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They produce and export goods exploiting their comparative advantage and import other goods and services. The long-living myth that ‘preferences for local produсers will lead to economic growth’Ĭountries trade because they specialize in the areas where they have a comparative advantage. Thus, although some producers would benefit, the overall effect of the localization bill would harm producers in sectors that use imported transport and equipment, which in turn would have a negative effect on consumers. The gravity model of trade is consistent with all trade models that are used to explain trade patterns (see Head and Mayer, 2014). local content requirement) on trade flows between Ukraine and its trading partners. The analysis is based on the gravity model of trade, which accounts for direct and indirect effect of the increase in trade barriers (i.e. We estimated the economic effect of the proposed measures and found it to be negative.

To settle the argument requires careful empirical investigation. Proponents of localization say that in this way they support domestic producers in the spirit of the well-known slogan “Buy Ukrainian!” Opponents of such protectionism believe that it reduces productivity, promotes corruption and contradicts Ukraine’s commitments to the EU of non-discrimination against foreign producers in the public procurement. Proponents of the bill argue that imposing such measures would create incentives for foreign manufacturers to invest in Ukraine, by building new plants or acquiring existing ones, in order to localize their products to be able to participate in Ukrainian tenders or to cooperate more with local producers. (2015) demonstrated that one-quarter of Hungarian productivity growth during the 1993-2002 period was due to trade liberalization and reduced tariffs on the imported inputs. Khandelwal & Topalova, 2011 confirmed this finding for Indian firms, while Halpern et al. Kasahara and Rodrigue (2008) found even greater effect for Chilean companies. Studying Indonesian firms, they showed that 10% increase in tariffs leads to 12% reduction in productivity. Amiti and Koenings (2007) disentangle the effect of trade liberalization on productivity into output competition vs. An extensive literature shows that the purchase of imported intermediate and capital goods is an essential mechanism for increase in the total factor productivity (TFP). There is overwhelming evidence in the research and policy literature that limiting access to imported products, especially in machine building and transport, has a strong negative effect on productivity in all sectors that use such products and equipment.

Therefore, we can consider this measure as an example of a non-tariff barrier which limits access to Ukrainian markets. By limiting choice of suppliers, localization reduces imports. Import restrictions, such as import tariffs and non-tariff barriers, make imported products more expensive, or, in case of import quotas or prohibitive tariffs, ban them altogether. Supporters of this initiative are convinced that as a result of the bill implementation, the GDP growth would increase by 3.9 percentage points in the medium run (this figure is provided in the explanatory note to the bill, but there are no calculations presented that would back up this number except for the reference to the Global Trade Analysis Project, a model used for the evaluation).įrom the economic perspective, localization requirements work similarly to import restrictions. The draft law authors propose to ban the purchase of 88 groups of engineering products via Prozorro if they do not have localization at the 25-40% level. Two hundred forty-eight deputies supported this decision.Īccording to the explanatory note, the purpose of the Bill is to change the public procurement rules to promote domestic industries’ development and increase the number of entrepreneurs. On the 21st of July 2020, the draft law 3739 on localization in the public procurement of railway transport, urban passenger transport, municipal vehicles and special equipment, electrical machinery (transformers) was adopted by Verkhovna Rada in the first reading. However, our calculation shows that the overall effect of this draft law implementation on GDP growth will be minus 0.58 percentage points each year.

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