.2 percent, 0.5 percent and 0.7 percent. Again, this price increase for firms has a considerable impact on the competitiveness of the domestic firms operating in the heavy vehicles sector.
Source: ECIPE estimations
 This excludes the category of Rest of World as LCRs for this geographical location are not available for the automotive sector. Therefore, in order for consistent comparison, this category is taken out.
 Annex II outlines which specific HS 6-digit sectors are covered by automotive and heavy vehicles sectors.
 The LCRs are carefully collected in a database of which a link is put in the annex in order to consult online.
 HDVs are defined as freight vehicles of more than 3.5 tonnes (trucks) or passenger transport vehicles of more than 8 seats (buses and coaches). The HDV fleet is very heterogeneous, with vehicles that have different uses and drive cycles. Even trucks are segmented into several categories, including long-haul, regional delivery, urban delivery and construction, taken from http://europa.eu/rapid/press-release_MEMO-14-366_en.htm. For further definition of the Heavy Vehicles sector and their corresponding industry classifications, see Annex II and III.
 In the estimations, only LCRs related to government procurement, investments, financial support and business operations, and market access have been taken into account, while LCRs related to exports and data localization have been taken out in the econometric analysis. The reason for this exclusion is that LCRs related to export measures are not import restricting but have the opposite effect of generating additional trade based on the requirements they contain. The decision of LCRs related to data localization is relatively novel and also seems remote for our sector.
 All calculations of trade values in this chapter are based on trade statistics from WITS/UN Comtrade for 2016 and the selection of HS codes as described in Annex II.