Voluntary Export Restraint: Trade Regulation Mechanism

A detailed exploration of Voluntary Export Restraint (VER), its historical context, types, key events, implications, and more.

Historical Context

Voluntary Export Restraints (VERs) have been a significant part of global trade policy, particularly prominent during the 1970s and 1980s. VERs are agreements in which an exporting country agrees to limit the quantity of goods exported to another country. These restraints are often “voluntary” only in name; they are typically established under the threat of tariffs or other trade barriers from the importing country.

Key Historical Events:

• 1970s: The use of VERs became widespread as countries sought to protect domestic industries from foreign competition.
• 1981: The United States negotiated a VER with Japan to limit automobile exports, a move aimed at protecting the U.S. auto industry.
• 1992: A significant turning point came with the international agreement to phase out VERs, reached under the auspices of the General Agreement on Tariffs and Trade (GATT).

Types/Categories of Voluntary Export Restraints

1. Quantity-based VERs: These limit the number of units of a particular product that can be exported.
2. Value-based VERs: These set a limit on the total value of the goods exported.
3. Market-share based VERs: These cap the exporting country’s share of the import market in the destination country.

Key Concepts and Implications

• Trade Protectionism: VERs are a tool of trade protectionism, designed to shield domestic industries from foreign competition.
• Economic Impact: They can lead to higher prices for consumers in the importing country but can also protect jobs and industries deemed vital.
• Duress or Cooperation: While often imposed under threat, VERs can also arise from mutual agreements between exporting and importing countries to manage trade more smoothly.

Mathematical Models

In the context of International Trade Theory, the effects of a VER can be modeled similarly to tariffs and quotas. However, the welfare effects differ:

Welfare Analysis

$$ CS_{after} - CS_{before} + PS_{after} - PS_{before} - VER\_cost $$

Where:

• \(CS\) = Consumer Surplus
• \(PS\) = Producer Surplus

Importance and Applicability

VERs are important in the study of trade policies as they illustrate a non-tariff barrier to trade and their implications for both importing and exporting countries. While their use has declined, understanding VERs provides insight into the broader landscape of trade regulations.

Examples and Considerations

Examples:

• The 1981 VER between the U.S. and Japan on automobile exports is one of the most well-known cases.
• European Union (EU) and Japanese electronics industry agreements during the 1980s.

Considerations:

• While VERs can protect domestic industries, they may also lead to trade inefficiencies and higher prices for consumers.
• They can create diplomatic tensions and trade disputes.

Related Terms

• Tariffs: Taxes imposed on imported goods to protect domestic industries.
• Quotas: Limits set on the quantity of goods that can be imported.
• Trade Barriers: Any regulation or policy that restricts international trade.
• Dumping: Exporting goods at a price lower than the home market or below production cost.

Comparisons

VERs vs. Tariffs:

• Control: VERs control the quantity directly, while tariffs control through price.
• Revenue: Tariffs generate revenue for the government; VERs do not.
• Implementation: VERs often require bilateral agreements, while tariffs can be unilaterally imposed.

Interesting Facts

• VERs are considered a “grey area” in trade policies because they can be seen as voluntary but often occur under the threat of more severe trade barriers.
• They played a pivotal role during the 1980s in shaping trade relations between major economic powers.

Inspirational Stories

Companies in affected industries often innovated in response to VERs. For instance, Japanese automakers established production facilities in the United States following the 1981 VER, a move that significantly influenced the global automotive industry.

Famous Quotes

“Trade protection accumulates in bad times; it must be torn down in good times.” – P. J. O’Rourke

Proverbs and Clichés

• “Necessity is the mother of invention.”
• “Every cloud has a silver lining.”

Expressions, Jargon, and Slang

• Trade War: A situation where countries retaliate against each other’s trade restrictions.
• Quota Management: The process of ensuring exports do not exceed agreed limits.

FAQs

Why are VERs considered 'voluntary'?

While termed voluntary, they are often accepted to avoid more severe restrictions like tariffs.

Are VERs still used today?

They have largely been phased out due to international trade agreements but understanding them is still relevant.

References

1. Bhagwati, J. (1988). “Protectionism”.
2. Krugman, P. R., & Obstfeld, M. (2009). “International Economics: Theory and Policy”.
3. World Trade Organization. “Understanding the WTO”.

Summary

Voluntary Export Restraints (VERs) have been a critical mechanism in international trade policy. Primarily used during the 1970s and 1980s, they were designed to protect domestic industries from foreign competition. While phased out in the early 1990s, the legacy and effects of VERs continue to provide valuable lessons in trade economics. Understanding VERs involves exploring their historical context, economic implications, and the nuanced relationships between exporting and importing countries.