Voluntary Export Restraints Essay

A voluntary export restraint (VER) is a limit placed on exports by the exporting country, usually imposed because of political pressure from one or more importing trading partners. VERs are typically industry-specific, with prominent examples having been implemented by Japan in the automobile industry and by several Asian countries in the textile industry. VERs are rarely viewed as being truly voluntary because the alternative is usually the threat of tariffs or quotas that would accomplish the same objective that VERs are designed to achieve. An advantage to voluntary export restraints is that they can be removed at the discretion of the successful exporting country after the political aspects of the trading situation have moderated, whereas other tariff and nontariff barriers imposed by the importing country may not be so easy to remove once they are implemented.

In the early 1980s, the U.S. auto industry was facing stiff competition from more-fuel-efficient Japanese imports as the price of gas rose in the second Organization of Petroleum Exporting Countries (OPEC) oil price shock. A recession in the United States further depressed demand from auto buyers. Chrysler teetered on the verge of bankruptcy, and losses mounted at both General Motors (GM) and Ford. Intensive lobbying by the auto industry resulted in intervention by the U.S. trade representative’s office and the eventual agreement of Japan to self-imposed voluntary export restraints on the import of automobiles to the United States. British automakers followed a similar strategy, and Japan also agreed to impose voluntary export restraints there as well. These VERs did not violate any agreements made under the General Agreement on Tariffs and Trade (GATT), and limited the total number of cars imported into the United States from Japan to 1.68 million in 1981. This cap was gradually raised to 1.85 million in 1984 and to 2.3 million in 1985.

The Japanese VER in automobiles did help U.S. automakers to increase their profits, but did so at the expense of American consumers. Japanese car prices increased by about 14 percent, and in many cases, U.S. consumers had to get on long waiting lists to buy imported Japanese cars—paying further premiums to dealers. Many buyers who might have otherwise purchased Japanese cars opted for less expensive U.S. models, boosting sales and profits at U.S. automakers. Profits also increased for Japanese manufacturers because of the premium pricing they were able to sustain in the face of curtailed supplies.

To get around the limitations imposed by the voluntary restraint agreement, Japanese manufacturers opened plants in the United States and invested heavily in U.S.-based production. Cars manufactured by Japanese firms in the United States were not subjected to the limits imposed by the VER. This activity, combined with a recession and softening demand for cars in the early 1990s, made the export restraints largely irrelevant. The program was terminated in 1994.

VERs have also been used in the textile industry as far back as the 1950s. Again, the original agreements originated because of competitive pressures felt in the United States by textile producers in Japan. After a restraint agreement was negotiated and agreed upon by Japan, textiles from other Asian nations such as South Korea and Taiwan began to flood the U.S. market. These nations also agreed to limit their exports to the United States rather than face more aggressive trade barriers. European textile companies also felt pressure from their Asian competitors, and the European Economic Community negotiated VERs with Asian exporters as well.

The trade situation in textiles became increasingly complex, resulting in significant attention being paid to the issue in GATT negotiations. In the early 1970s, this process resulted in the signing of the MultiFiber Agreement, which specified quotas from major exporters to major importers. Once the issue became part of multilateral trade negotiations, the export restraints were no longer “voluntary,” resulting in an era of formally managed trade in textiles. Further agreements have subsequently phased out managed trade in textiles.

Voluntary export restraints, like many other trade barriers, protect less efficient producers in importing countries at the expense of consumers in those countries. Exporting firms sometimes get around the restrictions by shifting manufacturing to the countries that are the subject of the restraints, as occurred with Japanese automobile companies building plants in the United States in the 1980s and 1990s. GATT negotiations in the Uruguay Round resulted in an agreement to place limitations on the use of VERs. Based on that agreement, World Trade Organization (WTO) member countries must limit use of VERs to only one industry sector at a time.

 

Bibliography:

  • Ana Aizcorbe, “Japanese Exchange Rates, Export Restraints, and Auto Prices in the 1980s,” Monthly Labor Review (v.130/2, 2007);
  • Steven Berry, James Levinsohn, and Ariel Pakes, “Voluntary Export Restraints on Automobiles: Evaluating a Trade Policy,” The American Economic Review (v.89/3, 1999);
  • Chad P. Bown and Rachel McCulloch, U.S. Trade Policy toward China Discrimination and Its Implications (Brookings Institution, 2005);
  • Brati Sankar Chakraborty, “Capital Inflow under Voluntary Export Restraint,” Metroeconomica (v.59/4, 2008);
  • Roberto A. De Santis, “Why Exporting Countries Agree to Voluntary Export Restraints: The Oligopolistic Power of the Foreign Supplier,” Scottish Journal of Political Economy (v.50/3, 2003);
  • William A. Kerr and James D. Gaisford, Handbook on International Trade Policy (Edward Elgar, 2007);
  • Michael O. Moore, “VERs and Price Undertakings under the WTO,” Review of International Economics (v.13/2, 2005);
  • Masayuki Okawa, “Voluntary Export Restraints under Imperfect Competition,” Review of International Economics (v.12/1, 2004);
  • Kai-Uwe Seidenfuss and Yunus Kathawala, “Voluntary Export Restraint (VER) without Market Restraints? The Case Study of the Monitoring Agreement (1991–1999) between the Japanese Car Manufacturers and the European Union,” European Business Review (v.17/3, 2005);
  • Harry Stoffer, “Import Curbs Stimulated Honda’s U.S. Growth,” Automotive News (September 13, 2004).

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