What are voluntary export restraints?
Actually, they are not so "voluntary" despite the name. Why do countries sometimes pretend to voluntarily impose limits on how much their producers can export? Is a voluntary export restraint similar to an import quota? Is there any important difference between the two? Sounds interesting? Read on to find out more!
Voluntary Export Restraints Definition
What is the definition of voluntary export restraints?
Well, you can think of voluntary export restraints (VERs) as quotas that are imposed by the exporting country, unlike import quotas that are imposed by the importing country. The VER limits the quantity of certain exports that domestic firms can send to a foreign country.
It is "voluntary" in the sense that it is a limit imposed by the home country of the exporters. The VER is usually used by the exporting country to placate protectionist instincts in the destination country and avoid a potential trade conflict.
A voluntary export restraint (VER), sometimes known as a voluntary restraint agreement (VRA), is imposed by the home country to limit the quantity of certain exports that domestic firms can send to a foreign country in order to avoid a potential trade conflict with the foreign country.
You can learn more about other types of protectionist measures by checking out these explanations:
- Protectionism
- Tariffs
- Export Subsidies
- Import Quotas
- Local Content Requirements
Effects of Voluntary Export Restraints
Let's look at a graph to see the effects of voluntary export restraints.
Suppose that the importing country has exerted political pressure on all of its trading partners so that they all decide to impose a voluntary export restraint (VER) on their exports of batteries to avoid further trade disputes. From the perspective of the importing country, a voluntary export restraint imposed by the exporting country is comparable to the effect of an import tariff.
Figure 1 below shows the market for batteries in the importing country. In the case of autarky, the equilibrium quantity is Q0. The VERs essentially shift the domestic supply curve to the right by the amount allowed under the VERs. The new equilibrium quantity is Q2. Of this, domestic producers supply the quantity of Qs2. Contrast this with the case of free trade, domestic consumers will demand a quantity of Q1, and domestic producers only supply a small quantity of Qs1. The foreign producers who are able to export can sell their batteries at a higher price of P2 compared to free trade. The green area is the VER rent which goes to the foreign producers.
Fig. 1 - The effects of VERs on the importing country's market
Quotas vs. Voluntary Export Restraints
How should we compare import quotas vs. voluntary export restraints (VERs)? There are many similarities and one important difference between these two things.
The similarities come from the fact that both import quotas and VERs are quantity limits on goods being traded between two countries. Like import quotas, VERs reduce the quantity of goods that go to the importing country, push up the price, and generate quota rent. But since VERs are imposed and administered by the exporting country, the quota rent goes to the exporters instead of the importers.
The effect of an import quota of an equivalent quantity will look like that in Figure 1 above, with the green area being the quota rent which would go to the domestic importers or foreign exporters depending on how the quota regime is administered.
Need a refresher on import quotas? Here is our explanation: Import Quotas.
Voluntary Export Restraints Examples
A famous example of voluntary export restraints is the one that Japan imposed on its carmakers under pressure from the US in the 1980s.
Due to the impact of the oil crisis of 1979, Japanese cars became popular in the US for their smaller sizes and better gas mileage performance compared to cars made by US producers. Political pressure built up in the US to protect the domestic automobile industry. Instead of going for unilateral measures such as a tariff or quota on Japanese cars, the US put pressure on Japan to "voluntarily" reduce car exports to the US. The US chose this route because it feared that unilateral measures could lead to a wider trade war with Japan, and Japan agreed to it because it feared that the US may choose to impose unilateral measures otherwise.
The initial agreement in 1981 limited Japanese auto exports to the US to 1.68 million cars. The VER allowance was increased to 1.85 million cars in 1984. From 1985, the VER allowance was set at 2.30 million cars although the actual car export in 1988 was lower than the VER quota. The VER program finally ended in 1995.
A paper published in 1999 studies the effects of the VER program from 1981 to 1990. It finds that the VER increased the prices of Japanese cars in the US substantially, by around $750 in 1986 and by $1687 in 1987. At the same time, the prices of US-made cars were not affected as much by the VER. They increased by about $200 in 1987 and 1988.1
However, the profits of US carmakers increased substantially, for example, by $3.09 billion in 1987. The increase in US carmakers' profits was due to some consumers switching from Japanese to US-made cars. On the other hand, the study finds that the profits of Japanese carmakers were basically unaffected by the VER. The study attributes this to the VER rent that Japanese carmakers were able to capture due to the higher prices.1
The study finds that, in the period from 1986 to 1990, the VER program increased domestic producer profits by $10.2 billion while the consumer welfare loss amounted to $13.1 billion. Therefore, the net welfare loss in the US was $2.9 billion.1
History of Voluntary Export Restraints
Here is a brief history of the use of voluntary export restraints (VERs) by countries.
VERs had been a popular way for importing countries to remedy what they saw as imbalances in their trade with other countries. This was due to countries' willingness to protect their domestic industries without going into a damaging trade war. VERs were frequently used in the 1980s - the VER on Japanese automobile exports to the US being the most well-known example.
After the Uruguay round of negotiation, World Trade Organization (WTO) rules forbid governments from negotiating with each other and imposing VERs on exporters. However, the governments of the importing and exporting countries can still sometimes find ways to convince the exporters to agree to "voluntary" measures to limit the quantity of their exports.
Pros and Cons of Voluntary Export Restraints
What are the pros and cons of voluntary export restraints (VERs)? How do they compare with other types of protectionist measures like tariffs and import quotas?
Pros of Voluntary Export Restraints
The pros of voluntary export restraints are:
- For both countries: avoid trade wars
- For the importing country: protect domestic producers
- For the exporting country: the rent goes to domestic exporters
It is easy to see why VERs may be a better option for both the importing and exporting countries given that reaching an agreement for a VER can help them avoid a potentially costly trade war. For the importing country, VERs provide protection to domestic producers in the same way that an import quota does. For the exporting country, VERs have an additional advantage in ensuring that it is the domestic exporters who capture the VER rent.
Cons of Voluntary Export Restraints
The cons of voluntary export restraints are:
- For both countries: market distortions
- For the importing country:
- no tariff revenue for the government
- the rent goes to foreign producers
VERs carry the usual disadvantages of protectionist measures like tariffs and import quotas. They push up prices and reduce consumption quantities for consumers in the importing country and limit the amount that exporters can export to their destination market. In other words, VERs generate deadweight loss like other protectionist measures.
The market distortion effect can also affect domestic producers in the importing country if the goods in question are inputs in production processes. For example, if there is a voluntary export restraint on batteries for electric cars, the domestic electric car producers will suffer from it because they have to pay a higher price for one of the vital inputs in their products.
Compared to tariffs and import quotas, VERs also have further disadvantages for the importing country. Unlike tariffs, VERs do not generate tariff revenue for the government. Unlike in the case of import quotas where the government can give the quotas to domestic importers, the rent in the case of VERs will definitely go to the foreign producers, which is a further welfare loss for the importing country.
Why do countries impose protectionist measures even if they lead to net welfare losses? Learn more about Arguments for Trade Protection.
Voluntary Export Restraints - Key takeaways
- A voluntary export restraint (VER), sometimes known as a voluntary restraint agreement (VRA), is imposed by the home country to limit the quantity of certain exports that domestic firms can send to a foreign country in order to avoid a potential trade conflict with the foreign country.
- The effects of a VER are similar to those of an import quota. The main difference is that the VER rent definitely goes to foreign exporters.
- The main benefit of a VER is that both countries can resolve their trade disputes without going into a trade war.
References
- Berry, Steven, James Levinsohn, and Ariel Pakes. "Voluntary export restraints on automobiles: Evaluating a trade policy." American Economic Review 89, no. 3 (1999): 400-430.
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