VOLUNTARY EXPORT RESTRAINTS(VER)Alex Way

Jarryd Bray

Venita Ross

Definition:

A restriction set by a government on the quantity of goods that can be exported out of a country during a specified period of time. These restraints are typically implemented upon the insistence of the importing nations. This action is implemented to protect specific importing industries.

VER Situations

VER’s arise when import-competing industries seek protection from a surge of imports from specific exporting countries. VER’s are typically offered by the exporter to appease the importing country and to avoid the effects of possible trade restraints on the part of the importer.

VER Situations

VER’s are also typically enforced on a bilateral basis. One country will limit exports to another to limit imports on a specific industry in a specific country. This bilateral situation protects the members of specific industries within a country

Common Examples of VER

1980’s Japan (Automobile Industry) 1950’s Textile Industry

Price Effect of VER

Example: Wheat industry US: Wheat exporter that imposes a VER. Mexico: Wheat importer.

Prices Mexican wheat and US wheat import price

rise. Reduce Demand. Increase domestic supply, causing

reduced US export supply.

Price Effect of VER

In the US market: Excess supply. Lead to reduction in price.

Lower price will: Reduce US supply. Raise US demand.

Reduction in US export supply.

Price Effect Graph

VER Welfare Effects

PFT is free trade equilibrium price.

Importing country price will rise Demand equal to quota level.

Exporting country price will fall Export supply equal quota level.

Welfare Effects Graph

Importing Country Welfare Effects Consumer Surplus = - (A + B + C + D) Producer Surplus = + A Quota Rents = 0 National Welfare = - (B + C + D)

Exporting Country Welfare Effects Consumer Surplus = + e Producer Surplus = -(e + f + g + h) Quota Rents = +(c + g) National Welfare = c - (f + h) World Welfare = -(B + D) - (f + h)

Voluntary Export Restraints (VER) Significance

They Do not Violate countries agreement under the GATT (General Agreement on Tariffs and Trade) whose aim is to reduce barriers on International Trade.

Countries enjoy the benefits of protectionism while not in violation of International Trade rules by implementing tariffs

They encourage good diplomatic relations while promoting an openness of trade records.

Reasons for VER in Japan

Japanese vehicles were more fuel efficient due to oil prices and gave Japanese models an advantage over domestic producers.

Imported Sales were 17-22 percent of overall sales in US.

Japanese enjoyed substantial cost advantage. Cars were sold at a much lower price.

Impact Of VER

Intense competition from Japanese Brands generated calls for trade protection

Applied in 1980’s Japan auto makers under pressure from US competitors voluntarily limit exports to US market.

VER allowed 1.68m Japanese cars into the US each year in 1981.

Effects of VER on Free Trade Increase price for Japanese cars. Increased in US producers profits. US producers sold more cars. American Auto consumers suffered. Americans as a whole were worse off

due to export restraint. Prices were $1200 or 14% more than would have been without restraints.

Other Developments

Automakers shift production to the US which were excluded from limits.

Exchange rates : The pass through effect: This promoted a

stronger Yen which increases both the models produced in Japan and the landed cost of vehicle.

The competing good Effect: This increases the landed cost of Japanese models which leads to an increases in demand and prices of domestic substitutes.

VER and the Auto Industry

References

Suranovic, Steven M. “International Trade Theory and Policy.” <http://internationalecon.com/Trade/Tch90/T90-17.php>