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Diplomatic Considerations for LCRs

Thomas J. Duesterberg

Michael Lind’s essay on local content requirements (LCRs) has an Occam’s Razor -like elegance and plausibility, proposing LCRs as the most effective tool to achieve a broad return of supply chains to the United States. His critique of using subsidies to this end is also compelling. He rightly argues that the use of tariff measures cannot “guarantee” a revival of domestic production, but only incentivize this result. However, his assertions that LCRs are “less diplomatically sensitive” than subsidies or tariffs, that a country invoking them should apply the rule to both allies and adversaries, and that the U.S. should withdraw from any international agreements that limit their use, could engender counterproductive results. As with other measures supporting the goal of reinvigorating domestic production, prudence must be used with LCRs, especially with regard to those that impact allies in an era of weakened, long-standing alliances.

There is scope for narrowly tailored LCRs in national defense, medical security, and some crucial enabling technologies of the future such as quantum computing and telecommunications. But even these sectors ought to be open to some participation by trusted allies. Some products, like steel or medical protective, gear might fall under security imperatives, but a shared priority of close allies, such as those in the “Five Eyes” group, to meet these requirements surely would not endanger the overall goal. The “Five Eyes” have long fostered close collaboration in defense-related technologies and established a track record of reliability. It is possible, too, that close allies like Japan could be added to a circle of trusted allies.

The European Union is a slightly different matter. As an economic superpower, it is not easily convinced by the seemingly obvious choice to work with the U.S. on common problems like addressing the existential economic threat from China or even crafting a common approach to the COVID-19 outbreak. These issues, along with the frequent disdain of the Trump administration for cooperation, has instead led the European Commission, spurred by France and Germany, to propose subsidizing its own national champions in both traditional manufacturing and high technology sectors of the future and using LCRs to promote local producers. The European Union also seems intent on the localization of data storage to protect privacy. If U.S. businesses are not allowed to easily access the huge caches of data gathered in their European operations (and China is already employing data localization), Europe is at a major disadvantage to its longer-term development of artificial intelligence and the Internet of Things. Broad deployment of LCRs in the U.S. will spur Europe to expand further its own industrial policies.

If the U.S. were to expand the scope of LCRs beyond those allowed in negotiated agreements (e.g., WTO, regional agreements, and bilateral free-trade agreements) or by compelling security considerations it would also limit the ability of U.S. firms to access many markets as countries match the U.S. efforts. It would also undermine most U.S. attempts to build coalitions to take on the Chinese economic juggernaut. The evidence to date on the Trump administration’s confrontation with China is that this mercantilist power will not yield to bilateral pressure to modify the structure of its economy in a permanent way. I believe that only a broader coalition of non-mercantilist powers is likely to achieve this goal. Access to what is soon to become the world’s largest single economy is already eroding, and China has been able to gain market share in places like Europe, in part due to unease about unilateral U.S. actions.

Lind is right to argue that “selective strategic reshoring, not complete autarchy, should be the goal of LCRs.” But without limiting their use and working toward more cooperation with like-minded allies, however difficult that cooperation is to achieve, I fear the world will tilt in the direction of economic autarchy.

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