Navigating Fragmented Globalization: Local Content Policies in a New Trade Order

Global Value Chains (GVCs) have significantly transformed production geography in the last thirty years. They enable emerging countries to focus on tasks such as labor-intensive assembly or raw material extraction without requiring complete industrial ecosystems, which allows many emerging economies to engage in global trade. However, this form of integration has drawbacks, including minimal domestic value retention, limited industrial capacity, and increased susceptibility to external shocks (He et al., 2024; Waqas et al., 2024).

The COVID-19 pandemic starkly exposed these weaknesses. Supply disruptions, input shortages, and logistics bottlenecks crippled entire sectors, demonstrating the fragility of globally dispersed supply networks (Ali et al., 2022; Choksy et al 2022). At the same time, the escalating U.S.–China trade conflict, manifested through retaliatory tariffs, technology restrictions, and export controls, ignited broader geopolitical tensions. These developments have accelerated a new wave of industrial policies, guided less by economic efficiency and more by strategic imperatives such as national security, supply chain resilience, and technological sovereignty (Cui and Jiang, 2025; Ju et al., 2024; Whulanza, 2023).

This geopolitical shift has diminished the influence of established trade bodies such as the World Trade Organization (WTO), which in the past has become a symbol of the globalization of trade. As countries increasingly favour bilateral agreements and unilateral trade actions over multilateral discussions, tools like tariffs, export controls, and investment restrictions have regained prominence (Dang et al., 2024). Many nations now cite national security or public health issues to justify measures that would have previously faced obstacles under WTO regulations (Fan et al., 2025; Banga et al., 2022). At the same time, non-tariff barriers (NTBs), including data localization laws, certification requirements, and technical regulations, have become powerful instruments for advancing domestic policy goals under the guise of regulatory compliance. These shifts mark a profound transformation in global trade governance: from an era of liberalization and rule-based coordination to fragmentation, uncertainty, and strategic realignment (Dilyard et al., 2021).

Local Content Requirements (LCRs), once criticized under conventional trade theory, are gaining renewed relevance within this new policy landscape. Far from being crude protectionist measures, LCRs today serve as adaptive instruments for enhancing domestic participation in value chains (Vu et al., 2022; Boffa et al., 2021). LCRs can transform foreign direct investment (FDI) from a transactional presence into a foundation for sustained industrial capability by encouraging localization of activities such as component manufacturing, packaging, workforce training, or software integration (Ramakrishna et al., 2023). Instead of permitting companies to import inputs and export final products with little local effects, LCRs require or encourage the localization of particular production phases, such as component manufacturing, packaging, software integration, or workforce development.

In several cases, such as in Indonesia's mobile device industry, LCR has facilitated domestic assembly and the increasing localization of vital components like casings, batteries, and accessories (Hong et al., 2023). This advancement sets the stage for greater growth in the electronics sector. Likewise, in India, the Production Linked Incentive (PLI) scheme connects financial support to local value addition, encouraging companies to establish local supplier networks and strengthen backward linkages (Cherian et al., 2021). These initiatives assist emerging economies in evolving from mere terminal assembly locations to engaged participants in regional and global supply chains. Local content regulations have allowed second-tier suppliers in Brazil's automotive industry to branch into electronics and engineering (Sahoo et al., 2022). Furthermore, government-imposed electronics localization ratios in Vietnam have encouraged local firms to transition from contract labour to component assembly and testing (Dang et al., 2024).

The efficacy of LCRs lies not in rigid enforcement, but in smart alignment with GVC realities. Sectoral complexity, firm strategies, lead-firm governance, and compliance with global standards influence whether content thresholds yield meaningful development outcomes. Well-designed LCRs, supported by SME development, vocational training, and technical standards, can help build resilient industrial ecosystems beyond shallow integration. It also encompasses functional diversification, which includes developing local logistics, after-sales support, software integration, design, and branding capabilities. LCRs that effectively target these areas could expedite this process (Che et al., 2025).

Importantly, LCRs must be seen not as instruments of exclusion but as tools of inclusion. They should be seen as a mechanism to ensure that the benefits of globalization are more widely distributed, and that technological diffusion, job creation, and industrial learning are not left to market forces alone (Chen et al., 2024). By leveraging LCRs, governments can motivate foreign companies to set up more sophisticated operations within their borders, particularly when these requirements are combined with support for small and medium-sized enterprises, compliance with technical standards, and vocational training (Sudan et al., 2025).

As globalization fragments, emerging economies can no longer afford to be passive participants. Regional industrial integration—through platforms like ASEAN, AfCFTA, and MERCOSUR—offers an opportunity to consolidate supplier networks, harmonize content policies, and build economies of scale (Wang and Xie, 2025). Emerging economies can create coordinated infrastructure investments, regulatory alignments, and digital integration to transform regional blocs into competitive industrial clusters rather than disjointed markets. No longer is it sufficient to "plug into" GVCs; nations must actively shape the terms of integration to ensure domestic capability development and strategic autonomy (Peng et al., 2025). LCRs can be pivotal by being standardized or mutually recognized across borders, reducing compliance burdens and encouraging cross-border investments and technology partnerships. They serve not as rigid protectionist devices, but as adaptive levers for technology diffusion, economic resilience, and developmental upgrading (Zagloel et al., 2023).

The future of global supply chains is not merely about cost and speed; in the face of constant uncertainties, it is about control, resilience, and inclusivity. The ability of nations to retain, create, and govern value locally will increasingly define national prosperity. As such, emerging markets must not retreat from industrial policy but must refine and modernize it to reflect the complexity of 21st-century value chains. With flexibility in mind when designing and embedding LCR in broader development strategies, local content policies offer one of the most effective pathways to economic upgrading and strategic autonomy. Their success will depend on context-sensitive implementation, dynamic governance, and a willingness to continuously adapt as technologies, trade patterns, and geopolitical alliances evolve.