This article is part of a Synergies series on Next generation trade arrangements for environment and sustainable development. Any views and opinions expressed are those of the author(s).

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In this note “local content requirements” (LCRs) are defined broadly as provisions in instruments that favour locally produced goods or services. LCRs have returned to the centre of trade and industrial policy as governments increasingly evaluate economic policy not only by the price of goods, but also by where production takes place, who benefits from investment, and whether economic transformation creates domestic employment and productive capacity. It is public knowledge that many countries use various forms of LCRs in national or transnational trade programmes. LCRs are intertwined with sensitive social issues: fears of losing jobs, other vulnerabilities, and even (economic) security. Climate change, supply chain disruptions, energy security concerns, and geopolitical competition have reinforced interest in industrial policies aimed at strengthening domestic productive capacity and supply chain resilience. In renewable energy industries, for example, localization is driven both by the wish to create domestic jobs and capture more value from the transition and by concerns about strategic dependence, integrating employment into sustainable development choices. 

Economists and trade experts traditionally criticize LCRs because they could distort resource allocation—thus affecting economic efficiency—as they can force firms to buy from domestic producers even where foreign suppliers are cheaper or better, raise the cost of final goods or services, insulate domestic producers from competition and reduce incentives to improve productivity and innovate, and encourage a proliferation of similar measures abroad.

Certain GATT/WTO provisions, including GATT Article III:4, TRIMs Article 2 and its Illustrative List, and SCM Article 3.1(b), restrict LCRs. And WTO case law is categorical: LCRs of many sorts are generally WTO-inconsistent. But there are paradoxes in international trade with LCRs. Claims against LCRs have generally succeeded in WTO dispute settlement—Article XX justifications, when attempted, have been strongly rejected. However, in its first report, US – Gasoline, the Appellate Body made clear that Article XX, if respected, can justify measures inconsistent with any GATT provisions. Also, many regional trade agreements (RTAs) preserve, directly or indirectly, policy space for some local content or localization measures. Why are similar considerations not acceptable under WTO articles XX (General Exceptions) or XXIV (RTAs), XIX (Safeguards), or XXI (Security), especially if their goal is to enhance activities supporting sustainable development?

Of note, the G-90 coalition has proposed allowing developing members temporarily to deviate from TRIMs Article 2, notwithstanding GATT articles III and XI, for an initial period of up to 15 years or until the relevant development objective is achieved, whichever is shorter. The proposed flexibility covers measures pursuing objectives including industrialization, technology transfer, SME upgrading, sustainable development, and closing the digital divide. 

Article XX Inaccessibility Paradox

The recent dispute between China and Türkiye in Türkiye – Electric Vehicles (DS629) illustrates the difficulty of justifying measures favouring domestic productive capacity under Article XX, although the measure was not a classic local input requirement and one of the objectives of the measure was clearly environmental as green cars exist for the environment. China challenged (i) additional customs duties, found inconsistent with GATT Article II:1 for electric vehicles (EVs) and certain hybrid vehicles, and (ii) an import permit licensing scheme (IPLS), found discriminatory under Article III:4. Türkiye defended the additional duties under articles XX(b) and XX(g), and the IPLS under Article XX(d). Under Article XX(b), Türkiye argued that protecting its domestic EV industry would sustain investment in charging infrastructure and prevent an “infrastructure bottleneck” that could impede EV adoption and increase transport CO2 emissions. The panel rejected the argument on the evidence, finding the alleged risk hypothetical: the charging infrastructure was not inadequate and more than 70% of investment came from companies other than the three largest operators. It also questioned, without deciding, whether import competition could constitute the first link in such a causal chain where the imports were the “very same products” Türkiye wanted consumers to purchase to reduce CO2 emissions. Türkiye’s separate argument that import dependence created supply chain vulnerabilities also failed because the alleged risks were considered hypothetical; the panel further doubted whether import dependence itself could constitute a risk under Article XX(b). Under Article XX(g), the panel found no “close and genuine relationship of ends and means” between the duties and the objective of reducing CO2 emissions in the transport sector. Although it did not need to examine the requirement of corresponding restrictions on domestic production or consumption, it observed that Türkiye had identified none. Türkiye’s Article XX(d) defence of the IPLS also failed because it had not demonstrated that the requirements were taken to secure compliance with the relevant domestic laws.

The panel found discriminatory the requirement that affected foreign importers own the requisite service stations, particularly because the law in Türkiye permitted producers or importers to use existing service stations or service organizations. A less discriminatory alternative could have allowed foreign firms to use accredited local repair networks, together with technical documentation sharing, software diagnostic tool access, and EV Maintenance and Repair Technician training. As suggested later in this note , Türkiye could also have argued that LCRs designed as part of a technology transfer scheme serve development, education, training, and technology transfer objectives that other alternatives may not achieve to the same extent.

Is it possible to demonstrate a real risk to the environment when imported products comply with the environmental policy goal invoked by the importing country? Importantly, the panel did not reject, in principle, the possibility of an environmental causal chain between the import restriction and the environmental and health policy goal. But such an argument would need to demonstrate, through objective evidence, a real, specific, and non-hypothetical risk to human, animal, or plant life or health. The “causal chain” should include intermediate industrial steps, and the environmental connection of each should be demonstrated, as indicated by the Appellate Body when it addressed Brazil’s demonstration of its ends and means (see Brazil – Retreaded Tyres (DS332; AB-2007-4))

The responding member would need to show, for example, concrete supply chain vulnerabilities capable of impeding infrastructure rollout or a demonstrably distinctive role for domestic producers in building the required infrastructure. 

But is the right to regulate for the protection of the environment not covered by Article XX environmental policy space? Can this right imply LCRs? I want to believe so. In Campus Oil (Case 72/83, 1984), the European Court of Justice accepted that requiring petroleum importers to purchase part of their requirements from an Irish refinery could be justified on public security grounds to preserve domestic refining capacity in the event of a supply crisis. In certain circumstances, and when considering strategic dependence or supply chain vulnerability, it is possible to demonstrate a real risk to the environment when imported products comply with the environmental policy goal invoked by the importing country? It all depends on the categorization and policy defences in the WTO. We start from the premise that the right to protect the environment, national employment, and social peace must be taken into account in trade assessments. But where should these be addressed in the WTO legal system? Are those issues a risk to the economic security of the concerned country? If there is no “economic security” justification in WTO law, is the invocation of a formal security exception the only possibility to invoke the right to maintain national sustainable economic development and social cohesion? Is this concept part of economic security? But the issue of “economic security,” which lies between GATT articles XIX, XX, XXI, and XXIV, does not land easily in the wording of the GATT. Others believe that increases in bound tariffs is the best way to deal with economic security and this is essentially a matter of renegotiations under GATT articles II and XXVIII.  Mavroidis suggests that we explore the coverage of GATT Article XX(a), with “public morals” to include social peace and economic security. 

If, to date, the GATT appears to include only a “pure” security exception (and no economic security exception), then Article XX must be interpreted and applied to allow the consideration of fundamental rights, such as the protection of the environment and employment. If economic security cannot be covered by Article XX, then Article XXI (Security) may need to be interpreted differently so as to allow for the consideration of whether climate, LCRs, or employment can constitute an “emergency in international relations,” under Article XXI(b)(iii), capable of giving rise to dangers as serious as defence or military actions. In my view, Article XX justifications should include matters such as climate, LCRs, and employment—limiting the use of the pure security exception. But until the issue of “economic security” and its scope are clarified, justifications for LCRs or climate restrictions in the WTO will continue to balance between articles XX and XXI. Dealing with economic security will allow governments to find a balance between overly strict criteria constraining its use and the unilateral recourse to Article XXI on security. 

The Free Trade Agreements Paradox 

Many free trade agreements (FTAs) include various types of LCR provisions. For example, many modern investment chapters contain a performance requirements (PR) article, listing specific prohibited conditions: domestic content percentages, local purchase preferences, export requirements, technology transfer requirements, and similar conditions attached to an investment. A measure is subject to the PR prohibition only if it falls within one of these listed categories. If it does not—for example because it is a prudential or data protection requirement rather than a domestic content or local purchase requirement—then the PR prohibition does not apply, and no PR exception in the RTA is needed.

In a negative-list FTA, the relevant obligations apply across the sectors and activities within their scope unless a party has scheduled a reservation. A party preserves specified measures or policy space by listing them in a Non-Conforming Measures (NCM) Annex—e.g. Annex I for existing measures and Annex II for reserved future policy space. Australia's audiovisual local content quotas are listed this way. The United States-Mexico-Canada Agreement’s (USMCA) own Annex I expressly lists “Performance Requirements (Article 14.10)” among the obligations from which scheduled measures are reserved, confirming that NCM reservations can disapply the PR obligation specifically. Another approach is USMCA Article 14.10.3(c) which provides that certain specified prohibitions, including those on domestic content and local purchase requirements, do not prevent measures necessary for compliance, health protection, or conservation of natural resources. 

The parties to some FTAs incorporate GATT Article XX into their investment and trade chapters because they want to authorize LCRs. Local content measures falling within the relevant obligations could therefore be justified under the incorporated Article XX-type exceptions. Article 28.3 of the EU-Canada Comprehensive Economic and Trade Agreement (CETA) does this for specified investment obligations, alongside other exceptions covering matters including security, health, and data privacy protection. There are FTA mechanisms that do not use Article XX at all. For example, the African Continental Free Trade Area (AfCFTA) Investment Protocol states that State Parties may introduce measures promoting domestic development, including local content: a stated permitted policy, not an exception to a prohibition.

In sum, these mechanisms show that in some FTAs, parties preserve policy space for selected LCRs in the form of performance requirements or localization measures for example. What significance should this FTA practice should have under WTO law? In Türkiye – Electric Vehicles, the panel found that Article XXIV could justify the Article I:1 inconsistency arising from the preferential treatment of Türkiye’s RTA partners. As regards the IPLS (including LCRs), Türkiye defended the Article III:4 inconsistency only under Article XX(d). Article XXIV was not used to justify the Article III:4 inconsistency arising from the IPLS. Whether Article XXIV could justify such an inconsistency therefore remains untested. Of note, in Turkey – Textiles (WT/DS 34) the Appellate Body stated that Article XXIV “may justify a measure which is inconsistent with certain other GATT provisions.” This leaves unanswered the question of when a violation of Article III:4 can be justified as a necessary measure under article XXIV.

More broadly, if some FTA treaties preserve carefully constrained and circumscribed policy space for some local content or localization measures, why is comparable policy space so difficult to obtain through Article XX? And why can the logic and policy benefits that governments seek to preserve through such FTA provisions so rarely find justification under Article XX?

Three additional routes and policy mechanisms could be explored to allow countries to make use of LCRs: using schedules and negotiation or renegotiations; an economic security or development safeguard mechanism; and regulatory skills diffusion and “technology transfer credit.”

Using Schedules and Negotiation or Renegotiations

Simon Lester argues that rather than contorting Article XX exceptions, members seeking to protect nascent clean-tech sectors should use Article XXVIII to renegotiate bound tariff schedules and offer compensatory tariff adjustments on other products. Lester’s suggestion could also apply beyond the clean-tech industry.

In my last note, I discussed how governments should, in my view, make more use of schedules. They allow for partial/divided commitments and can incorporate conditions, qualifications, transition periods, and other adaptations to different situations. As recognized in US – Sugar and subsequently confirmed in EC – Bananas III and EC – Export Subsidies on Sugar, merely inscribing an LCR in a goods schedule would not by itself displace Article III:4 and make it WTO-consistent. So a justification would need to exist for those scheduled LCRs; but if part of a negotiation, different justifications could be discussed and eventually agreed and scheduled. Schedules could record specific LCR flexibilities, adapted to circumstances, with relevant conditions, and for determined periods. WTO practice already uses schedules to accommodate differentiated commitments, most notably under the GATS, where national treatment commitments apply subject to the conditions and qualifications inscribed in each member’s schedule. 

If WTO members were to agree on limited LCR policy space, under articles XVIII, XIX, XX, XXIV, (or another new mechanism), schedules could provide a useful instrument to initiate negotiations (and eventually record commitments) on the scope and duration of specific LCRs. These commitments could include related conditions, such as investment in innovation by firms and governments, actions on government corruption, and with transparency, monitoring, and review mechanisms by the membership. For example, in the steel and aluminium sector, members could agree on LCR levels, duration, and process that are considered acceptable.

An Economic Security or Development Safeguard Mechanism

Mona Paulsen’s Economic Security Safeguard (ESS) would replace strict injury/causation tests with a safeguard architecture based on shared risk assessment, forward-looking strategic foresight, and corrective action plans. A related development-oriented route exists in GATT Article XVIII. Trachtman, building on Hudec, describes Article XVIII as a possible “development safeguard,” noting that Article XIX requires increased imports, causation, and serious injury or threat thereof, and does not readily lend itself to infant industry protection. He suggests reinvigorating Article XVIII through careful, independent, and depoliticized assessment of whether temporary derogations genuinely respond to development needs.

TRIMs Article 4 allows developing country members temporarily to depart from Article 2 where GATT Article XVIII permits departure from articles III and XI. Article XVIII:C is also specifically concerned with measures for the establishment of particular industries. The question is therefore whether this existing development flexibility could be made more usable for carefully defined industrial development measures, including temporary effective LCRs.

The current safeguards of Article XIX (and the Safeguard Agreement), or GATT Article XVIII, or a new instrument, could consider the risk of disappearance of concerned national industry as nullification of benefits as a basis for temporary protection. During the period of “adjustment,” LCRs could be temporarily acceptable under certain conditions. To avoid subjective assessments of whether an industry has become sufficiently mature, any LCR flexibility should be subject to enhanced transparency, sunset periods, progressive liberalization, reporting, and WTO monitoring and review. These disciplines would make the protection temporary and transparent while requiring domestic firms to use the protected period for genuine adjustment and capacity building.

Regulatory Skills Diffusion and “Technology Transfer Credit”

Foreign enterprises do not seem to find many incentives in technology transfer in general, and in developing countries in particular. Are governments providing sufficient, or the appropriate, incentives to firms for them to transfer technology? Were fiscal incentives explored? We suggest that TRIPS Article 66.2 could be operationalized via and together with LCRs. TRIPS Article 66.2, which today applies only to least developed country members, could provide a basis for a broader mechanism applicable to more members to include certain other developing countries. 

What if, to compensate for the lack of incentives for developed country firms to transfer technology, flexibilities in local content for developing countries—with local training and innovation stimulus—become part of a transfer of technology development programme? Under a Technology Transfer Credit Swap, for example, a developing country could implement a local content/value addition policy in a strategic sector subject to certain conditions: the policy would be time bound with a sunset review; it would require an investment strategy on the part of governments and firms; and foreign enterprises would contribute to technology transfer by providing authentic technical training, diagnostic know-how, and supplier upgrading to local firms. In return, the home government of the foreign enterprise would receive formal WTO compliance “credit” towards its TRIPS Article 66.2 technology transfer obligations. Categorizing and comparing LCRs versus technology transfer actions would be challenging; but the mechanism would seek to rebalance and share the incentives between foreign enterprises and local firms and producers, while involving concerned developed and developing countries.

This note calls for a discussion on LCRs and the central policy dilemma of accommodating legitimate needs for industrial capacity building, structural transformation, legitimate protection, and green transition without opening the door to unconstrained protectionism. It examines whether LCRs can be justified under Article XX, their treatment in FTAs and under Article XXIV, and whether properly designed LCRs can support economic security, development, and national or regional capacities. It also explores schedules, economic security and development safeguards, and a technology transfer mechanism linked to time-bound LCR flexibility. 

Simon Lester points to the important tension in the use of LCRs: while they may help generate political support for clean energy subsidies, they can also undermine the impact of those subsidies in promoting clean energy. That tension raises the question of whether and when and under which conditions LCRs can preserve the political and developmental benefits governments seek though their use, while limiting the inefficiencies associated with prolonged protection.

The economic case against LCRs is strong in a simple comparative advantage model, but becomes more complicated once industrialization, employment, technology transfer, learning effects, and strategic supply chains are considered. The key distinction seems to be between protecting an inefficient activity and creating a positive externality. Where local production generates benefits the market does not capture (for example technology spillovers, learning-by-doing, employment in depressed regions, supply-chain resilience), there may be an economic justification for intervention. LCRs are not only a developing country issue, as illustrated by the US Inflation Reduction Act.

Tim Meyer’s Channelling Paradigm recognizes that domestic policies frequently involve “mixed motives” resulting from political coalitions between public interest advocates (e.g. environmentalists) and industries seeking economic protection. Existing approaches to WTO exceptions may unduly constrain such mixed-motive policies where economic protection forms part of the measure. If LCRs can bring support and participation in the multilateral trading system, that system needs to take it into account in assessing its chosen balance of policies. So, can we suggest that some LCRs resulting from those mixed motives may, in some situations, be WTO acceptable?

It is not clear whether tariffs are more effective than LCRs in protecting domestic productive capacity or employment. Tariffs may be more transparent, but LCRs could themselves be made more transparent through appropriate conditions, monitoring, and review. There is, however, evidence that LCRs can contribute to the creation and development of domestic input and related industries. More broadly, LCRs seem to be able to promote economic security legitimate concerns: international interdependence can create vulnerabilities when supplies of essential goods, technologies, or industrial inputs are highly concentrated or susceptible to geopolitical disruption. LCRs may help address those vulnerabilities by creating demand for domestic production, preserving industrial capabilities, and supporting technological learning. Employment is a fundamental component of social cohesion and sustainable development. In the 2022 and 2024 ministerial declarations, governments reiterated their WTO commitment to sustainable development in its social, environmental, and economic components. LCRs, if properly designed and monitored, can assist the social and environmental dimension of sustainable development.

But at the same time, in order to be effective, and not harm the concerned national economies, LCRs need to form part of a broader policy strategy involving innovation, transition programmes, appropriate regulation, and monitoring. Foreign and domestic firms benefitting from LCRs should commit to relevant investments and actions. 

Have the risks of non-resilience and competitive differences been sufficiently balanced when assessing justification efforts for LCRs? This note suggests that carefully designed and constrained LCRs could be acceptable under the WTO system. For example: a newly inspired Article XX exception; a reinvigorated Article XVIII development safeguard or a newly negotiated economic security safeguard; schedules recording agreed LCR policy space, scope, duration, and conditions; and mechanisms linking technology transfer, development, and local content, such as the proposed Technology Transfer Credit Swap. Together, these possibilities strengthen the case for a WTO capable of accommodating disciplined and temporary policy space for local development, while ensuring that any LCR flexibility remains appropriately constrained, transparent, and monitored.

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Gabrielle Marceau is Honorary Professor (Emr), University of Geneva; Visiting Professor, University of Ottawa; and Associate Professor, Laval University, Québec.

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Synergies is an online platform featuring expert commentary and opinions curated by TESS. We foster dialogue and incubate ideas on how to shape a global trading system that effectively addresses global environmental crises and advances sustainable development. Synergies draws on perspectives from leading experts and practitioners across policy communities from around the world. We cultivate solutions-oriented policy analysis for a sustainable future.

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