Introduction

This chapter analyzes economic effects of policies of content protection, such as the requirement that “domestic” automobiles sold in the United States to embody a prescribed minimum share of domestic value added. Similar policies have been implemented in a number of developing countries, as well as in Australia and Canada. Included in this broad class of policies are both requirements that final goods assembled in a country should use a minimum amount of domestic input, and requirements that final goods exported to a country should use a minimum amount of domestic input in their foreign assembly processes.

To analyze the consequences of such policies of content protection, it is assumed that the final product is produced in accord with a neo-classical production function, specified in section 2, that employs domestic inputs and imported (or foreign) inputs. This specification allows for smooth substitution possibilities between domestic and imported inputs which, it is argued, characterize the situation of many industries that are the actual or potential subjects of content protection policies. This specification differs from that of Grossman (1981) who assumes that the imported material input is a perfect substitute for a domestically produced material input and that total material input (imported plus domestic) substitutes against domestic labor in the production of final output.