Local content regulations have long been a device used by developing countries to force multinational companies to increase the rate at which they transfer technology and employment to their local operations. With respect to automobiles, these regulations typically require that a certain percentage of a vehicle's content be produced in the country of sale. This percentage may be defined by value or by weight. Weight is generally thought to be a stricter criterion because it is not susceptible to manipulation by transfer pricing. Yet it can lead to only low-technology, high-weight items being produced locally (e.g., steel castings and chassis components).
Although simple in concept, local content regulations can often be quite complicated in practice. The treatment of overhead and profit is often a problem. Some countries apply the regulations on the basis of fleet averaging, others to specific models. Mexico, where at least 50 percent of the value of all cars sold must be produced locally, strengthened its regulations by also requiring that the value of all component imports must be matched by component exports for each assembler. This led to a flurry of investments by Chrysler and Ford in engine facilities in Mexico.
Until recently, Spain had a 95 percent domestic content rule. All component imports were assessed a 30 percent customs duty, and 50 percent of all local manufacturing operations had to be Spanish owned. All this was changed in the 1975 negotiations between the Spanish government and Ford over Ford's "Bobcat" (or "Fiesta") project in Valencia. Contemplating the attractive prospect of a plant producing 225,000 cars annually, the Spanish government settled for 100 percent Ford ownership, 75 percent Spanish content, and 5 percent import duty on component parts. Concessions on import duty were also granted for machine tools and equipment unavailable in Spain. But two thirds of automobile production had to be exported from Spain, and Ford's sales in Spain could not exceed 10 percent of the previous year's total Spanish market size. General Motors arranged a similar deal for a plant in Zaragoza, Spain, producing 280,000 small "S cars" ("Corsas") annually. Spanish accession to the EEC would phase out much of its protective legislation.
[In mid-1983 ] local content regulations did not exist in any EEC or European Free Trade Association (EFTA) country except Portugal and Ireland. (The European Community's trade regime did have a scheme for defining local assembly with the EFTA countries for the purpose of trade classification-60 percent of value added had to be locally produced.) Nevertheless, there was a variety of statutory powers in the EEC and the General Agreement on Tariffs and Trade (GATT) that could protect specific industries. For example, Regulation No. 926 of the EEC allowed for the protection of specific industries and could be triggered by the Commission of the EEC after advice from the Council of Ministers.
At the GATT level, any member country could ask for temporary protection from imports from another member (under Articles 19-2 3) if those imports severely endangered national industry. These "escape clause" articles were difficult for EEC countries to use, however, because each country delegated responsibility for all trade negotiations to the EEC Commission in Brussels. Thus the European automobile industry would have to coordinate campaigns in a number of EEC member countries before it could approach the EEC Commission. Even then, there was no guarantee that the Commission would agree to take a case to the GATT. Not surprisingly, existing import restrictions were essentially bilateral diplomatic agreements-varyingwide1y from country to country-rather than statutory enactments.
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