Local Content Requirements and Their Economic Effect On Shipbuilding

LOCAL CONTENT
REQUIREMENTS
AND THEIR ECONOMIC
EFFECT ON
SHIPBUILDING
A QUANTITATIVE ASSESSMENT
OECD SCIENCE, TECHNOLOGY

AND INDUSTRY
POLICY PAPERS
April 2019 No. 69
2 │LOCAL CONTENT REQUIREMENTS AND THEIR ECONOMIC EFFECT ON SHIPBUILDING
OECD DIRECTORATE FOR SCIENCE, TECHNOLOGY AND INNOVATION
This paper was approved and declassified by written procedure by the Council Working Party 6 on
Shipbuilding (WP6) on 30 November 2018 and prepared for publication by the OECD Secretariat.
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OECD SCIENCE, TECHNOLOGY AND INDUSTRY POLICY PAPERS

LOCAL CONTENT REQUIREMENTS AND THEIR ECONOMIC EFFECT ON SHIPBUILDING│ 3
Table of contents
Executive Summary .............................................................................................................................. 5

1. Introduction ....................................................................................................................................... 7
2. Estimated Economic Effects of Local Content Requirements ..................................................... 10
2.1. Brazil's Offshore Oil and Gas Sector Programme ...................................................................... 10
2.2. US Jones Act - Section 27 of the Merchant Marine Act 1920 .................................................... 16
3. Final remarks ................................................................................................................................... 24
References ............................................................................................................................................ 25
Annex A. Details about the US Jones Act.......................................................................................... 29
Annex B. Ships produced in the US during 2016.............................................................................. 31
Annex C. Estimation of output value of US commercial shipbuilding industry ............................ 32
Annex D. Sensitivity analysis .............................................................................................................. 34
Annex E. Brazil’s Local Content Shares ........................................................................................... 36
Endnotes ............................................................................................................................................... 39
Tables
Table 1. New requirements on oil and gas concessions ........................................................................ 11

Table 2. Simulation results for Brazil.................................................................................................... 15
Table 3. Estimation results .................................................................................................................... 23
Table A B.1. Ships produced in the US during 2016 ............................................................................ 31

Table A C.1. Newbuilding prices per cgt .............................................................................................. 32
Table A C.2. Production of US ships in 2016 ....................................................................................... 33
Table A D.1. Sensitivity of results to assumption on demand elasticity ............................................... 35
Table A E.1. Brazil’s local content shares by sector – original and new .............................................. 36
Figures
Figure 1. Effect of Brazil’s Local Content Reform on Economic Outcomes ........................................ 12

Figure 2. Shipbuilding value added over final output ........................................................................... 19
Figure 3. Overview of simulation assumptions ..................................................................................... 21
Figure A A.1. Built in the US criteria ................................................................................................... 30

Figure A C.1. Indicative production plan .............................................................................................. 33
Boxes
Box 1. Brazil’s oil sector ....................................................................................................................... 11

Box 2. Brazil’s aircraft industry – how openness to trade matters ........................................................ 14
Box 3. International competition and productivity ................................................................................ 18

LOCAL CONTENT REQUIREMENTS AND THEIR ECONOMIC EFFECT ON

SHIPBUILDING – A QUANTITATIVE ASSESSMENT
Karin Gourdon and Joaquim J. M. Guilhoto
This study quantifies the significant economic gains that are expected to be revealed
through the abolition or relaxation of local content based policies. The work analyses two
specific local content policies affecting directly or indirectly the shipbuilding industry in
two countries: Brazil’s local content requirement as part of national concession contracts
in the oil and gas sector, and the long-standing US Jones Act obliging intra-US seaborne
trade to be conducted on US built and US flagged vessels. The paper’s static simulation
exploits OECD’s latest Trade-in-Value-Added (TiVA) data – a rich database on Inter-
Country Input-Output relationships. The database has been disaggregated to the level of
the shipbuilding industry, enabling an assessment of the effect of the two selected policies
on inter-industry trade. The simulation results suggest large economic benefits for both
countries in the long-term despite initial losses in the target industry.
The study was authored by Karin Gourdon from the Structural Policy Division (SPD) at
the OECD Directorate for Science, Technology and Innovation (STI). The simulation was
conducted by Joaquim J. M. Guilhoto (OECD/STI). Ali Alsamawi, Joaquim J. M. Guilhoto
and Norihiko Yamano (OECD/STI) created the database at a very detailed industry-level,
which was essential for a simulation at the level of the shipbuilding industry. Laurent
Daniel (OECD/STI) and Nick Johnstone (OECD/STI) contributed with essential insights
and suggestions, and supervised the project. The paper has also benefitted from helpful
suggestions and feedback from Sarah Box and Dirk Pilat (OECD/STI). Christian Steidl
(OECD/STI) provided research support at the initial stages of the project.
Keywords: Local content requirements, trade restrictions, international trade, input-output

models, shipbuilding
JEL Codes: F10, C67, R15

Executive Summary
Local content requirements (LCRs) are prominent government policy instruments in both
developed and developing countries. While LCRs may help governments to achieve certain
short-term goals, such as to meet employment, industrial or technological development
objectives, in the long-term they can be counter-productive insofar as they have been shown
to generate indirect costs in the economy.
Amongst others, the shipbuilding industry is currently confronted with two major policies
with significant elements of local content requirements in Brazil and the United States
(US). While there have been some recent reforms to Brazil’s local content regulation in its
oil and gas sector, there are no reforms expected to the long-standing US Jones Act.
Empirical results about the effect of LCRs on the shipbuilding sector are rather scarce. As
such the estimates of the economic impact for these two examples are particularly valuable.
The rich infrastructure of OECD’s Inter-Country Input-Output data used for this study
allows a simulation based on a static model of the Brazilian and US policies’ effects on
their domestic shipbuilding industries, and on other sectors in their economies. The
simulation results suggest large benefits following the proposed relaxation and hypothetical
abolition of the LCRs in the two countries despite initial losses in the target industry.
Brazil stands to reap significant economic gains from reforms
With the recent amendments in Brazil’s local content regulation in its oil and gas sector,
the country has the opportunity to generate in the long-term large economic gains which
may more than offset the estimated short-term losses of around USD 2.4 billion (-0.1%) in
total output. These gains can materialise through three channels.
First, the opportunity to source from foreign markets may lead to reduced prices, increased
productivity and a rise in new demand. In particular, in the oil and gas sector an increase
in final demand of USD 1 billion (in total output of USD 1.03 billion representing 2.2% of
total output in the oil and gas sector) would stimulate Brazil’s total economic output by an
additional USD 1.8 billion (+0.06%) resulting in an increase in value added of USD 0.5
billion in the sector itself, and of USD 0.9 billion for the total economy. To put these
numbers into perspective: an increase of only 0.03% in the oil production volume in 2017
at a conventional price of USD 60 per barrel would already offset the short-term losses.
The National Agency of Petroleum, Natural Gas and Biofuels (ANP) expects an increase
in oil production of, on average, 40% compared to the levels of 2017.
Second, the policy reform is estimated to lead to an additional USD 28 billion in royalties
collected by the government until 2027 (USD 2.8 billion per year). Hence, increased
government income could propagate throughout the economy in the form of increased
government expenditures (if not used to repay debt). The results show that an increase of
USD 1 billion in government spending would trigger off an increase in Brazil’s total output
of USD 1.4 billion and an increase in Brazil’s value added of USD 0.9 billion. In other
words, government spending of USD 1.7 billion (60% of collected annual royalties) could
already compensate for the short-term losses. Against the background of Brazil’s high
government spending relative to its income (-6% in fiscal balance in 2014) the royalties
would be beneficial to the government either in the form of investments or debt repayments.
Third, the ANP expects a total of 95 000 new shipyard positions as a result of the amended
local content policy. Assuming newly created worker positions in the shipbuilding industry

as a result of the LCR reform rather than labour flows from other sectors of the economy,
the increase in disposable income would fuel private consumption and thereby increase
Brazil’s total output and value added in the long-run. The results imply that with an increase
of USD 1 billion in household expenditures, Brazil’s total output would increase by USD
1.6 billion (+0.001%) and its value added by USD 0.9 billion (+0.0003%). With the newly
created jobs, Brazil could expect an increase in household consumption of around USD
1.76 billion, thereby outweighing the short-term losses through this third channel.
Overall, the simulations suggest that Brazil is heading in the right direction by opening up
its national oil and gas sector to foreign players. Despite certain short-term losses, the long-
term benefits are evident for the total economy in general and for different sectors in
particular. Among others, the oil and gas sector along with the shipbuilding industry would
have the opportunity to benefit from a more outward-focused economic environment,
which has been shown to stimulate industrial development and economic growth.
The US shipbuilding industry holds unrealised potential
The simulations suggest that a hypothetical repeal of the Jones Act, thereby opening up the
US shipbuilding industry, would require shipbuilders to reduce vessel prices by at least
50% to converge to international levels in order to remain competitive. This adjustment
process can either be stimulated through productivity gains and/or cost reductions as a
result of shifts in sourcing patterns away from domestic to foreign markets. In turn, a
decline in ship prices would not only stimulate new demand for US vessels, but would also
result in the long-term in cheaper transportation services for intra-US trade. The estimation
results reveal large benefits for the US economy in total, the shipbuilding industry in
particular, as well as other US industries. The US commercial shipbuilding industry has the
potential to increase its final demand by around 70%, from around USD 841 million to
USD 1.43 billion. Despite the repeal of the Jones Act, the model’s static results suggest
that the domestic US commercial shipbuilding industry would benefit from an increase in
value added of around USD 44 million (+10% from previous USD 412 million).
Beyond the shipbuilding sector itself, the beneficial effects on the US economy are largely
a result of the increase in industrial activity in other US sectors benefitting from reduced
water transportation costs for intra-US trade. Depending on the scenario assumed, these US
industries could generate at least additional final demand of around USD 22 billion
(+0.11%), and further output of approximately USD 40 billion (+0.13%), which represent
respectively more than 37 and 65 times the original US commercial shipbuilding industry
prior to the Act’s removal. The removal may furthermore generate additional domestic
value added in other US industries. Those can expect an increase of about USD 19 billion
(+0.11%), equivalent to 439 times the volume generated in the commercial US shipbuilding
industry under the Jones Act. The dimensions are extreme, simply by virtue of comparing
US industries of immense size that produce goods and services for the domestic market
with the usage of water transport services, with the US commercial shipbuilding industry
which represents only a small fraction of the US economy.
From an economic perspective, the Act evidently creates large cost inefficiencies by
protecting the shipbuilding industry – a tiny economic sector in the US – at the expense of
other US industries with enormous economic potential. The conclusions also hold under
several sensitivity analyses. The study’s results are a “mirror image” of previous outcomes
on the estimation of economic costs as a consequence of the Act. With the abolishment of
the Act the associated gains could in the long-term more than compensate the initial losses
incurred by the US shipbuilding industry.

1. Introduction
Localisation based policies have a long history in the toolkit of governments in both
developed and developing countries. Policy makers usually draw on various forms of local
content policies with the belief that such measures will generate economic and social
benefits to the domestic economy. The most widely promoted policy objectives attached to
such government measures are threefold: generating domestic employment, enhancing
competitiveness of the target industry in the global market, and supporting local ownership
requirements for strategic industries (Deringer et al., 2018[1]).1
Despite their well-documented counter-productive outcomes their popularity has increased
in the aftermath of the 2008 economic recession.2 It is often argued that this form of non-
tariff measure is still prevalent since it is less easily recognised as a protectionist tool
(Belderbos and Sleuwaegen, 1997[2]). As they are based on quantity signals in the form of
complex percentage input requirements, the price effects are difficult to determine, making
it a rather opaque measure. Policymakers (and others) can only assess the real economic
costs of such policies with some difficulty, or may not know the counterfactual outcomes
(i.e. without the policy) in which the market might have achieved the policy goals by its
own (Hufbauer et al., 2013[3]). This opacity may be intentional or incidental.
This study contributes to the ongoing efforts of analysing and quantifying various
government programs present in the shipbuilding industry. While Gourdon (2019[4])
discusses a wide-range of different classes of government measures and their effect on the
shipbuilding sector, the following work focuses on local content requirements (LCRs).
One important aspect of these policies is the requirement for firms to procure a minimum
percentage of value added or intermediate inputs domestically. The scope of the
requirement and/or the necessity for compliance can thereby vary. For instance, there are
differences in the policy coverage, ranging from goods, services, data storage, to staff or
subcontractor requirements. Some policies also oblige or encourage firms to provide
additional economic benefits to the local economy, such as in the form of in-country
investments, transfer of technology or knowledge, production under license, or
marketing/exporting assistance (Gourdon, Bastien and Folliot-Lalliot, 2017[5]).3 Regarding
the necessity for compliance, one can distinguish between: (i) whether compliance with the
requirement is mandatory in order to access the market or to receive other benefits in the
form of tax, tariffs and price concessions; or, (ii) whether non-compliance entails the
payment of a penalty tariff rate on intermediate inputs (Grossman, 1981[5]; Hufbauer et al.,
2013[3]). LCRs are often part of government procurement measures.4
Some scholars argue that although the effects of LCRs can hardly be measured and their
impact depend on the market condition and industry structure, LCRs can contribute to
industrial development and competitiveness if well designed and linked to other policies
(Weiss, 2016[6]). A country’s level of development, resource endowments and sector
maturity are critical factors to be considered prior to policy implementation (Ramdoo,
2016[7]). R&D capabilities, skills and domestic entrepreneurship are further elements
affecting the effectiveness of such government measures.
Yet, most studies on LCRs highlight the long-run inefficiencies that arise in the economy
as a result of the policy. By implementing an LCR the target industry is required to source
(a part of) its inputs domestically. Absent the policy, companies are able to freely decide
to purchase from domestic or foreign suppliers under profit maximization considerations.

Hence, their observed intermediate input use and sourcing pattern are based on optimal
allocation at given prices.
However, with the LCR policy in place, firms are obliged to purchase less competitive and
more expensive intermediate inputs domestically than they could acquire on the
international market.5 The policy results in the intended increase in output of the local
upstream sector, increasing welfare, but only in the short-term. In the long-term, the higher
prices of domestically procured components will increase the price of the final good and,
as a result, the quantity sold will decline as will domestic welfare.6
Previous work of the OECD’s Trade and Agriculture Directorate highlights the costs
associated with LCRs imposed not only on the target sector, but also on other sectors in the
economy from a trade perspective (Stone, Messent and Flaig, 2015[8]). The study
differentiates between the impact on intermediate inputs and final demand, and examines
the decline in trade with third countries. The analysis shows that although final goods are
affected by the LCR, around 80% of the decline in trade arises from the policy’s effects on
intermediate products. Households and other non-LCR targeted sectors are only able to
mitigate the losses inflicted by the policy by shifting from local to international markets –
a development such a protectionist measure initially tried to hamper (Stone, Messent and
Flaig, 2015[8]). The results illustrate the policies’ overall negative impact on trade by
restricting imports and reducing exports. Furthermore, LCRs increase the price for
imported goods, leading to higher prices for firms and consumers. In the short term, the
industry output in the target sector may increase but only at the expense of other related
industries, outweighing the benefits by negative side effects.
More recently, Dixon, Rimmer and Waschik (2018[9]) found that the “US Buy American
Act” offers domestic manufacturing industries only a small level of protection against
import competition and results in other sectors of the economy having around 360 000
fewer jobs than would have been the case if the Act were to be abolished.7 Using a model
of successive oligopoly in up- and downstream industries, Belderbos and Sleuwaegen
(1997[2]) find that LCRs have anti-competitive effects and generally fail to increase
domestic welfare. Although Veloso (2006[10]) argues that under the assumption of positive
spill-over effects moderate LCRs might be welfare-enhancing, he concedes that too high
LCRs can have significant detrimental effects on the economy. Which effect dominates
depends not only on the price elasticity of demand for the final goods, but also on the price
elasticity of intermediate goods used in its production and their degree of tradability.
Further studies argue that LCRs can result in an inefficient allocation of resources by
distorting the principle of comparative advantage, a reduction in competition for the target
industry, a decline in product quality by inhibiting access to technologically-advanced
inputs, as well as corruption and favouritism if the policy design is opaque (Hufbauer et al.,
2013[3]; Kuntze and Moerenhout, 2013[11]; Weiss, 2016[6]). Hufbauer et al. (2013[3]) argue
that the objectives of LCRs, such as building up a competitive industry through stronger
industrial links, supplier’s creation and backward linkage can hardly be obtained. In most
cases, LCRs isolate high-cost producers from global competition and innovation, and result
in insufficient incentives for R&D investments. In general, it was observed that stronger
domestic linkages are created when foreign firms find competitive partners in the domestic
economy.
Sectoral studies on the costs and benefits associated with LCRs have been undertaken,
among others, on the oil and gas industry (Hufbauer et al., 2013[3]; Tordo et al., 2013[12];
Heum et al., 2011[13]), automobile (Hufbauer et al., 2013[3]; Veloso, 2006[10]), renewable
energy (Hufbauer et al. (2013[3]) on photovoltaic and wind; Kuntze and Moerenhout,

2013[11]; Bahar, Egeland and Steenblik, 2013[14]), heavy vehicle (Deringer et al., 2018[1])
and health care (Hufbauer et al., 2013[3]) sectors. These have generally concluded that while
these policies may achieve certain short-run objectives (such as to meet employment,
industrial or technological development goals), they undermine industrial competitiveness
over the long-run and for the economy as a whole.
Empirical results about the effect of LCRs on the shipbuilding sector are rather scarce
although LCR policies are relatively common in the sector. The most closely related
analysis to our work comes from Francois et al. (1996[11]) albeit it focusses on the water
transportation sector rather than shipbuilding specifically. The authors simulate the effects
of a reduction in water transportation costs on welfare, production, trade, and employment
in the US economy and a selection of important up- and downstream industries, including
shipbuilding, as a consequence of a removal of the US Jones Act. In order to fill the gap in
the literature, the following work represents to our knowledge the first study on the
quantification of the impact of LCRs specifically affecting the shipbuilding sector with the
use of Inter-Country Input-Output (ICIO) data. The rich data structure allows an assessment
of the policy’s effects in terms of final demand, total output and value added on the
domestic shipbuilding industry as well as on other sectors in the economy. Gourdon and
Steidl (forthcoming[12]) provide more information about OECD’s ICIO data, so-called
Trade-in-Value-Added (TiVA), applied to the shipbuilding industry in the context of an
analysis of global value chains.
The analysis encompasses simulations for the reduction in Brazil’s local content
requirement present in its national oil and gas sector, and a hypothetical abolishment of the
long-standing US Jones Act. The results show the significant economic gains a relaxation
and an abolition of local content policies can have on the imposing country’s own economy.
The paper is structured as follows. Section 1 provides a description of LCRs affecting the
shipbuilding industry. Section 2 presents the static model’s results of the simulation for the
two shipbuilding-related local content based policies on various economic indicators.
Ultimately, the study provides final remarks and provides policy implications.

2. Estimated Economic Effects of Local Content Requirements
This section describes two local content policies affecting the shipbuilding industry and
presents the estimates of their economic impacts. The first estimation simulates the
reduction in LCR announced by Brazil’s National Agency of Petroleum, Natural Gas and
Biofuels (ANP). The second estimation simulates what would happen to the US economy
and domestic shipbuilding industry if the long-standing US Jones Act got abolished.
2.1. Brazil's Offshore Oil and Gas Sector Programme
2.1.1. Background
Brazil is the 9th largest oil producer with an exploration volume of 3.3 million barrels per
day, accounting for around 3% of global oil production and making up about 22% of
volume extracted by the US which is the largest oil producer in 2017 (US Energy
Information Administration, 2018[13]). The country’s oil and gas industry is regulated by
the National Agency of Petroleum, Natural Gas and Biofuels (ANP), which is responsible
for ensuring compliance with regulations and oversees contracting. The agency applies
local content requirements for the stages of exploration and production development (E&P)
of oil and natural gas blocks since the first bidding round in 1999 (ANP, 2018[14]).
The LCR clause is embedded in concession agreements which are contracted between ANP
and winning companies. The percentages of local content procurement offered by
competing companies count for scoring purposes during the bidding rounds for oil and gas
blocks. Concession holders must ensure a preference for contracting Brazilian suppliers as
long as price, delivery time and quality are equivalent to foreign supplier companies. This
model remained in force until the fourth bidding round in 2002, and has been modified
several times resulting in an increasingly complex structure (ANP, 2018[14]).
For the subsequent two rounds in 2003 and 2004, the ANP modified the local content clause
in concession contracts and introduced minimum and differentiated percentages for the
procurement of Brazilian goods and services used in the exploration of onshore blocks and
offshore blocks located in shallow and deep waters.
In the 7th bidding round, that took place in 2005, ANP limited the local content percentages
(offered by companies during their bids) to minimum and maximum values. It furthermore
established spreadsheets mandating bidding firms to allocate weights and percentages of
local content to several items and sub-items for the exploration and development stages.8
With the discovery of the immense pre-salt cluster in the Atlantic Ocean off the Brazilian
coast in 2005/2006,9 the local content has been gradually increased. Since the pre-salt oil
deposits are located offshore under extremely deep, thick layers of rock and salt they
require substantial investment to extract. At the same time, they hold a massive potential
for exploration and production. For the pre-salt (i.e. offshore) round the minimum required
local content amounted to 37% for the exploration phase, and 55% (59%) for the modules
of the development stage to start production by 2021 (by 2022). The ANP did not set a
maximum percentage.
In a move to boost oil and gas activities to generate economic growth sufficiently quickly,
the ANP recognized the need to relax the LCR in place.10 In 2017, the National Energy
Policy Council (CNPE) defined a new local content system under the CNPE Resolution

No. 02 (as of April 11, 2017) to be applied in the next bidding rounds, starting with the 14th
concession round taking place in September 2017.11 The modifications include a reduction
of local content as a scoring factor in bids and a simplification of commitments along with
a reduction of the minimum required local content percentages. Box 1 provides further
information about Brazil’s oil sector and the state-owned oil and gas company Petrobas.
Box 1. Brazil’s oil sector
Almost the entire national oil extraction in Brazil takes place in offshore areas
of the pre-salt cluster in the south-eastern region of the country (Campos and
Santos basins). More than 50% of Brazil’s crude-oil production comes from
the Campos basin, extracted from six offshore oil-fields (Barracuda, Jubarte,
Marlim, Marlim Sul, Marlim Leste and Roncador). The Brazilian state-
controlled oil and gas company, Petrobras (Petróleo Brasileiro SA) retains a
dominant position in hydrocarbons production despite the loss of its monopoly
position in 1997 (OECD, 2014[15]). 12 Yet, the company has enjoyed market
protection partly under a law passed in 2010, which required Petrobas to be the
lead operator of investments in the ‘pre-salt’ cluster and to hold a minimum
stake of 30% in these projects (The Economist Intelligence Unit, 2016[16]).
However, with the amendment of the local content rules in 2016 (Law 13,
365/2016), Petrobas no longer has to be a partner in projects related to the pre-
salt cluster (ANP, 2018[17]).
Table 1 sets out the new required local content shares compared to the 13th concession
round of December 2015 which was still under the old system. For onshore blocks, only
commitments of 50% are required for both the exploration and the production development
stages – a reduction of 20 and 27 percentage points, respectively. As far as offshore areas
are concerned, the requirement for the exploration phase was reduced from 37% under the
previous system to 18% under the new requirement. For the production development stage
in offshore projects, the minimum commitments are fixed for three groups: well
construction with 25% (prev. 55%), collection and drainage system with 40% (prev. 55%)
and stationary production units with 25% (prev. 55%) (ANP, 2018[14]). The contractual
commitments as part of these concession contracts (e.g. oil licenses) require oil companies
to procure the new minimum percentage of equipment and services from local suppliers.
Table 1. New requirements on oil and gas concessions
13th Concession Round New Requirement

Onshore
Exploration 70% 50%
Development 77% 50%
Offshore
Exploration 37% 18%
Development:
Well construction 55% 25%
Collection & Drainage system 55% 40%
Stationary production unit 55% 25%
Source: based on ANP (2018[14]) and Rhodes (2017[18]).
According to ANP, the LCR reform will debottleneck the domestic supply chain due to the
reduction in local content fines and the aforementioned new requirements allowing foreign

supplier firms better market access. The country’s previous LCR policy was rather complex
and international companies had to cope with administrative burdens in documenting LCR-
compliant bids in order to obtain an E&P contract in Brazil’s oil and gas sector. These
obstacles led to a withdrawal of (international) investors from the market and a bottleneck
in the domestic supply chain (information obtained from companies). ANP further confirms
that the better utilisation of the supply chain would allow a faster development of the 21
billion barrels of oil equivalent (boe) of discovered resources in the pre-salt cluster, which
in turn will boost royalty collection and job creation (ANP, 2018[17]).
2.1.2. Estimation Strategy and Results
Estimation Strategy
The estimation strategy follows two steps (Figure 1): first, a simulation of the short-term
effects of the relaxed sourcing requirements on economic outcomes for the shipbuilding
industry, as a supplier industry to Brazil’s oil and gas sector, and for Brazil’s economy as
a whole. For instance, under the new requirements vessel hulls13 can be built internationally
while selected modules are built and integrated locally. This applies in the same way to
other supplier industries, where an increasing number of components can now be sourced
from foreign markets. In the short-term, Brazil’s upstream industries to the oil and gas
sector may therefore expect a decline in total output and value added. Table A E.1 in Annex
E sets out the local content shares by sector assumed in the simulation.
Second, an analysis of the long-term effects which evidently outweigh the short-term losses
as shown in the next section. As a result of the LCR reform, industries can better exploit
and utilize the supply chain, which in turn allows a faster development of the discovered
resources in the pre-salt cluster, boosting royalty collection and employment creation.
Hence, the oil and gas sector can expect increasing E&P activity, the government will
thereby increase royalties – a government income which might (partly) be reinvested in the
economy, and the shipbuilding industry will create new shipyard positions (ANP, 2018[17]).
For the latter aspect, by assuming newly created worker positions in shipbuilding rather
than labour flows from other sectors, the Brazilian economy can likely expect an increase
in household consumption which in turn generates economic value added.
Figure 1. Effect of Brazil’s Local Content Reform on Economic Outcomes
Source: Author’s own elaboration.

Estimation Results
Short-term
For the shipbuilding industry in the short-term, the new local content requirements will
likely lead to a decline in total output by around USD 328 million (-6.7%) and value added
by about USD 82 million (-6.7%). Although it is difficult to derive the increase in orders
purely as a consequence of the new requirements, our results indicate that with an increase
in vessel production by only USD 327 million (+13%) the short-term losses are expected
to be more than offset (Table 2). Considering that this amount equals around three-quarters
of the price of one FPSO delivered by Brazil in 2016 (Clarkson World Fleet Register) it
might be quite feasible for Brazil’s shipbuilding industry to reach this threshold. Besides,
the ANP (2018[17]) estimates that around 36 new FPSOs will be built until 2027 as a
consequence of the new requirements.14
For Brazil’s total economy the short-term losses will likely amount to around USD 2.4
billion (-0.1%) in total output and USD 1 billion (-0.1%) in value added as a consequence
of the losses incurred by other upstream sectors due to the shift of procurement activity in
the downstream sectors to foreign markets.
Long-term
The enormous long-term gains for the Brazilian economy are, however, expected to
outweigh the short-term losses, particularly through three channels which are reinforced by
a multiplier effect owing to the interconnectedness of economic sectors.
The reduced prices, increased productivity and rise in new demand would more than offset
these losses in the long-term. More precisely, only for the oil and gas sector an increase in
final demand of USD 1 billion (in total output of USD 1.03 billion and 2.2%) 15 could
stimulate Brazil’s total economic output by additional USD 1.8 million (+0.06%) likely
resulting in an increase in value added of USD 0.5 billion in the sector itself, and of USD
0.9 billion for the total economy. This multiplier effect is a result of the interconnectedness
of sectors throughout the economy. To put the figures into perspective: according to ANP
(2018[17]) the country can expect a production of around 21 billion barrel of oil equivalent
(boe) until 2027 (on average 2.1 billion barrels per year) partly as a consequence of the
amended LCR rules in 2018.16 Brazil’s oil production in 2017 reached about 1.2 billion
barrels (3.3 million barrels per day according to the US Energy Information Administration
(2018[13])), hence 60% of the predicted potential. An increase of only 0.03% of the oil
production volume in 2017 at a conventional price of USD 60 per barrel could already
offset the short-term losses of USD 2.4 billion in Brazil’s total output.
In addition, the policy reform is expected to lead to additional USD 28 billion in royalties
collected by the government until 2027 (i.e. USD 2.8 billion per year) (ANP, 2018[17]).
Hence, increased government income could (at least partly) propagate throughout the
economy in the form of increased government expenditures (if not used to repay public
debt). The results show that an increase of USD 1 billion in government spending could
trigger off an increase in Brazil’s total output of USD 1.4 billion and an increase in Brazil’s
value added of USD 0.9 billion. In other words, government spending of around USD 1.7
billion (60% of collected royalties per year) could easily compensate for the short-term
losses. In addition, against the background of the high government spending relative to
public income of more than 100% (i.e. -6% in fiscal balance in 2014 according to OECD
(2014[19])) the collected royalties would be very beneficial to the Brazilian government
either in the form of investments or debt repayments.

Finally, the ANP (2018[17]) expects a total of 95 000 new shipyard positions. Assuming
newly created worker positions in the shipbuilding industry as a result of the LCR reform
rather than labour flows from other sectors of the economy, the increase in disposable
income is expected to fuel private consumption and thereby increase Brazil’s total output
and value added in the long-term. The simulation results imply that with an increase of
USD 1 billion in household expenditures Brazil’s total output may increase by USD 1.6
billion (+0.001%) and its value added by USD 0.9 billion (0.0003%). With the newly
created jobs Brazil may expect an increase in household consumption of around USD 1.76
billion17 and thereby likely outweighing the short-term losses through this third channel
(next to the described increase in demand and royalty collections).
Overall, Brazil therefore seems to benefit substantially from opening up its national oil and
gas sector to foreign players. The benefits may not only be evident for the total economy,
but also for different sectors. Shipbuilding in particular has now the opportunity to benefit
from a more outward-focused economic environment supporting industrial development.
Brazil’s aircraft industry is a prime example of how a sector that is well integrated into
global production networks has outpaced an inward-focused assembly industry (Box 2).
Box 2. Brazil’s aircraft industry – how openness to trade matters
Brazil has a relatively diversified industrial sector. Yet, while the country’s
automotive sector faces a rather hard time, its aircraft sector is thriving. The two
sectors are two opposite examples with the former one inward-focused and the latter
one fully integrated into global trade. In view of the much smaller production
volumes of airplanes compared to automobiles, economies of scale require that
firms in this industry focus on the global market. Embraer, originally created in
1969 as a state-owned company, was privatized in the 1990s and has become one
of the top global players in the industry since then. Its initial strategy was largely
based on buying almost all components internationally for a final assembly in
Brazil, although over time it has started to produce parts itself. As a result, Embraer
has always been strongly integrated into global production chains, and imports still
account for 70% of its value added. At the same time, exports have grown steadily,
performing significantly stronger than motor vehicle exports. By now, Embraer has
become the world’s third largest aircraft producer, and the global leader in the 70-
130 seat aircraft segment, where it accounts for 60% of global deliveries.
Source: Arnold (2016[20])

Table 2. Simulation results for Brazil
Notes Impact on final demand (FD) Impact on total output (TO) Impact on total output (TO) Impact on value added (VA) Impact on value added (VA)
USD USD USD USD USD
Shipbuilding % Shipbuilding % Economy % Shipbuilding % Economy %
million million million million million
Original Original SB Original
Original SB FD 2,512 Original SB TO 4,910 3,102,346 1,229 1,646,151
ECO TO VA ECO VA
New ECO New ECO
New SB FD 2,512 New SB TO 4,582 3,099,924 New SB VA 1,147 1,645,070
TO VA
Short-term
Change in SB Change in SB - Change in - Change in - Change in -

0 0.0% -328 -2,422 -82 -1,081
FD TO 6.7% ECO TO 0.1% SB VA 6.7% ECO VA 0.1%
Shipbuilding Shipbuilding Economy Shipbuilding Economy
Original Original SB Original
Neutral Original SB FD 2,512 Original SB TO 4,910 3,102,346 1,229 1,646,151
ECO TO VA ECO VA
for SB New ECO New ECO
VA New SB FD 2,838 New SB TO 4,933 3,100,434 New SB VA 1,235 1,645,233
TO VA
Change in SB Change in SB Change in - Change in Change in -
327 13.0% 23 0.5% -1,912 6 0.5% -917
FD TO ECO TO 0.1% SB VA ECO VA 0.1%
Oil & Gas Oil & Gas Economy Oil & Gas Economy
Original O&G Original O&G
47,206 20,083
TO VA
Change in Change in Change in Change in Change in
1,000 1,038 2.2% 1,833 0.1% 482 872
O&G FD O&G TO ECO TO O&G VA ECO VA
Government Economy Economy
Multiplier Effects
Long-term
Original Gvt 356,52

FD 9
Change in Gvt Change in Change in
1,000 0.3% 1,416 939
FD ECO TO ECO VA
Households Economy Economy
Original HH 1,113,
FD 453
Change in HH Change in Change in
1,000 0.1% 1,644 868
FD ECO TO ECO VA
Note: Short-term effects are separated into actual estimates and estimates that do not affect the value added in shipbuilding with the removal of the Act. Long-term effects
are in the form of multipliers, i.e. a change of 1 000 EUR in final demand in a sector can have an impact of x EUR on total output or value added in the whole economy.
Source: OECD simulation based on OECD Trade-in-Value-Added (TiVA) (2018).

2.2. US Jones Act - Section 27 of the Merchant Marine Act 1920
2.2.1. Background
The Jones Act reserves domestic shipping for vessels that are built, owned, crewed and
flagged in the US. It is in force since 1920. The Act’s obligations directly affect the
shipbuilding and shipping industry through the domestic-built requirement as well as the
conditions on employment of a domestic crew and flag registration, respectively.
Figure A A.1 in Annex A provides more details about the Act’s specific requirements.
The Act includes almost all territory of the US, including Hawaii, Alaska, Puerto Rico, and
Guam and temporary exceptions are very limited. 18 Those states and territories, not
attached to the mainland US, seem to be most severely affected by the Act because of their
long shipping distances from neighbouring US and because their geographical location
prevents them from using substitute transportation modes such as trucks, trains, and
pipelines. There are, however, some territories, such as the US Virgin Islands, that have
been exempt from certain requirements of the law. Almost all ship types are covered by the
Act, encompassing oceangoing cargo vessels, barges, ferries, tugboats, small service ships,
and passenger vessels. Furthermore, vessels that dredge material used for landfills and
those that transport sewage sludge are included, as well as service drilling ships and
production platforms for oil and natural gas in the Gulf of Mexico (Grennes, 2017[21]).19
The original rationale of the Jones Act goes back to national security concerns, as the Act
aimed to enable the American merchant marine fleet to remain viable. In particular, after
the significant war losses to the US Merchant Marine Fleet in World War I, the viability of
the fleet was a major concern to the US. These reasons are still promoted today although
several cases suggest a dependence of the US navy on foreign-built vessels, such as for
sealifts, as well as due to capacity constraints (seemingly only one of the five shipyards
that produce major vessels for the Navy and Coast Guard builds commercial vessels that
are Jones Act compliant). 20 Subsequently, the Act’s main purpose moved towards
supporting employment and work conditions for American shipbuilders and seamen
(Bergstresser and Melitz, 2017[22]).
The debate about the costs and benefits of the Act can be separated into an economic
perspective (mainly supported by opponents of the Act) and a political-economy angle
(mainly supported by proponents of the Act). The latter one is seemingly more difficult to
translate into measurable costs and benefits.
Proponents of the Act reiterate the original purpose of the Act, citing it as necessary to
protect the US Merchant Marine and to maintain domestic shipbuilding capabilities. The
Navy has repeatedly issued statements to Congress opposing the repeal of the Jones Act,
stating that “for decades, US merchant mariners have provided essential support for the
U.S. Navy during times of war and national crisis.” Furthermore, it is argued that in the
interest of national defence, the Act is essential to maintaining a domestic “maritime
industrial base of shipyard and repair facilities.”
Against the background of an ever-changing geopolitical landscape, there would still exist
a need for shipyards and experienced shipbuilders to protect US citizens and the country’s
economy (Brown Brothers Harriman, 2015[23]). Moreover, labour unions strongly support
the Act by viewing it as a means to protect employment. The unions are determined to
prevent manufacturing offshoring to foreign markets and thereby have been instrumental
in lobbying to save the Act’s survival. According to their figures for 2011, the private
shipbuilding and repairing industry directly provided 107 240 jobs in the US. The industry

LOCAL CONTENT REQUIREMENTS AND THEIR ECONOMIC EFFECT ON SHIPBUILDING │ 17
in total – including direct, indirect and induced impacts – was credited with creating 402
010 jobs, USD 23.9 billion of labour income and USD 36 billion in GDP (Maritime
Administration (MARAD), 2013[24]).
Opponents emphasize the massive economic net losses of the Act on the overall US
economy and in particular on the non-contiguous states and territories of Hawaii, Alaska,
Puerto Rico, and Guam.21 Translating these losses into employment, estimates suggest that
every job saved by the Jones Act costs around USD 250 000 with the legislation costing
American citizens over 1 billion USD every year (National Public Radio, 2016[25]).22
Further studies report that the Act significantly raises transportation costs between
American ports. As of November 2018, the US merchant fleet includes around 3 000
vessels, but around 90% of them are tug boats, dredgers or small offshore ships rather than
transport-efficient oceangoing vessels (Clarkson Research World Fleet Register, 2018).23
Since US ships must operate under a crew comprising 75% American citizens, the
operating costs of a Jones Act eligible ship are around 2.7 times that of a foreign-flagged
vessel. The elevated costs are primarily a result of the higher living standards, wage rates
and social benefits of the US crew (US Maritime Administration (MARAD), 2011[26]).
Another study commissioned by MARAD highlight that higher labour costs contribute to
additional USD 12 000 to USD 15 000 per day to operating cost differentials between US
and foreign-flag vessels (PwC, 2011[27]). The US shipping industry has seemingly struggled
to compete on the international market, and Jones-Act eligible ships are used primarily for
domestic transportation services. As a result of elevated costs and low demand for US
shipping services the average age of the US merchant fleet is almost 30 years, as of
November 2018 (Clarkson Research World Fleet Register, 2018).
According to a study by the Congressional Research Service the cost of shipping crude oil
from Texas to refineries in the East Coast is considerably more expensive per barrel than
shipments to much more distant locations (Frittelli, 2014[28]).24 In 2012, the Federal Reserve
Bank of New York found that shipping cost for a twenty-foot container from the US
mainland to Puerto Rico was USD 3 063, but only half for the same container from the US
mainland to the Dominican Republic (Federal Reserve Bank of New York, 2012[29]).
Overall, the World Economic Forum (2013[30]) estimates that preventing foreign ships from
transporting cargo between US ports costs the US economy USD 200 million per year in
extra shipping costs.
In addition, research outcomes show that the provision of the Act’s domestic built-
requirement results in increased ship prices. For example, the Congressional Research
Service estimates that oil tankers built in the US are about four times more expensive than
those built abroad (Frittelli, 2014[28]). An article by Brown Brothers Harriman (2015[23])
reports that Matson Incorporated placed a 418 million USD order for two Jones Act ships
with prices about five times what it would have cost to build the tankers in Asia.
Furthermore, the contract price of USD 250 million for two vessels purchased by Philly
Tankers AS was more than three times what comparable ships constructed in Vietnam
would have cost (Bergstresser and Melitz, 2017[22]).
It is the goal of this paper to provide more insights into the economic effects of the abolition
of the Jones Act on the US shipbuilding industry and the overall US economy. To do so,
we use a static Inter-Country Input Output model and use the information provided above
for our simulation assumptions. Our simulation approach is most closely related to Francois
et al. (1996[11]). The authors use an Applied General Equilibrium (AGE) model to estimate
the effects of a hypothetical repeal of the Act on the US economy in terms of welfare,
production, trade and employment. The focus of the model lies on the cabotage and water

transportation sectors which are directly affected by the Jones Act, as well as a selection of
sectors that have significant up- and downstream linkages to cabotage services, including
shipbuilding, or to petroleum and refined petroleum products and other transportation
sectors. This approach differs from our work in two ways. First, the authors’ approach does
not assess the increase in final demand, output and value added of other US economic
sectors – that are not directly linked to cabotage services but are dependent on water
transportation services for intra-US sales – due to a decrease in output prices in these sectors
caused by lower water transportation costs. In other words, our approach goes beyond the
study’s quantitative assessment by estimating the economic effects of an increase in intra-
US trade in US sectors stimulated by the reduction of water transportation costs as a
consequence of the Act’s removal. In particular this additional effect can explain the
difference in estimation results on the US economy between the study by Francois et al.
(1996[11]) and our work. Second, our approach simulates the direct effects of the Act’s US
built-requirement for ships on the shipbuilding sector itself. These are some of the novelties
brought about by the modelling approach of this work presented in the following section.
2.2.2. Estimation Strategy and Results
Estimation Strategy
The simulations are based on the rationale that the exposure of firms to greater competition
results in aggregate productivity gains and lower mark-ups which may be reflected in
reduced prices (in the case of full cost-pass-through). These channels are supported by
empirical research results. Box 3 summarizes results discussed in the research literature
about the effect of international competition on firm productivity and prices.
Box 3. International competition and productivity
Empirical results show that by exposing producers to greater competition,

international trade can lead to aggregate productivity gains. The effect of
cost-reductions (as a result of increased competition) on prices depends on
the cost-pass-through on the producers’ side. Although increased
competition may lower prices, firms can offset this reduction by raising
mark-ups (De Loecker et al., 2016[31]). With the fall of trade barriers
exposing firms to more intense competition, aggregate industry productivity
rises as less productive firms exit the market and the remaining firms expand
(Melitz (2003[32]); Pavcnik (2002[33])), and thereby take advantage of cheaper
or more competitive goods that were previously unavailable in the domestic
market (e.g. Goldberg et al. (2010[34]); Amiti and Konings (2007[35]) on
Indonesia’s trade reform; Halpern, Koren and Szeidl (2015[36]) on Hungary;
Brandt et al. (2017[37]) on China; Edmond, Midrigan and Yi (2015[38]) on
Chinese Taipei). Melitz and Ottaviano (2008[39]) show in their model how
exposure of firms to stronger competition results in higher aggregate
productivity and lower average mark-ups.
Abolishing the Jones Act will expose US ship producers to intensified international
competition. US shipbuilders thus need to adjust prices (and thereby profits) to global levels
and increase industrial productivity in order to remain competitive. Since value added is
measured as the sum of operating surplus (i.e. profits), employee compensation (salaries),

depreciation of fixed capital and net taxes on production (less subsidies), 25 the adjustment
effect of reduced profits will be echoed in a decline in value added in the short-term. The
required increase in US firm productivity will furthermore be revealed in a rise in output
value (either through increased production or product quality) in the long-term.26 These
adjustment effects will likely appear in different guises. Nevertheless, in sum these
channels are reflected in the reduction of the US ratio of value added over output (48% in
2015) to an international (weighted) average (31.2%).
Latest OECD research on global value chains in the shipbuilding industry (Gourdon and
Steidl, forthcoming[12])highlights the striking difference of US value added as share of ship
production value compared to other shipbuilding economies (Figure 2). While the ratio
amounts to 20% to 30% in most of the shipbuilding nations, the US stands out with a share
of 48% in 2015 – which could be an indication of inflated profits and prices likely as a
result of local content policies.27
Figure 2. Shipbuilding value added over final output
Note: Results for Brazil are omitted for the year 2005 because of data limitations.
Source: Gourdon and Steidl (forthcoming[12]).
Figure 3 illustrates the different channels the simulation is based on. As elaborated in the
previous section, US built ships are two to five times more expensive than foreign-built
vessels.28 Opening up the US shipbuilding industry will thus require shipbuilders to reduce
vessel prices by at least 50% to converge to international levels in order to remain
competitive.
Such a reduction in ship prices will likely trigger new demand for US ships. The
simulations assume elastic demand for ships between 1.2 to 1.6, implying that a reduction
in US ship prices by 50% may lead to an increase of 60% to 80% in ship demand. A
sensitivity analysis (described in more detail in Annex D with results in Table A D.1) with
respect to demand elasticity shows that up to a unit elasticity (i.e. 1) the overall US
economy can expect positive economic growth and the shipbuilding industry a positive
value added following the abolishment of the Act.
In addition, reduced ship prices represent reduced capital costs for shipping companies
which in turn can offer cheaper transportation services. In scenario 1, by reducing only

capital costs (i.e. keeping operational and other shipping costs constant) the model implied
(endogenous) results show a reduction in prices for domestic water transportation services
(i.e. freight rates) of around 14.7%.
Separately, scenario 2 is based on research results discussed in the previous section
implying that the requirement to use a ship in conformity with the Jones Act leads to freight
rates that are at least two times higher. As a consequence of the Act’s abolishment, freight
rates will hence decrease by around 50% to approximate water transport costs associated
with foreign ships. In other words, scenario 2 comprises the reduction in freight rates as a
consequence of both reduced capital and operational costs.29
Finally, several econometric studies show the significant effect of changes in water
transportation costs on trade flows. Limao and Venables (2001[40]) find an elasticity of trade
with respect to freight costs in the range of -2 and -3.5 and Behar and Venables (2011[41])
of -3. Clarke, Dollar and Micco (2004[42]) estimate for country-specific transport costs an
elasticity of -1.3. For both scenarios in our simulation, the elasticity of intra-US (domestic)
maritime trade with respect to freight rates is initially set to the level of -2%. In other words,
a reduction (increase) in freight rates of 1% will result in an increase (reduction) in the
demand for water transportation services of 2%.30
A sensitivity analysis (described in more detail in Annex D and results in Table A D.1)
shows how robust the conclusions are to the assumptions made on reductions in freight
rates (as a result of cheaper vessels) and the increase in intra-US seaborne trade (i.e. trade
elasticities). By assuming very conservatively either a reduction in freight rates of 1.4%
coupled with an elasticity of trade of -2 (as set in the model), or a reduction in freight rates
by 14.7% (only based on capital costs) coupled with an elasticity of trade of -0.2 (very
inelastic) the results show positive net gains for the total US economy.
As illustrated in the following, even on the basis of very conservative assumptions made
(which are far less strict than reported in previous research), an abolishment of the Act will
result in net economic gains for the US, in particular for US industries dependent on water
transportation services for intra-US sales, and the shipbuilding industry itself.

Figure 3. Overview of simulation assumptions
Estimation Results
The estimation results reveal large benefits for the US economy in total; not only for other
US industries but also in the long-term for the US shipbuilding industry itself.31 The results
refer to the economic gains in the long-term such that the US economy will have
structurally adjusted to the shock associated with the abolition of the Act, i.e. the
shipbuilding industry will have reached international productivity levels, water
transportation services will have approached the price levels of non-Jones Act conform
vessels, and intra-US maritime trade will have been stimulated by lower freight rates.
In both simulation scenarios (Table 3), the US commercial shipbuilding industry has the
potential to increase its final demand by around 70% from approximately USD 841 million
to USD 1.43 billion and its total output by about 71% from USD 859 million to USD 1.47
billion. Despite the repeal of the local content requirement the domestic US shipbuilding
industry can largely benefit as reflected in the increase in value added of around USD 44
million (from previous USD 412 million). This is the result of the increased number of new
ship orders following the reduction in sales prices. A sensitivity analysis with respect to
demand elasticity shows that up to a unit elasticity (i.e. 1) the shipbuilding industry can still
expect gains in value added following the abolishment of the Act (Table A D.1).
The total US economy may benefit from an increase in final demand in the range of USD
22 billion (scenario 1) and USD 74 billion (scenario 2) which represent a rise between
0.12% and 0.39% in the long-term. US total output is likely to increase between USD 40
billion (0.1%) and USD 135 billion (0.4%). In terms of domestic value added the results
amount to around USD 19 billion and USD 64 billion, making up an increase of around
0.1% to 0.36% for the total US economy.
The effect on the total US economy is largely a result of the increase in industrial activity
of other sectors. The reduced freight rates will stimulate demand for intra-US trade (using
water transportation services), thereby benefitting overall US economic growth. In 2015,
domestic final demand of US industries using water transportation services amounted to

around USD 74 billion. Final demand of other US industries in total (i.e. serving the
domestic and foreign market by using all kinds of transportation modes) reached USD 18.9
trillion. Throughout the report, the comparison for economic growth will be made with
respect to the latter one, hence, with other US industries in total. It is worth highlighting
that the estimation results reported by Francois et al. (1996[11]) do not include this additional
effect on other sectors due to the increased demand stimulated by lower water
transportation costs, and they are therefore lower than the outcomes under the following
two scenarios.32
In scenario 1, US industries may generate additional final demand of almost USD 22 billion
(+0.11%), and further output of approximately USD 40 billion (+0.13%), which represent
respectively more than 37 and 65 times the original US commercial shipbuilding industry
prior to the Act’s removal. The removal could furthermore generate additional domestic
value added in other US industries. Those can expect an increase of about USD 19 billion
(+0.11%) which equals 439 times the volume generated in the commercial US shipbuilding
industry under the Jones Act.
In scenario 2, other US industries can expect an increase in final demand of about USD 74
billion (+0.4%), and further output of approximately USD 134 billion (+0.4%), which
represent respectively two times and three times the size of the original US shipbuilding
industry under the Act. The abolition may also create domestic value added in other US
industries. Those can expect an increase of about USD 66 billion (+0.4%) which is 219
times the value added originally generated in the shipbuilding industry.
The dimensions are extreme, simply by virtue of comparing US industries of immense size
serving the domestic US market with the usage of water transport services, with the US
commercial shipbuilding industry representing only a small sector in the US economy.
From an economic perspective, the Act evidently creates large cost inefficiencies by
protecting the shipbuilding industry – a tiny economic sector in the US – at the expenses
of other US industries with enormous economic potential. Our results are a “mirror image”
of previous research outcomes on the estimation of economic costs as a consequence of the
Jones Act. With the abolishment of the Act the associated gains will in the long-term more
than compensate the initial losses incurred by the US shipbuilding industry through the
illustrated economic adjustment processes.

Table 3. Estimation results
Scenario 1: Model implied transport cost reduction (capital costs);

Scenario 2: Cost reductions based on research outcomes (capital and operational costs)
Scenario 1 Scenario 2
Impact on final demand (FD) Impact on final demand (FD)
US Shipbuilding* USD million % Impact USD million % Impact
Original shipbuilding FD 841 841
New shipbuilding FD 1,430 1,430
Change in shipbuilding FD 589 70% 589 70%
US Other Industries
Original other industries FD 18,938,603 18,938,603
New other industries FD 18,960,367 19,012,572
Change in other industries FD 21,764 0.11% 37.0 73,969 0.39% 126
Total US Economy
Total original US FD 18,939,444 18,939,444
New total US FD 18,961,797 19,014,002
Change in US FD 22,353 0.12% 38.0 74,558 0.39% 126.6
Impact on total output (TO) Impact on total output (TO)
Original shipbuilding TO 859 859
New shipbuilding TO 1,471 1,471
Change in shipbuilding TO 612 71.21% 612 71.21%
US Other Industries
Original other industries TO 30,819,990 30,819,990
New other industries TO 30,860,079 30,954,389
Change in other industries TO 40,089 0.13% 65.5 134,399 0.44% 219.7
Total US Economy
Total original US FD 30,820,849 30,820,849
New total US FD 30,861,550 30,955,860
Change in US FD 40,701 0.13% 66.5 135,011 0.44% 220.7
Impact on value added (VA) Impact on value added (VA)
Original shipbuilding VA 412 412
New shipbuilding VA 456 456
Change in shipbuilding VA 44 10.61% 44 10.61%
US Other Industries
Original other industries VA 17,638,457 17,638,457
New other industries VA 17,657,662 17,702,774
Change in other industries VA 19,205 0.11% 439.6 64,317 0.36% 1472
Total US Economy
Total original USA VA 17,638,869 17,638,869
New total USA VA 17,658,118 17,703,229
Change in USA VA 19,249 0.109% 440.6 64,361 0.37% 1473
Note: *refers to commercial US shipbuilding only (i.e. excludes military production).


24 │LOCAL CONTENT REQUIREMENTS AND THEIR ECONOMIC EFFECTS ON SHIPBUILDING
3. Final remarks
This study quantifies the significant economic gains that are expected to be revealed
through the abolition or relaxation of local content based policies. The work analyses two
specific local content policies affecting directly or indirectly the shipbuilding industry in
two countries: Brazil’s local content requirement as part of national concession contracts
in the oil and gas sector, and the long-standing US Jones Act obliging intra-US seaborne
trade to be conducted on US built and US flagged vessels.
By exploiting the Inter-Country Input-Output (ICIO) framework of OECD’s Trade-in-
Value-Added (TiVA) database, the applied static model simulates the impacts of the two
policies on the sector itself, as well as for the economy more generally. The results for
Brazil reveal the enormous gains expected with the reduction in its protectionist measure.
The results for the US illustrate the unrealized potential the economy could exploit should
the US Jones Act be abolished.
Overall, the study mirrors the negative economic effects of localisation based policies.
Should governments require new policy tools for employment creation, industrial and/or
technological development, there are more efficient alternatives to LCRs that could achieve
these objectives. For instance, governments can help stimulate employment generation
through a stable macroeconomic framework as well as certain structural policies which
encourage innovation, skills and business development. Moreover, governments need to
respond to skills gaps that may act as barriers and obstacles to economic growth, such as
by offering flexible training, education and employment services (OECD, 2014[43]).
Besides, improved logistics can reduce trade transaction costs, and can make firms more
competitive internationally and at the same time create additional jobs. Also, infrastructure
investment is critical for economic performance and generating domestic employment, but
require lower economic costs than the detrimental economic effects revealed through local
content policies (Hufbauer et al., 2013[3]). The core factor of any such policy is that it is
designed to resolve these development obstacles rather than distorting prices.
For future research it would be interesting to understand the results in the context of
adjustments of trade flows with third economies – a relevant topic when considered in light
of global value chains.

LOCAL CONTENT REQUIREMENTS AND THEIR ECONOMIC EFFECTS ON SHIPBUILDING│ 25
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Annex A. Details about the US Jones Act
For a US-flagged vessel to be qualified to engage in US coastwise trade (46 USC 55102(b)),
originally section 27 of the Merchant Marine Act, 1920, as amended Jones Act trade)) and
qualify for a coastwise endorsement on its certificate of documentation it must be, inter
alia:
 built in the United States and
 owned by entities whose chief executive officer, president and chairman of the
board of directors (and anyone that can act in their absence or disability) must be
US citizens, and whose equity is at least 75 per cent held (of record and
beneficially) by US citizens,
 with 75% of US crew,
 registered under US flag.
Built in the US criteria:
A vessel is deemed to be built in the US only if all major components of the hull and
superstructure are fabricated in the US and the vessel is entirely assembled in the US (46
CFR 67.97).
The US Coast Guard has consistently held that items not integral to the hull or
superstructure, such as propulsion machinery, consoles, wiring harnesses and other
outfitting that has no bearing on a US build determination, may be foreign-built without
compromising the vessel's coastwise eligibility.
The US Coast Guard has also held that foreign components amounting to less than 1.5 per
cent of a vessel's steel weight are not considered 'major'. Within these confines the
shipbuilding contract and the vessel's specifications should permit foreign-sourced
materials and equipment to be incorporated in the vessel without adversely affecting the
vessel's qualification for a coastwise endorsement on its certificate of documentation (van
Steenderen, 2018[44]).
Figure A A.1 provides an overview of the requirements for a ship to qualify for being built
in the US. As long as major components of the vessel’s hull and superstructure are
fabricated in the US these components can be imported from outside of the US. However,
once a major component of the hull and superstructure imported weights more than 1.5%
of the vessel’s steel weight it fails to fulfil the US built criteria. In this case, ship owners
will not be allowed to operate the vessel in intra-US maritime transport.
Taken together, this suggests that US shipbuilders aren’t required to source intermediate
inputs domestically to fulfil the LCR as long as they fabricate the major components of the
hull and superstructure and assemble the vessel in the US.

Figure A A.1. Built in the US criteria
Note: *e.g. major components of hull and superstructure that are purchased from foreign steel manufacturers in
standard lengths, widths and shapes and are not custom designed or fabricated for use in the vessels.
Source: based on US Department of Home Security (2017[45])

Annex B. Ships produced in the US during 2016
There are a total of 106 different ships which are at least partly produced during 2016.
These ships were ordered in 2014, 2015 or 2016 and delivered during the subsequent years.
Table A B.1 provides more details about the vessel types ordered and produced during
2016.
Table A B.1. Ships produced in the US during 2016
Vessel Types Contract Year Delivery Year Frequency

Anchor Handling Tugs & Supply 2014 2018 1
Cruise 2-59,999 GT 2015 2017 1
Cruise 2-59,999 GT 2015 2018 1
Dredgers <2,000 GT 2016 2017 1
Handy Products Tankers 10-54,999 dwt 2015 2017 2
Miscellaneous Types <2,000 GT 2015 2016 1
Miscellaneous Types <2,000 GT 2016 2017 1
Other Offshore 2015 2016 2
Other Offshore 2016 2018 1
Passenger Ferries 2-9,999 GT 2014 2018 1
Passenger Ferries <2,000 GT 2015 2016 1
Ro-Ro 10,000+ dwt 2016 2019 1
Ro-Ro 10,000+ dwt 2016 2020 1
Tugs <2,000 GT 2014 2016 2
Tugs <2,000 GT 2015 2016 5
Tugs <2,000 GT 2015 2017 11
Tugs <2,000 GT 2015 2018 8
Tugs <2,000 GT 2016 2017 6
Tugs <2,000 GT 2016 2018 26
Tugs <2,000 GT 2016 2019 2
Source: based on Clarkson World Fleet Register (2018).

Annex C. Estimation of output value of US commercial shipbuilding

industry
We derive the value of each vessel produced on the basis of the weighted average
newbuilding prices for contracts realized in 2015 as shown in Table A C.1. Offshore have
the highest value followed by passenger ferries, dredgers, anchor handling tugs & supply,
cruise ships, handy products tanker, Ro-Ro, smaller passenger ferries, tugs and the
miscellaneous category.
Table A C.1. Newbuilding prices per cgt
Weighted average of available prices by year
Vessel Types 2015 Note

Other Offshore 0.021 from 2013
Passenger Ferries 2-9,999 GT 0.014
Dredgers <2,000 GT 0.009 from 2011
Anchor Handling Tugs & Supply 0.006 from 2012
Cruise 2-59,999 GT 0.005
Handy Products Tankers 10-54,999 dwt 0.005 from 2014
Ro-Ro 10,000+ dwt 0.005 from 2016
Passenger Ferries <2,000 GT 0.003 global from 2016
Tugs 0.002 global from same year
Miscellaneous Types <2,000 GT 0.001 global from 2005
Note: bolt-highlighted prices were reported for US produced ships (i.e. no imputation) or has been imputed
from observations of historical US produced vessels (specified in the note). Prices for passenger ferries, tugs
and miscellaneous types were imputed from weighted average prices from other countries.*
Source: based on Clarkson World Fleet Register, 2018.
Since we are only interested in the value of ships produced during the year 2016, and ship
production usually takes place over several years, we derive the individual production value
by allocation the production share per month. The allocation exercise is based on
information provided by ship yards, and Figure A C.1 provides for illustration purposes an
indicative production plan. Table A C.2 presents the results of production values by ship
type, amounting to a total of around USD 841 million for the production of commercial
ships.

Figure A C.1. Indicative production plan
Note: OD=order date of ship (=contract signing); PS=production start; DD=delivery date.
Table A C.2. Production of US ships in 2016
No of ships Value in million USD

Vessel Types Cgt produced
produced produced
Anchor Handling Tugs & 5,089 2.4 29
Supply
Cruise 2-59,999 GT 17,793 1.9 92
Dredgers <2,000 GT 2,498 0.8 22
Handy Products Tankers 10- 46,796 1.9 241
54,999 dwt
Miscellaneous Types <2,000 555 0.5 0
GT
Other Offshore 6,600 0.9 135
Passenger Ferries 2-9,999 10,253 1.3 132
GT
Passenger Ferries <2,000 GT 14,388 7.7 41
Ro-Ro 10,000+ dwt 876 0.03 7
Tugs <2,000 GT 56,347 29.7 140
Note: Figures may vary due to rounding.

Source: based on Clarkson’s World Fleet Register (2018).

Annex D. Sensitivity analysis
Table A D.1 presents the results of a sensitivity analysis with respect to the assumptions
made. The sensitivity analysis reveals that with a unit demand elasticity (i.e. of 1), where a
price reduction of 1% leads to an increase in final demand for ships of around 1%, will still
result in net gains for the US economy as a whole. In this simulation, the shipbuilding
industry will not incur any losses in value added since the increase in ship orders will
outweigh the price reductions.
Again, other US industries using water transportation services for their intra-US trade (i.e.
domestic sales) can expect large benefits as a result of the reduced water transportation
costs stimulating demand for their goods. The simulation tests the sensitivity of the
assumption of price reductions in water transport services (i.e. freight rates) on the results.
Even with a small reduction of 1.47% in freight rates the abolishment of the Act will still
generate economic gains for the US and in particular for US industries dependent on intra-
US sales. Against the background of the largely inflated freight costs for Jones Act conform
ships as reported in various studies (i.e. observing freight rates twice as high as of foreign-
built and operated ships), the assumption of a reduction in freight rates by only 1.47% is
extremely underestimated, making the simulation results tremendously conservative. In
particular, states and territories not attached to the mainland US (i.e. Puerto Rico, Hawaii
etc.) will benefit the most from the abolishment of the Act. In the view of their dependence
on US goods and services they will likely increase their demand following the reduction in
trade costs.
In sum, even on the basis of very conservative assumptions made, an abolishment of the
Act will result in net economic gains for the US, in particular other US industries dependent
on water transportation services for intra-US sales, and the shipbuilding industry itself.

Table A D.1. Sensitivity of results to assumption on demand elasticity
Impact on final demand (FD)

US Shipbuilding* USD million % Impact
Original shipbuilding FD 841
New shipbuilding FD 1,295
Change in shipbuilding FD 454 54%
US Other Industries
Original other industries FD 18,938,603
New other industries FD 18,940,779
Change in other industries FD 2,176 0.01% 5
Total US Economy
Total original US FD 18,939,444
New total US FD 18,942,074
Change in US FD 2,631 0.01% 5.8
Impact on total output (TO)
Original shipbuilding TO 859
New shipbuilding TO 1333
Change in shipbuilding TO 473 55.09%
US Other Industries
Original other industries TO 30,819,990
New other industries TO 30,824,564
Change in other industries TO 4,574 0.01% 9.7
Total US Economy
Total original US FD 30,820,849
New total US FD 30,825,896
Change in US FD 5,047 0.02% 10.7
Impact on value added (VA)
Original shipbuilding VA 412
New shipbuilding VA 412.8
Change in shipbuilding VA 1 0.20%
US Other Industries
Original other industries VA 17,638,457
New other industries VA 17,640,669
Change in other industries VA 2,212 0.01% 2741
Total US Economy
Total original USA VA 17,638,869
New total USA VA 17,641,082
Change in USA VA 2,213 0.01% 2742
Note: *refers to commercial US shipbuilding only (i.e. excludes military production).


Annex E. Brazil’s Local Content Shares
Table A E.1. Brazil’s local content shares by sector – original and new
Industry Original New

Industry
Description Industry Description domestic domestic
Code
Code share share
D01 AGR Crop and animal production, hunting and related 83.6
service activities 83.5
D02 FOR Forestry and logging 97.6 97.6
D03 FSH Fishing and aquaculture 88.2 88.2
D05 COL Mining of coal and lignite 0.7 0.6
D06 OIL Extraction of crude petroleum and natural gas 70 69.9
D07 ORE Mining of metal ores 19.2 19.1
D08 QUA Other mining and quarrying 90.7 90.7
D09 MSR Mining support service activities 0 0.0
D10 FOD Manufacture of food products 91.8 48.6
D11 BEV Manufacture of beverages 92.6 49.1
D12 TOB Manufacture of tobacco products 73 38.6
D13 TXT Manufacture of textiles 81.8 43.3
D14 APP Manufacture of wearing apparel 77.7 41.8
D15 LTH Manufacture of leather and related products 90.7 48.1
D16 WOD Manufacture of wood and of products of wood and 97.5
cork, except furniture; manufacture of articles of straw
and plaiting materials 51.6
D17 PAP Manufacture of paper and paper products 91.2 48.3
D18 PRI Printing and reproduction of recorded media 92.1 48.7
D19 PET Manufacture of coke and refined petroleum products 92.8 49.1
D20 CHM Manufacture of chemicals and chemical products 78.2 41.4
D21 PHR Manufacture of basic pharmaceutical products and 36.2
pharmaceutical preparations 18.4
D22 RUB Manufacture of rubber and plastics products 86.1 45.6
D23 NMT Manufacture of other nonmetallic mineral products 92.6 49.0
D241_2431 FRO Manufacture of iron and steel 85.6 45.3
D242_2432 NFR Manufacture of non-ferrous metals 83.4 44.2
D25 MET Manufacture of fabricated metal products, except 86.8
machinery and equipment 46.0
D26 COM Manufacture of computer, electronic and optical 64.5
products 34.1
D27 ELE Manufacture of electrical equipment 74.4 39.4
D28 MCH Manufacture of machinery and equipment n.e.c. 70.9 37.6
D29 MOT Manufacture of motor vehicles, trailers and 90.3
semitrailers 47.7
D301 SHP Manufacture of Ships 58.5 30.9
D302T309 OTE Manufacture of other transport equipment 88.6 46.9
D31T32 OMN Manufacture of furniture; manufacturing nec 86.6 45.9
D33 REP Repair and installation of machinery and equipment 94.1 49.8

Industry Original New

Industry
Description Industry Description domestic domestic
Code
Code share share
D35 UTL Electricity, gas, steam and air conditioning supply 97.4 51.61
D36 WAT Water collection, treatment and supply 98.1 51.99
D37T39 WST Sewerage; Waste collection, treatment and disposal 96.8
activities; materials recovery; and remediation activities and
other waste management services 51.31
D41T43 CON Construction 91.1 48.25
D45 RMO Wholesale and retail trade and repair of motor vehicles and 65.8
motorcycles 34.83
D46 WHO Wholesale trade, except of motor vehicles and motorcycles 88.4 46.84
D47 RET Retail trade, except of motor vehicles and motorcycles 93.8 49.68
D49 LTN Land transport and transport via pipelines 93.5 49.54
D50 WTN Water transport 57.1 30.25
D51 ATN Air transport 81.4 43.14
D52 STN Warehousing and support activities for transportation 91.8 48.45
D53 POS Postal and courier services 99.2 52.58
D55 HTL Accommodation 99.1 52.50
D56 RES Food and beverage service activities 99.8 52.88
D58 PUB Publishing activities 75.9 40.21
D59T60 BRO Motion picture, video and television programme production, 95
sound recording and music publishing activities;
programming and broadcasting activities 50.34
D61 TEL Telecommunications 98.4 52.13
D62T63 SOF Computer programming, consultancy and related activities 69.1 36.56
D64 FIN Financial service activities, except insurance and pension 93.9
funding 49.77
D65 INS Insurance, reinsurance and pension funding, except 96.6
compulsory social security 51.18
D66 AUX Activities auxiliary to financial services and insurance 97.4
activities 51.63
D68A ESTA Imputed rents 0 0.00
D68B ESTB Real estate activities 98 51.92
D69T70 LEG Legal and accounting activities; activities of head offices; 93.4
management consultancy activities 49.51
D71 ACH Architectural and engineering activities; technical testing 85.2
and analysis 45.13
D72 RND Scientific research and development 5.4 2.85
D73 ADV Advertising and market research 96 50.86
D74T75 OSC Other professional, scientific and technical activities; 80.3
veterinary activities 42.53
D77 LEA Rental and leasing activities 57.8 30.59
D78 EMP Employment activities 98.8 52.33
D79 TRA Travel agency, tour operator reservation service and 93.6
related activities 49.62
D80T82 OSR Security and investigation activities, services to buildings 80.9
and landscape activities; and office administrative, office
support and other business support activities 42.82
D84 GOV Public administration and defence; compulsory social 98.3
security 52.07
D85 EDU Education 77.7 41.25
D86 HLT Human health activities 98 51.93
D87T88 SOC Residential care activities and social work activities without 64.2
accommodation 34.04

D90T92 ART Creative, arts and entertainment activities; libraries, 53.3 28.25
archives, museums and other cultural activities; gambling
and betting activities
D93 SPO Sports activities and amusement and recreation activities 63.6 33.73
D94 MEM Activities of membership organisations 99.8 52.88
D95 PRP Repair of computers and personal and household goods 99.8 52.88
D96 OPR Other personal service activities 85.8 45.47
D97T98 HCA Activities of households as employers; undifferentiated 0 0.00
goods and services producing activities of households for
own use
Source: based on OECD Trade-in-Value Added (2018).

Endnotes
1
Weiss (2016[6]) provides a more detailed overview of arguments for local content policies, such as
(i) economic benefits by achieving sectoral development in fast growing sectors and benefitting from
an increased tax base for governments; (ii) the infant industry argument where domestic producers
achieve economies of scale more rapidly, reducing unit costs and resulting in a more cost efficient
and competitive industry. This explanation also includes the argument that governments seek a
legitimization for their public support to infant industries that require large upfront investments,
such as it is the case in the renewable energy sector. The high financial burden might not be publicly
supported if there were no local benefits attached to it (Kuntze and Moerenhout, 2013[46]); (iii)
technology transfer from foreign to domestic firms so the quality of the final product (despite using
local inputs) does not suffer. Domestic firms are able to engage in learning by doing and absorbing
knowledge capacity, which may make them more competitive in the long-term.
2
Between 2010 and 2012, G20 countries put an additional 265 local content requirements in place.
The increase is particularly related to implementations in G20 countries in the IMF classification
“G20 emerging and developing economies” (UNCTAD, 2017[48]).
3
These so-called offsets requirements are for instance only authorized under the WTO Government
Procurement Agreement (GPA) for developing countries during transitional periods.
4
In the context of public procurement provisions, Hufbauer et al. (2013[3]) claim that LCRs are “the
norm rather than the exception”.
5
The ideal choice (in the market equilibrium) would stipulate that local producers of a good source
the optimal amount required for profit maximization from abroad.
6
Which effect dominates depends on the degree the target industry is already fulfilling the LCR (i.e.
to what extent the LCR is binding for the target industry). For instance, if the current domestic
content in inputs is 60% and the LCR is 50%, the policy will have no effect on the composition of
foreign and domestically produced intermediate inputs (Stone, Messent and Flaig, 2015[8]).
Furthermore, the economic outcomes depend on how sensitive the intermediate good production
reacts to changes in its output price (i.e. demand elasticity of intermediate goods) and how sensitive
final good production is to changes in intermediate good prices (i.e. demand elasticity of final goods)
(Veloso, 2006[10]).
7
The abolition of the Act would boost employment in the overall economy with a net gain of around
300 000 jobs whereof the target sectors would see a fall of around 60 000 jobs while sectors in the
rest of the economy would record an increase in jobs of around 360 000.
8
The agency introduced a specific Local Content Primer – a guideline for bidding companies to
accurately calculate the local content percentages for each (sub)-item.
9
Petrobas first discovered the pre-salt layers in Brazil’s offshore Santos Basin in 2005, and further
exploration in the Santos, Campos and Espirito Santos basins revealed additional potential for oil
production (US Energy Information Administration, 2017 [55]).
10
In light of intensified competition in the global energy markets, an expected loss of the share of
fossil fuels in the global energy mix by 2040 (where oil, gas, coal and non-fossil fuels each contribute
by around 25%) and the rapid growth of renewable energy sources (providing around 14% of
primary energy), the ANP expects a significant drop in the value of fossil fuels (ANP, 2018[17]).
11
The 15th (latest) bidding round took place in March 2018 on the basis of the new requirements.

12
Petrobas held a monopoly position until 1997, when Brazil began liberalizing its energy sector by
allowing international and domestic oil companies to operate in the market through concession
agreements, authorizations or production-sharing-contracts (PSCs).
13
For oil and gas exploration, the ship type “floating production storage and offloading units”
(FPSOs) is primarily ordered.
14
However, this number refers to the vessel capacity required to exploit the offshore oil and gas
reserves in general, and is not purely a result of the LCR reform. It is not clear how many vessels
would have been ordered anyway for offshore services in the absence of the policy reform.
15
In order to serve USD 1 billion in final demand for oil and gas production the industry itself needs
to generate oil and gas used in its production. Hence, total output in the oil and gas sector is with
USD 1.03 billion slightly higher than final demand with USD 1 billion.
16
It is not clear how much additional oil production is purely the result of the LCR reform, and the
extent of oil exploration in the absence of the policy reform.
17
According to Brazil’s national account table the average yearly wage in the other transport
equipment sector (including shipbuilding) amounted to around USD 21 000 in 2015. With 95 000
new jobs, total wages will represent about USD 1.99 billion. Taking the saving rate of Brazilian
households of 11.6% in the same year, the expected household consumption will make up around
USD 1.7 billion.
18
The Jones Act was temporarily suspended by President Trump on September 28 in an effort to
support relief efforts in Puerto Rico. Similar suspensions of the Jones Act occurred in the wake of
Hurricanes Harvey and Irma, as well as Sandy in 2012, and Hurricanes Katrina and Rita in 2005, to
expedite the delivery of fuel.
19
According to one interpretation of the law, pleasure boats owned by companies and used to
entertain clients are also subject to the law.
20
Yet, according to a study published by Congressional Research Service (a public policy research
agency of the US Congress) the US Department of Defence (DOD) frequently leases foreign vessels
for missions that require sealift. The study reports that the DOD opposed the idea proposed by the
American Shipbuilding Association (ASA) to reduce a legal limit on leases of foreign built-ships
from five to two years, arguing that the “ship leases are the most cost-effective way to meet the
needs for the ships in question.” (O’Rourke, 2010[47]).
21
See Hufbauer and Elliott (1993[49]); US International Trade Commission (1999[50]); Federal
Reserve Bank of New York (2014[51]); Swisher and Wong (2015[52]); Krueger, Teja and Wolfe
(2015[53]); Hansen (November 16, 2015[54]).
22
Estimates calculated by Joseph Stiglitz during his time as chair of the Council of Economic
Advisers under President Clinton.
23
60% are tugs < 2 000 GT, 10% are Anchor Handling Tugs and Supply (AHTS), 9% other offshore
vessels, 6% miscellaneous ships < 2 000 GT and 2% dredgers.
24
“According to oil shippers, the price for moving crude oil from the Gulf Coast to the U.S.
Northeast on Jones Act tankers is $5 to $6 per barrel, while moving it to eastern Canada on foreign-
flag tankers is 2.41 USD. ” (Frittelli, 2014[28]).
25
For more information on the measurement of value added in the shipbuilding industry see
Gourdon and Steidl (forthcoming[12]).
26
Increased firm productivity can also be reflected in lower prices if firms pass through their cost
reductions to consumers.
27
The US produces primarily low-value added ships, such as tugs, dredgers, some small offshore
vessels and passenger ships, which can hardly explain an increase of production value as a

justification for the outstanding value added share of US output value. See Table A B.1 in Annex B
for an overview of ships partly produced (i.e, work-in-progress) during 2016.
28
Due to the lack of reported US newbuilt prices the simulation is based on research findings and
observed transactions described in the previous section.
29
As discussed in the previous section, the elevated operational costs were primarily a result of the
higher living standards, wage rates and social benefits of the US crew required to operate the ship
under the US Jones Act. In addition, the Jones Act imposes heavy restrictions highlighting the lack
of flexibility for market participants and the elevated trade costs by using less efficient ships for
transportation services. For instance, in the severe winter of 2014, New Jersey ran short of road salt.
Enough road salt was available in Maine, only 400 miles away, close to vessel that could transport
it. However, as a foreign vessel it was not Jones Act-compliant, and it was therefore banned from
completing the delivery. Ultimately, the shipment was delayed and more than double what it would
have cost had the foreign-vessel been able to transport it (Bergstresser and Melitz, 2017[16]).
30
Note: this paragraph highlights the broader perspective which our simulation approach takes in
comparison to Francois et al. (1996[11]) as discussed in the previous section.
31
Please note, the simulation for the shipbuilding industry focuses only on commercial shipbuilding
which is estimated to have an output value (not delivery value) of around USD 841 million in 2016.
For more information on how the commercial ship production value for 2016 is derived see Annex
C.
32
Francois et al. (1996[11]) estimate welfare gains, materializing as a result of the removal of the,
Act of USD 2 billion to USD 3.4 billion in 1989 USD annually, which corresponds to around USD
4 billion to USD 6.8 billion adjusted to 2018 USD annually (using USA consumer price indices
from OECD Stat. (2019[56])). The results can be interpreted as the annual loss in real national income
imposed by the Jones Act.

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LOCAL CONTENT

OECD SCIENCE, TECHNOLOGY

OECD DIRECTORATE FOR SCIENCE, TECHNOLOGY AND INNOVATION

OECD SCIENCE, TECHNOLOGY AND INDUSTRY POLICY PAPERS

Executive Summary .............................................................................................................................. 5

Table 1. New requirements on oil and gas concessions ........................................................................ 11

Table A B.1. Ships produced in the US during 2016 ............................................................................ 31

Figure 1. Effect of Brazil’s Local Content Reform on Economic Outcomes ........................................ 12

Figure A A.1. Built in the US criteria ................................................................................................... 30

Box 1. Brazil’s oil sector ....................................................................................................................... 11

OECD SCIENCE, TECHNOLOGY AND INDUSTRY POLICY PAPERS