Voluntary•7 \iExport Restraints

mT .. ... - -* • NA-
They are often not voluntary; they are costly and discriminatory; but they can be
a tempting form of protection relative to other measures.
Clemens FJ. Boonekamp

Successive rounds of multilateral trade for a restriction on the volume of the latter's
negotiations under the aegis of the General exports of one or more products. By this
Agreement on Tariffs and Trade (GATT) definition, the term VER is a generic refer-
have progressively reduced the importance ence for all bilaterally agreed measures to
of tariffs as barriers to trade. This, however, restrain exports. Strictly speaking, however,
has not been matched by a corresponding a VER is an action unilaterally taken and
liberalization of international trade. Since the administered by the exporting country and is
early 1970s, with the relatively slow rates of "voluntary" in the sense that the country has
growth and the rise in surplus capacity in a formal right to eliminate or modify it.
many countries, protectionist pressures have Usually a VER arises because of pressure
steadily built up, especially in industrialized from an importing country; it can then be
countries whose international competitive- thought of as "voluntary" only in the sense
ness in traditional industries has declined, in that the exporting country may prefer it to
particular vis-a-vis Japan and the newly alternative trade barriers that the importing
industrializing countries of Asia. As a result, country might use. Further, in a noncompet-
nontariff barriers have become more prev- itive, especially oligopolistic, industry export-
alent, to the point that they currently rival, if ing firms might find it to their advantage to
not exceed, tariffs as impediments to trade. negotiate a VER, which is then truly "volun-
Voluntary export restraints (VERs) are tary."
now a common form of nontariff barrier, A VER that consists of a government-to-
having grown in number and spread, in recent government agreement is normally referred
years, from textiles, clothing, steel, and to as an orderly marketing arrangement and
agriculture to automobiles, electronic pro- often specifies export management rules,
ducts, and machine tools. This article dis- consultation rights, and the monitoring of
cusses the basic elements of VERs, why they trade flows. In some countries, notably the
are employed, and their economic conse- United States, orderly marketing arrange-
quences. ments are legally distinct from a VER as
strictly defined. Agreements which involve
What are VERs?
industry participation are often referred to
A VER is a measure by which the as voluntary restraint arrangements. The
government or an industry in the importing distinction between these forms of VER is
country arranges with the government or the largely legal and terminological and has little
competing industry in the exporting country bearing on the economic impact of VERs.

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©International Monetary Fund. Not for Redistribution

 A typical VER limits the supply of exports, invariably precedes other forms of protectio- member states, and 32 restrain exports to
by commodity type, by country, and by nism, such as increasing tariffs or imposing the United States. In general, VERs have
volume. GATT Articles, which are concerned quotas. In such a debate, the cost of the been introduced to protect industries in
with governmental actions affecting trade, protective measure is likely to become more OECD markets where certain developing
prohibit export restraints under normal cir- clearly recognized, making the action polit- countries, East European countries, or Japan
cumstances; when permitted, they must be ically expensive and risky. A VER then has have become serious competitors. Indeed,
nondiscriminatory and applied only through the advantage that, as an action taken by a the exports of these countries are restrained
duties, taxes, and charges. However, the foreign source, a domestic legislative struggle by about 80 VERs.
involvement of governments in VERs is not may be avoided; it often can be negotiated The above numbers do not include the
always clear. Also, VERs do not always have quickly without its costs becoming obvious. Multi-Fibre Arrangement (MFA), which to-
firm market-sharing provisions; they may, for Further, in the context of exports which are, gether with its predecessor, the Long-Term
example, be in the form of an export forecast or are suspected of being, subsidized, the Arrangement on Cotton Textiles (1962-72),
and thus become cautionary in nature. For domestic authorities can bypass the often has been the model for VERs. The MFA is a
these reasons, VERs fall into a "grey area" expensive and time-consuming process of a negotiated, multilateral departure from GATT
in that there can be doubt as to their illegality countervailing-duty investigation by coming based on the principle that industrial coun-
under GATT. Further, parties to a VER are to a VER agreement with the exporter. tries, which are the main importers of
unlikely to request a finding under the Finally, it can be argued that a VER, by textiles, require special protection against
GATT's dispute settlement procedures— addressing the source of the problem, that is "market disruption" by lower-cost, normally
they have never done so—while third parties the one or few low-cost suppliers disrupting developing-country, exports. Under its aegis
can often appear to benefit from a VER and the domestic industry, obviates the need for a multiplicity of bilateral export restraint
may therefore be reluctant to initiate dispute wider action that could harm third countries, agreements have been concluded, covering
procedures. Finally, signatories to the Code as would be the case with a nondiscriminatory approximately 50 percent of trade in textiles
on Subsidies and Countervailing Duties Code import quota of equivalent import-reducing and clothing. In addition, as the table notes,
that resulted from the Tokyo Round of trade effect (see below). For any of these reasons there are 11 known VERs in this sector
negotiations seem to have acquired legal domestic policymakers often prefer a VER outside the scope of the MFA. As a result a
powers to negotiate VERs. It is in these to alternative measures; it offers relatively considerable portion of world trade in textiles
respects that the decision of the GATT quick, politically inexpensive assistance to an and clothing is managed, and thus not subject
Council of Representatives in 1987 to estab- industry threatened by import competition. to the normal forces of international trade.
lish a dispute panel to examine the Japan-US A VER can also be attractive to the Apart from textiles and clothing, steel is
semiconductor agreement is important. exporting country. As indicated above, it the product category most heavily affected
offers rents which, at least in the short-run, by VERs. Since the first restraint in this
Why are VERs introduced? are windfall gains to the extent that demand sector was negotiated in 1968 between the
Broadly speaking, restrictive trade mea- in the rest of the world is elastic so that terms United States and several European and
sures are taken usually for two purposes: to of trade losses are minimal or zero. This can Japanese exporters, about a quarter of the
protect or improve the balance of payments be important relative to alternative trade total trade in steel has come under VERs,
situation, and to provide relief for industries barriers that the importing country might affecting exports from nearly all the major
adversely affected by foreign competition, in take; tariff revenues, for example, accrue to third country suppliers to the United States
principle allowing them time to undertake the the government that levies them. Also, VERs and the European Community, as well as
adjustments necessary to regain external can serve to assure the exporter of market exports from the European Community to the
competitiveness. VERs are employed for this access to the importing country, terminate United States. Exports of agricultural pro-
latter purpose and, compared to other forms the uncertainty inherent in a countervailing- ducts are also restrained by VERs, principally
of protectionism, offer several advantages duty investigation, and provide the exporting from the more efficient producers, such as
from the viewpoint of the protecting country. government with an element of control over Australia and Argentina, to the European
Under GATT rules, safeguard provisions its domestic industry. These factors suggest Community. In automobiles and transport
exist for the temporary, emergency pro- that when faced with the probability of equipment, as well as in electronic products
tection of domestic industries injured by protection by the importing country, particu- and machine tools, Japanese exporters limit
import competition. Such safeguard actions, larly if it is an important market for other their sales to both the European Community
however, involve negotiating compensation products, the exporter might agree readily and the United States, while in footwear a
with the countries affected by the measures. to a VER. number of OECD markets are protected by
These negotiations can be difficult and may VERs with Korean exporters.
not succeed. In that case, the protecting
Prevalence of VERs
According to one calculation, in 1984 some
country risks retaliation by the exporting Quantitative export restraints first seem 10 percent of total world trade, and 12
country. In either case—compensation or to have appeared in 1935 when Japan was percent of non-fuel trade, was covered by
retaliation—the exports of the country taking induced to limit its textiles exports to the VERs ("Export Restraint Arrangements" by
the safeguard action may suffer. VERs, on United States. However, only in the past M. Kostecki, World Economy, forthcoming).
the other hand, have built-in compensation, decade or so have they come into widespread This study also estimated that in the same
- in the form of rents (i.e., higher earnings use. The accompanying table lists almost 100 year approximately 38 percent of Japanese
arising out of the scarcity of a product). This major, known VERs. The actual number may exports to the European Community and 32
, makes acceptance by the exporting source well be greater as there are reported to be percent of Japanese exports to the United
I more likely and retaliation less probable. various undisclosed industry-to-industry and States were covered by VERs. Other com-
The importing country, in negotiating a govemment-to-industry arrangements. Of the mentators estimate that in 1983 about 11
VER, tends to avoid the frequently lengthy, known number of VERs, 55 restrict exports percent of world trade in developing coun-
public, and often multilateral, debate that to the European Community or its individual tries' manufactured goods was restrained by

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 United States in 1984 was about $1,650, or
Prevalence of VERs 17 percent, higher than it would have been
in the absence of the VER. Of this estimated
Major known VERs Restrained exporters Protected markets increase about $1,030 reflected improve-
(excluding the MFA)1 (by number of arrangements)2 (by number of arrangements)2 ments in quality. Exporters under a volume
Total: 99 Japan (24), Korea (14), Brazil (4); EC (S5)3; USA (32); constraint have an incentive to upgrade the
ODCs (21); OICs (20); E. Eur. (16) (Canada, Japan, Norway (12)
quality of their product on the restricted
Steel 39 EC (4); OICs (12); DCs (12); USA (25); EC (14) market in order to maximize profit per unit
E. Eur. (11) sold. Unrestricted foreign suppliers and do-
Agricultural
products 17 DCs (6); ICs (6); E. Eur. (5) EC (16); Canada (1) mestic producers are likely to follow suit if
Automobiles their products are relatively close substitutes
and transport
equipment 13 Japan (11); Korea (2) EC (9); USA (1); OICs (3)
for the improved, export-restrained, product.
Textiles and In the above study the pure price effect was
clothing 11 Korea (2); ODCs (9) USA (4); EC (3); OICs (4) some $620 per car in 1984; this cost US
Electronic
products 7 Japan (6); Korea (1) EC (6); USA (1) consumers a total of $6.6 billion.
Footwear 5 Korea (3); Japan (1); Taiwan (1) EC (2); OICs (3) VERs can distort trade and production in a
Machine tools 3 Japan (3) • EC (2); USA (1) number of ways. First, in the importing
Other 4 Korea (3); ICs (1) EC (3); Norway (1)
country the market share of exporters not
Sources: GATT Secretariat, and M. Kostecki, "Export Restraint Arrangements.", World Economy, forthcoming. subject to VERs can increase. The price of
VERs known to be in place in late 1986.
2
EC is the European Community; E. Eur. is East Europe; ODCs are other developing countries; OICs are other the product subject to the VER in the
industrialized countries; DCs are developing countries; ICs are industrialized countries. The term "other" in ODC and OIC
refers to countries other than those identified in the particular classification (e.g., OICs under "footwear" refer to all industrial
importing country is likely to exceed the
countries other than EC).
3
lneluding 12 arrangements involving individual EC member states.
world price; the latter may in fact fall,
particularly if the importing country's market
is large and the VER well enforced. In these
circumstances, non-restrained suppliers may
divert exports to the protected market, thus
distorting the pattern of trade. At the time
VERs. Further, the percentages appear to the demand for the domestic product is more of the 1977 orderly marketing arrangement
have risen rapidly in the early 1980s. By one responsive to changes in the price of the for color television sets between Japan and
estimate the share of exports of the newly home product than to changes in the price of the United States, Japan accounted for some
industrialized countries of Asia and Japan the imported substitute. The VER then 90 percent of US imports of such sets. Two
affected by VERs rose from some 15 percent protects domestic producers, by raising their years later Japan's share had fallen to about
in 1980 to about 32 percent in 1983. profits, but does not protect domestic pro- 50 percent, while that of the Republic of
duction. Korea and Taiwan, Province of China had
The economics of VERs These results become less tenable the grown significantly. Subsequently the DMA
In general, the effect of VERs is to reduce larger the number of firms in the industry. was extended to Korea and Taiwan.
the level of imports and thus increase the First, it becomes more difficult to persuade Second, there may be an incentive for new
price of the product in question in the all domestic firms to be part of the price- firms in both the importing and other coun-
importing country. This will happen as the leadership role; some may prefer to increase tries to enter the affected industry, making
normally low-cost, but now restricted, for- market share by price competition. Second, investments that might not have been effi-
eign suppliers raise their export prices to if not all foreign firms are covered by a VER, cient at the free trade level of imports. Third,
capture the rents created by the VER. The they, too, may seek a larger market share. the existing VER-affected firms in the export-
higher price will normally encourage an Thus the larger the number of firms in the ing country may seek to circumvent their
increase in domestic output of the product. industry, the more likely that the VER will constraints by exporting via third countries.
However, even if the VER is set at the need to be set at an import-reducing level if Finally, foreign suppliers may take to export-
free trade level of imports, in an oligopolistic the domestic price is to rise and encourage ing, or increasing exports of, close substi-
industry prices can rise because a VER higher local production levels. However, the tutes for the VER-protected products to the
fundamentally changes the nature of competi- oligopolistic example does point to the impor- importing market.
tion in the affected industry. Given that the tant conclusion that, regardless of the number If VERs spread so as to cover imports of
exporting industry (or country) administers of firms in the industry, a VER provides an a product from all sources, the VER-system
the VER, producers in the protecting country incentive for collusion between firms, to then resembles an import quota. The pro-
become "price leaders" relative to those in change the nature of competition. This cess, however, is quite different. A quota is
the exporting country: any increase in the creates vested interests in both the importing normally applied on a global basis; it is
price by domestic producers must result in and exporting country. A VER may encour- nondiscriminatory, usually being allocated
an appropriate rise in the price of the age, therefore, what anti-monopoly legisla- either on a "first-come, first-served" basis
imported substitute if the VER is to be tion is meant to forestall. or by quota-shares in accord with the
observed. In these circumstances the profits Price rises due to VERs can be substantial. previous pattern of import shares. VERs are
of both the domestic and foreign firms In a recent study of the impact of the VER bilaterally negotiated, normally with one or a
increase. Consumers will, of course, lose. on Japan's automobile exports to the United few suppliers. They are discriminatory, there-
Producers in the exporting country can be States ("The Cost of Trade Restraints" by fore, with export volumes depending on
expected to agree willingly to a proposed Charles Collyns and Steven Dunaway, IMF negotiating strength. They can bias the
VER, particularly since it can increase their Staff Papers, March 1987) it was estimated pattern of trade for the VER-covered product
share of the importing country's market, if that the average price of a car sold in the to the importing country against the more

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 efficient exporters and may create invest- Similarly, if a VER implies a political con- ment on Japan's color television exports to
ment signals for producers in third countries straint to retain employment, adjustment by the United States cost about $60,000 per
that could turn out to be wrong. As such, the industry might be delayed. This might year.
VERs can lead to larger efficiency losses than happen in any event as the VER, akin to other
a globally applied quota of equivalent import- forms of protectionism, reduces competitive
Regulating VERs
reducing volume. pressures and makes it easier to continue The prevalence of VERs and their inherent
As already indicated, VERs can—and have production with outdated and inefficient tech- drawbacks, especially their tendency to
—spread from country to country and from nology. The industry then retains low-quality spread and fragment the trading system into
product to product. In this respect their staff, displacing potentially higher-skilled a series of market-sharing arrangements
demonstration effect can be important. More- employees who could make a greater con- dominated by the major trading nations, has
over, as previously noted, a VER tends to tribution to raising real incomes. led some commentators to suggest that they
lower the world price of the product, More generally, by raising domestic profits should be regulated and their use be sub-
increasing demand in third countries, which VERs can make resources available for jected to strict conditions and multilateral
might be satisfied by imports of the product. adjustment. This appears to have happened surveillance. This would encourage greater
This effect could be reinforced to the extent in the US automobile industry and in certain adherence to internationally agreed trade
that the VER-covered exporters are able to parts of the textile and steel industries in both rules. These observers also note that GATT
use their rents from the protected market to the European. Community and the United already sanctions certain departures from the
win market share in nonprotected countries. States. However, in these sectors the VER principle of nondiscrimination as, for example,
These factors may help to persuade third protection has also afforded the exporters an in its provisions for customs unions and free
countries, especially those that manufacture opportunity to upgrade the quality of their trade areas. Others suggest that the principle
the product in question, also to negotiate products. The domestic industries thus face of nondiscrimination is too vital to be further
VERs. Eventually, as in textiles and clothing, increased competition in precisely those weakened by giving VERs official approval.
and steel, a VER network could effectively areas where they might otherwise have had Nondiscrimination in economic terms means
result in a globally managed market-sharing a comparative advantage. that a given level of protection for domestic
arrangement. A recent GATT report shows that VERs producers can be achieved at minimum cost
VERs tend to create rents, which can be have not prevented a loss of employment in to domestic consumers and the rest of the
substantial, for foreign producers. The OECD the textiles, clothing, and steel industries in world. It also protects the interests of smaller
has estimated that the annual transfer from the protecting countries. In the period trading nations and helps to ensure the access
OECD countries to exporters of textiles and 1973-84, employment in the steel sectors of of new entrants to the international market
clothing in the newly industrialized countries the European Community and the United place. Its role in GATT rules lends transpar-
of Asia is at least $2 billion under MFA States declined by 42 percent and 54 percent, ency and predictability to international trade
bilateral export restraint arrangements. In respectively; in textiles and clothing the relations and to domestic decisionmaking. In
the above-noted study of the VER on Japan's declines were 46 percent and 43 percent, this view, VERs would be controlled by a
auto exports to the United States, it was respectively, in the European Community, firmer commitment by trading nations to
calculated that Japanese exporters, on pure and 22 percent and 18 percent, respectively, nondiscrimination in the formulation and
price effects alone, "earned" rents of $1 in the United States. Modernization, gains in practice of their trade policies.
billion in 1984; the total transfer to foreign productivity, and changes in macroeconomic This issue is on the agenda of the recently
suppliers was $1.67 billion, indicating that conditions dominated the employment situa- launched Uruguay Round of multilateral trade
third-country exporters not restrained by the tion in these sectors, as they did in the US negotiations, especially in the context of
VER may have benefited from it. M. automobile industry where employment fell GATT's safeguard provisions. The decisions
Kostecki, using a VER tariff-equivalent by some 250,000 jobs in the early 1980s. It of the negotiators could have an important
method, has estimated that the rent transfers is possible, however, that employment in effect on the future of the international trading
resulting from VERs worldwide in 1984 could these sectors would have fallen further in the system and by implication on the growth and
have been as much as $27 billion. absence of protective measures. Thus, by employment prospects of its member coun-
Trade policymakers are not unaware of the one estimate between 40,000-75,000 jobs tries. •
effects discussed above, in particular of the were saved in the US automobile industry
efficiency losses in the allocation of re- during 1981-84 as a result of the VER on
sources. This is one reason why VERs are Japan's car exports to the United States.
generally negotiated to have a relatively short Similarly it has been calculated that a 50
lifespan. Nevertheless, VERs can be a percent relaxation in the VERs protecting the
tempting form of protection. Once they are Swedish clothing industry would reduce cloth-
in place, vested interests may work against ing employment in Sweden by about 6 Clemens F.J. Boonekamp
their removal. percent. a Dutch national, is with
Job maintenance by VERs can be very the Fund's Office in
Do VERs work? costly. Estimates for 1984 indicate that the Geneva. He completed his
The answer to this question depends on annual cost, as a result of higher prices, to graduate studies at Brown
• whether a VER serves its purpose of US consumers under VERs on textiles and University and has taught
safeguarding employment and promoting adjust- clothing amounted to $50,000 and $39,000, at the University of British
I ment in the protected sector, and, if so, at respectively, per position saved, as compared Columbia (Canada). He
joined the Fund staff in
what price. These aims might not be consis- with annual average textile and clothing
1980.
tent with each other. Modernization to regain wages of $13,400 and $10,500, respectively.
competitiveness often entails switching to a The OECD has calculated that each job
more capital-intensive mode of production. protected under the orderly marketing arrange-

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©International Monetary Fund. Not for Redistribution