Voluntary Export Restraints A variant on the import quota is the voluntary export restraint (VER), also known as a voluntary restraint agreement (VRA). (Welcome to the bureaucratic world of trade policy, where everything has a three-letter symbol!) A VER is a quota on trade imposed from the exporting country's side instead of the importer's. The most famous example is the limitation on auto exports to the United States enforced by Japan after 1981. Voluntary export restraints are generally imposed at the request of the importer and are agreed to by the exporter to forestall other trade restrictions. As we will see in Chapter 10, certain political and legal advantages have made VERS preferred instru- ments of trade policy in some cases. From an economic point of view, however, a vol- untary export restraint is exactly like an import quota where the licenses are assigned to foreign governments and is therefore very costly to the importing country. A VER is always more costly to the importing country than a tariff that limits imports by the same amount. The difference is that what would have been revenue under a tariff becomes rents earned by foreigners under the VER, so that the VER clearly produces a loss for the importing country. Numerical examples suggest that voluntary export restraints can be beneficial for the exporting country and damaging to the importing country. A study that examines the welfare effect of VERS on the world economy suggests that a government's preference for VERS offers a short-term expansion effect on the exporting country. The effects of VERS can only bring positive results in the case of perfect competition for the goods market or when the exporting country is larger than the importing country. Overall, a VER not only damages the domestic economy in the long-run but also has a deteriorating effect on the overall welfare of the world economy." Some voluntary export agreements cover more than one country. The most famous multilateral agreement is the Multi-Fiber Arrangement, which limited textile exports from 22 countries until the beginning of 2005. Such multilateral voluntary restraint agreements are known by yet another three-letter abbreviation: OMA, for “orderly marketing agreement." 13

Voluntary Export Restraints A variant on the import quota is the voluntary export restraint (VER), also known as a voluntary restraint agreement (VRA). (Welcome to the bureaucratic world of trade policy, where everything has a three-letter symbol!) A VER is a quota on trade imposed from the exporting country's side instead of the importer's. The most famous example is the limitation on auto exports to the United States enforced by Japan after 1981. Voluntary export restraints are generally imposed at the request of the importer and are agreed to by the exporter to forestall other trade restrictions. As we will see in Chapter 10, certain political and legal advantages have made VERS preferred instru- ments of trade policy in some cases. From an economic point of view, however, a vol- untary export restraint is exactly like an import quota where the licenses are assigned to foreign governments and is therefore very costly to the importing country. A VER is always more costly to the importing country than a tariff that limits imports by the same amount. The difference is that what would have been revenue under a tariff becomes rents earned by foreigners under the VER, so that the VER clearly produces a loss for the importing country. Numerical examples suggest that voluntary export restraints can be beneficial for the exporting country and damaging to the importing country. A study that examines the welfare effect of VERS on the world economy suggests that a government's preference for VERS offers a short-term expansion effect on the exporting country. The effects of VERS can only bring positive results in the case of perfect competition for the goods market or when the exporting country is larger than the importing country. Overall, a VER not only damages the domestic economy in the long-run but also has a deteriorating effect on the overall welfare of the world economy." Some voluntary export agreements cover more than one country. The most famous multilateral agreement is the Multi-Fiber Arrangement, which limited textile exports from 22 countries until the beginning of 2005. Such multilateral voluntary restraint agreements are known by yet another three-letter abbreviation: OMA, for “orderly marketing agreement." 13

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter12: The Partial Equilibrium Competitive Model

Section: Chapter Questions

Problem 12.10P

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