The high cost of protecting Uruguay's automotive industry
Takacs, Wendy E.
Domestic content requirements are regulations that mandate minimum percentages of domestic value-added, or domestic components for products sold within the country, or provide strong incentives to substitute domestic for imported inputs. The author developed a model to investigate the distortions, costs, and transfers among groups caused by the combination of domestic content and compensatory export requirements. This model was applied to the protection scheme for Uruguay's automobile industry. The author found that the protective regime keeps vehicle prices and domestic production costs high and transfers large sums to special interest groups. Higher finished vehicle prices encourage more output from domestic assembly operations, but domestic content and compensatory export requirements discourage domestic assembly. The net effect could either encourage or discourage domestic assembly operations, depending on the net impact of the regulations. Trade in this industry should be liberalized. Care should be taken not to inadvertently increase effective protection of the assembly industry by, for example, phasing out domestic content and compensatory export requirements on kits faster than those on finished autos, thus temporarily encouraging domestic assembly.
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