voluntary export restraints
TRANSCRIPT
Chapter 1
INTRODUCTION
Trade barriers are government-induced restrictions on international trade.[1] The barriers can
take many forms, including the following:
Tariffs and Non-tariff barriers to trade
Import licenses, Export licenses, Import quotas, Subsidies, Voluntary Export Restraints,
Local content requirements, Embargo, Currency devaluation, Trade restriction
Most trade barriers work on the same principle: the imposition of some sort of cost on trade
that raises the price of the traded products. If two or more nations repeatedly use trade
barriers against each other, then a trade war results.
Economists generally agree that trade barriers are detrimental and decrease overall economic
efficiency, this can be explained by the theory of comparative advantage. In theory, free trade
involves the removal of all such barriers, except perhaps those considered necessary for
health or national security. In practice, however, even those countries promoting free trade
heavily subsidize certain industries, such as agriculture and steel.
Trade barriers are often criticized for the effect they have on the developing world. Because
rich-country players call most of the shots and set trade policies, goods such as crops that
developing countries are best at producing still face high barriers. Trade barriers such as
taxes on food imports or subsidies for farmers in developed economies lead to
overproduction and dumping on world markets, thus lowering prices and hurting poor-
country farmers. Tariffs also tend to be anti-poor, with low rates for raw commodities and
high rates for labor-intensive processed goods. The Commitment to Development Index
measures the effect that rich country trade policies actually have on the developing world.
Another negative aspect of trade barriers is that it would cause a limited choice of products
and would therefore force customers to pay higher prices and accept inferior quality.
OBJECTIVE OF STUDY
NON TARIFF BARRIERS
Non-tariff barriers to trade (NTBs) are trade barriers that restrict imports but are not in the
usual form of a tariff. Some common examples of NTB's are anti-dumping measures and
countervailing duties, which, although they are called "non-tariff" barriers, have the effect of
tariffs once they are enacted.
Their use has risen sharply after the WTO rules led to a very significant reduction in tariff
use. Some non-tariff trade barriers are expressly permitted in very limited circumstances,
when they are deemed necessary to protect health, safety, or sanitation, or to protect
depletable natural resources. In other forms, they are criticized as a means to evade free trade
rules such as those of the World Trade Organization (WTO), the European Union (EU), or
North American Free Trade Agreement (NAFTA) that restrict the use of tariffs.
Some of non-tariff barriers are not directly related to foreign economic regulations, but
nevertheless they have a significant impact on foreign-economic activity and foreign trade
between countries.
Trade between countries is referred to trade in goods, services and factors of production.
Non-tariff barriers to trade include import quotas, special licenses, unreasonable standards
for the quality of goods, bureaucratic delays at customs, export restrictions, limiting the
activities of state trading, export subsidies, countervailing duties, technical barriers to trade,
sanitary and phyto-sanitary measures, rules of origin, etc. Sometimes in this list they include
macroeconomic measures affecting trade
Six Types of Non-Tariff Barriers
1. Specific Limitations on Trade:
1. Quotas
2. Import Licensing requirements
3. Proportion restrictions of foreign to domestic goods (local content requirements)
4. Minimum import price limits
5. Embargoes
2. Customs and Administrative Entry Procedures:
1. Valuation systems
2. Anti-dumping practices
3. Tariff classifications
4. Documentation requirements
5. Fees
3. Standards:
1. Standard disparities
2. Intergovernmental acceptances of testing methods and standards
3. Packaging, labeling, and marking
4. Government Participation in Trade:
1. Government procurement policies
2. Export subsidies
3. Countervailing duties
4. Domestic assistance programs
5. Charges on imports:
1. Prior import deposit subsidies
2. Administrative fees
3. Special supplementary duties
4. Import credit discrimination
5. Variable levies
6. Border taxes
6. Others:
1. Voluntary export restraints
2. Orderly marketing agreements
Examples of Non-Tariff Barriers to Trade
Non-tariff barriers to trade can be:
Import bans
General or product-specific quotas
Rules of Origin
Quality conditions imposed by the importing country on the exporting countries
Sanitary and phyto-sanitary conditions
Packaging conditions
Labeling conditions
Product standards
Complex regulatory environment
Determination of eligibility of an exporting country by the importing country
Determination of eligibility of an exporting establishment (firm, company) by the importing
country.
Additional trade documents like Certificate of Origin, Certificate of Authenticity etc.
Occupational safety and health regulation
Employment law
Import licenses
State subsidies, procurement, trading, state ownership
Export subsidies
Fixation of a minimum import price
Product classification
Quota shares
Foreign exchange market controls and multiplicity
Inadequate infrastructure
"Buy national" policy
Over-valued currency
Intellectual property laws (patents, copyrights)
Restrictive licenses
Seasonal import regimes
Corrupt and/or lengthy customs procedures
TYPES OF NON TARRIF BARRIERS
There are several different variants of division of non-tariff barriers. Some scholars divide
between internal taxes, administrative barriers, health and sanitary regulations and
government procurement policies. Others divide non-tariff barriers into more categories such
as specific limitations on trade, customs and administrative entry procedures, standards,
government participation in trade, charges on import, and other categories. We choose
traditional classification of non-tariff barriers, according to which they are divided into 3
principal categories.
The first category includes methods to directly import restrictions for protection of certain
sectors of national industries: licensing and allocation of import quotas, antidumping and
countervailing duties, import deposits, so-called voluntary export restraints, countervailing
duties, the system of minimum import prices, etc. Under second category follow methods
that are not directly aimed at restricting foreign trade and more related to the administrative
bureaucracy, whose actions, however, restrict trade, for example: customs procedures,
technical standards and norms, sanitary and veterinary standards, requirements for labeling
and packaging, bottling, etc. The third category consists of methods that are not directly
aimed at restricting the import or promoting the export, but the effects of which often lead to
this result.
The non-tariff barriers can include wide variety of restrictions to trade. Here are some
example of the “popular” NTBs.
Licenses
The most common instruments of direct regulation of imports (and sometimes export) are
licenses and quotas. Almost all industrialized countries apply these non-tariff methods. The
license system requires that a state (through specially authorized office) issues permits for
foreign trade transactions of import and export commodities included in the lists of licensed
merchandises. Product licensing can take many forms and procedures. The main types of
licenses are general license that permits unrestricted importation or exportation of goods
included in the lists for a certain period of time; and one-time license for a certain product
importer (exporter) to import (or export). One-time license indicates a quantity of goods, its
cost, its country of origin (or destination), and in some cases also customs point through
which import (or export) of goods should be carried out. The use of licensing systems as an
instrument for foreign trade regulation is based on a number of international level standards
agreements. In particular, these agreements include some provisions of the General
Agreement on Tariffs and Trade and the Agreement on Import Licensing Procedures,
concluded under the GATT (GATT).
Quotas
Licensing of foreign trade is closely related to quantitative restrictions – quotas - on imports
and exports of certain goods. A quota is a limitation in value or in physical terms, imposed
on import and export of certain goods for a certain period of time. This category includes
global quotas in respect to specific countries, seasonal quotas, and so-called "voluntary"
export restraints. Quantitative controls on foreign trade transactions carried out through one-
time license.
Quantitative restriction on imports and exports is a direct administrative form of government
regulation of foreign trade. Licenses and quotas limit the independence of enterprises with a
regard to entering foreign markets, narrowing the range of countries, which may be entered
into transaction for certain commodities, regulate the number and range of goods permitted
for import and export. However, the system of licensing and quota imports and exports,
establishing firm control over foreign trade in certain goods, in many cases turns out to be
more flexible and effective than economic instruments of foreign trade regulation. This can
be explained by the fact, that licensing and quota systems are an important instrument of
trade regulation of the vast majority of the world.
The consequence of this trade barrier is normally reflected in the consumers’ loss because of
higher prices and limited selection of goods as well as in the companies that employ the
imported materials in the production process, increasing their costs. An import quota can be
unilateral, levied by the country without negotiations with exporting country, and bilateral or
multilateral, when it is imposed after negotiations and agreement with exporting country. An
export quota is a restricted amount of goods that can leave the country. There are different
reasons for imposing of export quota by the country, which can be the guarantee of the
supply of the products that are in shortage in the domestic market, manipulation of the prices
on the international level, and the control of goods strategically important for the country. In
some cases, the importing countries request exporting countries to impose voluntary export
restraints.
Agreement on a "voluntary" export restraint
In the past decade, a widespread practice of concluding agreements on the "voluntary" export
restrictions and the establishment of import minimum prices imposed by leading Western
nations upon weaker in economical or political sense exporters. The specifics of these types
of restrictions is the establishment of unconventional techniques when the trade barriers of
importing country, are introduced at the border of the exporting and not importing country.
Thus, the agreement on "voluntary" export restraints is imposed on the exporter under the
threat of sanctions to limit the export of certain goods in the importing country. Similarly, the
establishment of minimum import prices should be strictly observed by the exporting firms in
contracts with the importers of the country that has set such prices. In the case of reduction of
export prices below the minimum level, the importing country imposes anti-dumping duty
which could lead to withdrawal from the market. “Voluntary" export agreements affect trade
in textiles, footwear, dairy products, consumer electronics, cars, machine tools, etc.
Problems arise when the quotas are distributed between countries, because it is necessary to
ensure that products from one country are not diverted in violation of quotas set out in second
country. Import quotas are not necessarily designed to protect domestic producers. For
example, Japan, maintains quotas on many agricultural products it does not produce. Quotas
on imports is a leverage when negotiating the sales of Japanese exports, as well as avoiding
excessive dependence on any other country in respect of necessary food, supplies of which
may decrease in case of bad weather or political conditions.
Export quotas can be set in order to provide domestic consumers with sufficient stocks of
goods at low prices, to prevent the depletion of natural resources, as well as to increase
export prices by restricting supply to foreign markets. Such restrictions (through agreements
on various types of goods) allow producing countries to use quotas for such commodities as
coffee and oil; as the result, prices for these products increased in importing countries.
Quota can be of the following types:
1) Tariff rate quota
2) Global quota
3) Discriminating quota
4) Export quota
Embargo
Embargo is a specific type of quotas prohibiting the trade. As well as quotas, embargoes may
be imposed on imports or exports of particular goods, regardless of destination, in respect of
certain goods supplied to specific countries, or in respect of all goods shipped to certain
countries. Although the embargo is usually introduced for political purposes, the
consequences, in essence, could be economic.
Standards
Standards take a special place among non-tariff barriers. Countries usually impose standards
on classification, labeling and testing of products in order to be able to sell domestic
products, but also to block sales of products of foreign manufacture. These standards are
sometimes entered under the pretext of protecting the safety and health of local populations.
Administrative and bureaucratic delays at the entrance
Among the methods of non-tariff regulation should be mentioned administrative and
bureaucratic delays at the entrance which increase uncertainty and the cost of maintaining
inventory.
Import deposits
Another example of foreign trade regulations is import deposits. Import deposits is a form of
deposit, which the importer must pay the bank for a definite period of time (non-interest
bearing deposit) in an amount equal to all or part of the cost of imported goods.
At the national level, administrative regulation of capital movements is carried out mainly
within a framework of bilateral agreements, which include a clear definition of the legal
regime, the procedure for the admission of investments and investors. It is determined by
mode (fair and equitable, national, most-favored-nation), order of nationalization and
compensation, transfer profits and capital repatriation and dispute resolution.
Foreign exchange restrictions and foreign exchange controls
Foreign exchange restrictions and foreign exchange controls occupy a special place among
the non-tariff regulatory instruments of foreign economic activity. Foreign exchange
restrictions constitute the regulation of transactions of residents and nonresidents with
currency and other currency values. Also an important part of the mechanism of control of
foreign economic activity is the establishment of the national currency against foreign
currencies.
The transition from tariffs to non-tariff barriers
One of the reasons why industrialized countries have moved from tariffs to NTBs is the fact
that developed countries have sources of income other than tariffs. Historically, in the
formation of nation-states, governments had to get funding. They received it through the
introduction of tariffs. This explains the fact that most developing countries still rely on
tariffs as a way to finance their spending. Developed countries can afford not to depend on
tariffs, at the same time developing NTBs as a possible way of international trade regulation.
The second reason for the transition to NTBs is that these tariffs can be used to support weak
industries or compensation of industries, which have been affected negatively by the
reduction of tariffs. The third reason for the popularity of NTBs is the ability of interest
groups to influence the process in the absence of opportunities to obtain government support
for the tariffs.
Non-tariff barriers today
With the exception of export subsidies and quotas, NTBs are most similar to the tariffs.
Tariffs for goods production were reduced during the eight rounds of negotiations in the
WTO and the General Agreement on Tariffs and Trade (GATT). After lowering of tariffs, the
principle of protectionism demanded the introduction of new NTBs such as technical barriers
to trade (TBT). According to statements made at United Nations Conference on Trade and
Development (UNCTAD, 2005), the use of NTBs, based on the amount and control of price
levels has decreased significantly from 45% in 1994 to 15% in 2004, while use of other
NTBs increased from 55% in 1994 to 85% in 2004.
Increasing consumer demand for safe and environment friendly products also have had their
impact on increasing popularity of TBT. Many NTBs are governed by WTO agreements,
which originated in the Uruguay Round (the TBT Agreement, SPS Measures Agreement, the
Agreement on Textiles and Clothing), as well as GATT articles. NTBs in the field of services
have become as important as in the field of usual trade.
Most of the NTB can be defined as protectionist measures, unless they are related to
difficulties in the market, such as externalities and information asymmetries information
asymmetries between consumers and producers of goods. An example of this is safety
standards and labeling requirements.
The need to protect sensitive to import industries, as well as a wide range of trade
restrictions, available to the governments of industrialized countries, forcing them to resort to
use the NTB, and putting serious obstacles to international trade and world economic growth.
Thus, NTBs can be referred as a “new” of protection which has replaced tariffs as an “old”
form of protection.
Chapter 2
INTRODUCTION
VOLUNTARY EXPORT RESTRAINT
It is defined as an agreement by exporters not to export to a certain country, usually under
threat of tariff barriers being imposed by that country. A voluntary export restraint (VER) or
voluntary export restriction is an imposed limit by the government on the quantity of goods
that can be exported out of a country during a specified period of time
Typically VERs are generated when the import-competing industries seek protection from a
surge of imports from particular exporting countries. The exporter offers the VERs to
appease the importing country and to deter the other party from imposing even more explicit
(and less flexible) trade barriers
VERs are implemented on a bilateral basis, that is, on exports from one exporter to one
importing country. In use, since the 1930s VERs have been applied to products ranging from
textiles and footwear to steel, machine tools and automobiles. They became popular during
the 1980s perhaps in part because they did not violate countries' agreements under the GATT
Some interesting examples of VERs happened with the auto exports from Japan in the early
1980s and with textile exports in the 1950s and 1960s. In May 1981, with the American auto
industry mired in recession, Japanese car makers agreed to limit exports of passenger cars to
the United States . This "voluntary export restraint" (VER) program, initially supported by
the Reagan administration, allowed only 1.68 million Japanese cars into the U.S. each year.
The cap was raised to 1.85 million cars in 1984, and to 2.30 million in 1985, before the
program was terminated in 1994
Over the period of 1986-1990 the restraints (in essence, quotas) caused the prices of Japanese
cars sold in the United States to average about $1,200 higher (in 1983 dollars), some 14 per
cent above than without the restraints.
The higher prices for caused some consumers to defer purchases and others to switch to
American autos. In fact, the negative impact on sales of the Japanese automakers completely
offset the profit-enhancing effects of higher prices. Hence, Japanese firms were no better off
than if unrestrained trade had prevailed.
Matters were different for American firms, however. The consumers who switched to
domestic cars tended to be price-sensitive, so the American makers were able to raise prices
by only about 1 per cent. American car buyers were the biggest losers, particularly those who
opted to purchase Japanese vehicles even in the face of their higher prices. Overall, American
consumers suffered a loss of some $13 billion, measured in 1983 dollars.
Agreement by an exporting country to limit exports to a specified importing country, for a
price. The World Trade Organization prohibits discriminatory arrangements in international
trade, and has led to a substantial reduction in tariff barriers. The resulting intensified
competition among manufacturing producers often leads to painful industrial dislocation,
generating a political dynamic which many governments have difficulty resisting. One way
around the problem is to negotiate Voluntary Export Restraint Agreements with those
countries which are a source of rising import penetration. The successful exporter, such as
Japan, ‘voluntarily’ agrees to restrict exports to the country whose products it is displacing.
Japanese and other successful exporters tolerate VERs first because they risk facing the
closure of the market in question, but also because despite making fewer sales than under
free trade, they make more profit per sale. The resulting subsidy from the citizens of the
protectionist country to Japan is unnoticed and therefore uncontroversial, although the flows
can be enormous. It has been estimated that the VER between Japan and British car
producers in the 1970s and 1980s involved a flow of some £50 per head per year from
Britain to Japan.
As VERs do not involve any formal violation of WTO rules, they have provided an
extralegal channel for dealing with tensions in the international trade regime. However, their
discriminatory character cannot be denied, and partially successful attempts were made in the
context of the Uruguay Round (December 1993 agreement founding the WTO) to remove
them. The most prominent VER arrangement, discriminating against textile and clothing
exports from developing countries and known as the Multi-Fibre Arrangement, was to be
dismantled over a ten-year period. US and EU-imposed VERs against Japan were likewise to
be removed.
HOW VOLUNTARY EXPORT RESTREAINTS AGRTEEMENT WORKS
VERs actually work much like import restrictions. In a system of import restrictions, Country
A might impose a quota on steel from Country B and stop further shipments from crossing its
borders. In a VER scenario, Country B agrees to limit exports to Country A, even though
Country B's steel industry can out-compete Country A's. Country B might voluntarily cut its
steel shipments to Country A because, as one economist explains, "the importing nation
[Country A] can threaten to establish quotas or raise tariffs at a later date." Country B might
prefer to compete less aggressively to avoid duties and tariffs that would drive up its prices to
its customers in Country A.
ECONOMIC EFFECTS OF AGREEMENTS
By agreeing to limit steel exports to Country A, Country B essentially agrees to what
economist Robert J. Carbaugh calls a "market sharing pact." Country B keeps some of the
market share it earned through competition, and Country A's less efficient industry stays
alive.
However, Country B will actually profit most from the agreement. When it exports less steel
to Country A, consumers in Country A will pay more per unit because they will have to buy
more steel from less efficient domestic manufacturers. Meanwhile, Country B's producers
now can hike their prices to customers in Country A, and every penny of increase represents
pure profit to Country B's steelmakers.
VOLUNTARY EXPORT RESTRAINT AGREEMENT
Voluntary Export Restraint (bilateral basis)
A voluntary export restraint (VER) or voluntary export restriction is a government imposed
limit on the quantity of goods that can be exported out of a country during a specified period
of time.
Typically VERs arise when the import-competing industries seek protection from a surge of
imports from particular exporting countries. VERs are then offered by the exporter to
appease the importing country and to deter the other party from imposing even more explicit
(and less flexible) trade barriers.
Also, VERs are typically implemented on a bilateral basis, that is, on exports from one
exporter to one importing country. VERs have been used since the 1930s at least, and have
been applied to products ranging from textiles and footwear to steel, machine tools and
automobiles. They became a popular form of protection during the 1980s, perhaps in part
because they did not violate countries' agreements under the GATT. As a result of the
Uruguay round of the General Agreement on Tariffs and Trade (GATT), completed in 1994,
World Trade Organization (WTO) members agreed not to implement any new VERs and to
phase out any existing VERs over a four year period. Exceptions can be granted for one
sector in each importing country.
Some examples of VERs occurred with auto exports from Japan in the early 1980s and with
textile exports in the 1950s and 1960s.
Examples of Voluntary Export Restriction Agreements
One of the most famous VERs involved Japan's agreement to capture car exports to the U.S.
in the early 1980s. As American automakers struggled to compete against Japanese
companies, the U.S. Congress debated strict quotas to limit Japanese market share. Japan
avoided a quota by cutting a three-year deal with President Ronald Reagan. The U.S.
protected jobs in its auto industry, consumers paid more for American and Japanese cars and
the VER ultimately encouraged Japanese companies to locate plants in the U.S. to avoid the
export restrictions.
In the 1950s the U.S. negotiated similar agreements on textiles from several Southeast Asian
countries that produced these goods more cheaply than American textile manufacturers
could. During the late 1960s, the U.S. State Department used VERs to protect the domestic
steel industry against unprecedented foreign competition from Japan and Europe.
The End of Voluntary Export Restraint Agreements
The 1994 Uruguay Round of the General Agreement on Tariffs and Trade led to what one
commentator called "the final nail in the coffin" for VERs. In keeping with the World Trade
Organization goal of eliminating trade barriers, participating nations agreed to stop making
new VERs and sunset existing agreements.
A voluntary export restraint is a decision by one nation to reduce the export of a product to
another nation. The emergence of voluntary export restraints came after World War II to
stave off international economic tensions and to perhaps level the playing field. A somewhat
more recent example is Japan's voluntary restraint of auto exports to the United States in the
early 1980s. A nation initiating voluntary export restraints does so in the hope of avoiding
economic retribution from the importing nation. Exporting nations can circumvent these
restraints by investing in foreign factories and/or finding new markets.
Nations increased tariffs and forbade foreign imports as a way to strengthen their own
domestic industries prior to 1945. The harsh repayment plans and lending policies set by
Allied nations after World War I contributed to the start of World War II according to some
historians. The end of World War II encouraged world leaders to encourage worldwide
commerce by decreasing formal economic barriers. This market boost would come from
voluntary agreements between nations about minimizing the effect of foreign competition.
These agreements would then allow nations to develop their own industries without
interference from similar imported products that might undermine domestic industry.
Chapter 3
THE JAPNESE AUTOMOBILE
Case study
An oft-cited example for voluntary export restraints is the one that emerged between the
Japanese and the United States in the 1980s. Japanese automakers had been exporting cars
and trucks to the United States that were cheaper and more popular than American vehicles.
Executives from the U.S. automaking industry lobbied President Ronald Reagan to establish
import quotas on Japanese cars. These American automakers were concerned that Japanese
automobiles were permanently drawing consumers away from U.S.-made vehicles. The
Reagan administration was successful in convincing the Japanese government to temporarily
halt auto exports to the U.S. in 1981.
In general, an exporting nation in this situation might agree to voluntarily comply because it
may want to avoid damaging its relationship with a foreign government and the consumers of
the country. For example, imported goods could significantly cost jobs in and damage the
economy of the recipient country; as a practical matter, out-of-work persons have less money
to spend on cars or other imported goods. Another reason why a nation might restrain is
exports is that requesting nations may pursue retribution ranging from increased tariffs, taxes,
or quotas on on imported goods to an outright ban on foreign products, among other things.
An exporting nation could avoid voluntary export restraints by producing goods within the
foreign market itself. This approach would require purchasing factories, hiring local workers,
and shifting machinery from domestic to overseas facilities. For example, some Japanese
automakers now produce cars at United States plants. Each product from these factories
would be delivered directly to the consumer rather than through the more complicated import
process. Another option for getting around voluntary export restraints is to locate another
foreign market to offset potential losses in a current market.
May of 1981, at the urging of the U.S. government, the Japanese government organized a
cartel for the export of motor vehicles to the United States. The government of Japan
imposed a voluntary export restraint (VER) on its automakers, administered by the Ministry
for International Trade and Industry (MITI). Over the past seven years, the VER has
extracted billions of dollars of tribute from American car-buyers to the benefit of Japanese
autoworkers and the stockholders of Japanese auto makers.
Coming in the wake of the oil price hikes of 1979 and record losses in 1980 by US auto
makers, the VER was intended to halt the growth of Japan's share of US car sales, and to
provide the United States time to catch up with the Japanese in producing smaller, more fuel-
efficient cars. Japanese manufacturers, it was said, viewed the VER as a violation of free
trade. They spoke of it critically and suggested that their government had forced it upon them
in order to undercut attempts by American protectionist interests to get still more onerous
trade restraints.
According to my research, the idea that the Japanese would be hurt by the VER was
fundamentally wrong. The VER promised large benefits to the stockholders of automakers in
Japan, and Japanese investors were well aware of this when the VER was imposed. Rather
than improving our competitive edge, the VER has encouraged the Japanese to begin
producing larger, more expensive cars, thus making them an even greater competitive threat
for the future.
THE GENESIS OF THE VER (ORIGIN)
When the Organization of Petroleum Exporting Countries tripled the price of barrel of crude
oil in 1979, the US gasoline prices jumped to $1.40 per gallon, car buyers reacted in
predictable ways. They reduced their purchases of new cars and dramatically altered their
purchases toward smaller, more fuel-efficient cars. Small foreign cars, particularly imports
from Japan, sold at a record rate. The Japanese share of the US market, just 12 percent in
1975, jumped to 27 percent in 1980. In that year the "Big Three" US automakers lost $4
billion: Ford had a record annual loss of $1.5 billion. By the end of the year, an estimated
210,000 US autoworkers had been laid off, and both the United Auto Workers union and
industry management were pushing for protectionist relief.
The Election of Ronald Reagan in November 1980 seemed initially to be a blow to
protectionist forces. But there were indications that the new Commerce Secretary, Malcolm
Baldrige, would recommend a meeting with Japanese government officials to discuss
voluntary limits on auto imports. Shortly thereafter, it became known that Transportation
Secretary Drew Lewis was preparing a task force report that was expected to pave the way
for a voluntary export restraint. There were also rumblings on Capitol Hill; Senators John
Danforth and Lloyd Bentsen announced their intentions to introduce a bill to restrict the entry
of Japanese cars.
Although Japanese spokesmen indicated that their government would not act to limit
automobile exports unless specifically asked to do so, it was only a matter of weeks until
MITI announced it was preparing a "compromise" plan. On April 30, 1981 the US and
Japanese governments announced an agreement to restrain Japanese auto exports to the
United States for a three-year period. The quota for the first year was set at 1.68 million cars,
which was 120,000 lower than actual imports in 1980. Further details were still to be
negotiated, including how the quota would be allocated among Japanese auto firms.
In June it became public information that MIII had told each Japanese auto maker how many
cars it would be allowed to sell in the United States. Each firm's assigned market share (for
the 12 months ending on March 31, 1982) was proportional to its 1979 sales.
The original VER agreement expired in 1985. However, it has been voluntarily extended by
the Japanese government each year since, and remains in effect today. Remarkably, there is
still no clear consensus about what the effects of this policy are, or why the Japanese
government chooses to continue these limits. The dominant view is that the quotas were
accepted by the Japanese because they were judged to be less onerous than legislation
pending in Congress. Presumably they are continued because of an ongoing concern about
possible legislative action. This view needs to be analyzed further.
THE MAKING OF CARTEL
I believe the VER effectively cartelized the Japanese automobile industry by limiting the
number of firms which could supply cars to the United States and by allocating export
assignments to these firms. To the extent that these limits were binding, the VER prevented
effective price competition among Japanese auto makers, enabling them to raise prices and
increase their profits. If this is correct, the expected boost for business should have been
reflected in the price of the common stock of Japanese auto makers as soon as the news about
the VER became available.
A casual look at the data on stock prices suggests that Japanese investors expected the VER
to have a positive effect on the automobile industry. The bar chart on the opposite page
provides information on the price of the common stock of each of the six major Japanese
auto makers. The dates selected are April 1, 1981, before any formal announcement about a
VER; May 1, after the preliminary announcements; and July 1, after MITI announced the
allocation of the quota among individual firms. As shown, between April 1 and May 1, stock
prices jumped 23 percent for Nissan, 33 percent for Toyota, and 35 percent for Honda.
Overall, the six firms gained an average of 24 percent, or about $1.85 billion in total value.
Not all of this rise can be attributed to the first MITI announcement on April 21. Clearly
something happened in April that caused investors to view the Japanese automobile industry
as a much better investment at the end of April than at the beginning. Between May 1 and
July 1, stock prices rose another 20 percent on average. The total rise in market value for the
six firms in these three months was $3.8 billion, or 49 percent.
It would appear from these data that Japanese investors knew that the VER was a cartel that
would help the auto makers. But in order to draw any solid conclusions, the data on stock
prices must be more carefully analyzed.
ANALYSING THE 1981 VER
Finance analysts have developed an empirical technique called an event study to examine the
effects of government actions on the prices of sensitive assets. The value of a firm's common
stock is expected to reflect all the factors affecting the future profitability of that firm. Any
change in a firm's valuation between two dates must be adjusted for changes in the market
rate of return. The remaining so-called excess (or net-of-market) returns should reflect
matters relating to the specific firm and its industry. Applied to the 1981 auto VER, an event
study makes it possible to determine whether auto stock prices moved differently from the
rest of the market around the date of each important event in the VER's creation and
continuation.
To determine this I studied common stock prices for the six large Japanese auto makers
receiving allocations: Daihatsu Diesel Manufacturing Company (a Toyota supplier), Fuji Car
Manufacturing Company, Honda Motor Company, Mazda Motor Corporation, Nissan Motor
Company, and Toyota Motor Corporation. These firms produced 93 percent of total Japanese
auto exports to the United States in 1980, and were engaged almost exclusively in
assembling motor vehicles. The event study analyzes the excess returns of these companies
in the two market trading days beginning on the day the events were announced in the United
States.
The key events in the creation of the VER are as follows: April 21, 1981, MITI's first
announcement of a VER; April 30, the US and Japanese governments' joint announcement;
June 10, MITI's announcement of the quota allocations; and June 24, the announcement of a
similar VER between Japan and the Federal Republic of Germany. The results of the analysis
of net-of-market changes in stock prices for the April 21 announcement are illustrated in the
chart below.
As shown in the chart, Japanese auto stock prices jumped substantially when MITI
announced the imposition of the VER in April 1981. The net-of-market increase in stock
prices ranged from 6.1 percent for Mazda to 14 percent for Nissan. The total stock value of
the six firms rose $915 million in just two days, April 21 and 22, representing an average
increase of 11.8 percent. Thus approximately half of the gains during April appeared as a
prompt response to the VER announcement. Stock prices remained at the new higher price
level. This large permanent increase in stock prices for Japanese auto makers suggests that
the profit implications of the VER were well understood by Japanese investors.
AMERICAN AUTO STOCKS
Given the large immediate effect of the VER on the value of Japanese auto makers, it is
reasonable to ask whether shareholders of US firms also benefited. The VER is a quota
which, by reducing the availability of Japanese cars, should have raised the price of both
Japanese and American cars and increased the number of American-made cars sold.
To determine the effect of the VER on US firms, I examined common stock prices for our
five big auto makers-American Motors Corporation (AMC), Chrysler Corporation, Ford
Motor Company, General Motors Corporation (GM), and Honda-in the five-year period 1981
through 1985. All except American Motors showed substantial share price increases between
April 16 and 24, 1981. By May 1, however, these increases had vanished for both Chrysler
and Ford.
The initial increase in stock prices is consistent with the view that the VER was a protective
device aimed at improving the health of these firms and restoring employment. But why did
only GM and Honda sustain the increase? A simple explanation is available. AMC and Ford
were very weak and seemed headed for bankruptcy. Even if the VER promised to help the
profitability of these firms eventually, an intervening bankruptcy could have wiped out the
equity owners. Chrysler had already gone through a reorganization equivalent to a
bankruptcy in order to qualify for a federal government bailout loan in 1979. Its finances
were still fragile.
Within eight days of the announcement of the VER, these three struggling firms issued their
regular quarterly earnings reports. While poor performance was probably anticipated by
some investors, the losses were large enough to shake the confidence of many in the
continued viability of these firms. Chrysler had lost $298 million during the first quarter, at a
time when its common stock was worth only $452 million. Ford's situation was only slightly
less desperate, with losses of $440 million compared to a stock valuation of $2.8 billion.
The table below shows the effect of the VER on the market value of US auto firms. (Because
the announcement of AMC's - gloomy quarterly report coincided with the announcement of
the VER, AMC was excluded from this portion of the study.) Each firm gained at least 3.8
percent in value due to the VER announcement. Overall, the stocks of these four firms rose
8.7 percent, representing a gain of $1.9 billion for shareholders. The largest gainers were
Chrysler and American Honda, the two firms with the largest proportion of sales in small
cars.
Apparently, from the standpoint of automobile company managers, political lobbying for a
VER had been a profitable use of their time. But one must remember who paid the price.
Japanese automobile manufacturers were not harmed by the VER-they gained over $900
million in value. It was the American car-buying public that had to face an artificially
restricted supply of Japanese imports and at the same time pick up the tab for higher prices
on all automobiles.
Reagan's About-face
On March 28,1985, the Reagan Administration announced that the United States would not
seek to have the automobile quotas extended for another year. The decision came on the
heels of two good years for US auto makers. With the general economic recovery in 1983,
car sales in the United States rose 18 percent, and all of the gains went to US firms. Sales by
US firms, flat in 1981 and 1982, jumped 26 percent in 1983. This was the first sign that
American firms were actually gaining market share under the VER. Profits rose substantially,
reaching over $6 billion, and employment rose somewhat. Profits rose again in 1984,
reducing support for the VER's continuations.
Changes in Value of US Auto Companies Due to Ver Announcements*
($ amounts in millions)
US Auto CompanyMITI Announces
VER(4/21/81)
Reagan Announces Non-
renewal (3/1/85)
AMC N/A N/A -16.5 -4.1%
Chrysler $47.6 10.5% -51.1 -1.2
Ford 106.5 3.8 -149.8 -1.9
GM 1,448.0 9.1 -598.5 -2.4
Honda 277.5 12.0 -182.6 -3.6
All Companies $1,879.7 8.8 -$998.5 -2.4%
* Value of outstanding common stock based on net-of market changes in
stock prices during April 20-24, 1981, and March 1-2, 1985.
The president's announcement had the expected effect on the stock values of US auto firms,
which is shown in the table for all five of the publicly traded firms, including AMC. All
firms dropped in share price, with the portfolio dropping 2.4 percent. This drop represented a
loss in share value of almost $1 billion, over half of the increase generated by the original
MITI announcement in 1981.
THE JAPENESE RESPONSE
Unfortunately for American car-buyers, the VER was voluntarily extended by the Japanese
government in 1985 and continued each year since. This government action protects the auto
cartel from the antitrust objections it would otherwise be subject to in US courts. The quotas
were set at 1.85 million for the fifth year (same as the fourth year) and 2.3 million for the
sixth and seventh years.
Apart from enjoying the higher profits on their small exported cars, the Japanese have also
been moving into new markets, causing new problems for US auto makers. Under the VER,
the Japanese have shifted from the economy end of the automobile market to luxury
compacts and sports cars. Between 1980 and 1984 alone, large and sporty models increased
from 45 percent of Japanese exports to 57 percent. This shift is consistent with the finding of
economist Rodney Falvey that any quantitative limitation on imports, such as a quota or
VER, can be expected to result in exporters shifting to higher priced, higher quality units.
Removing the VER today would find Japanese imports competing almost across the board
with Detroit's products, a situation that stands in marked contrast to that of the 1970s.
Japanese profits have risen dramatically under the VER. For example, excluding its
American sales corporation, the after-tax profits of Honda rose from 30 billion yen to 44
billion yen between the year ending February 1981 and the year ending February 1986.
Profits in the Japanese domestic market, by contrast, have been poor; one analyst has
concluded that even though less than 20 percent of Japanese production is shipped to the
United States, these sales are responsible for over 75 percent of profits.
Prices of Japanese cars sold in the United States also have risen substantially (and the rise
began even before the rise in the yen). Robert Feenstra of Columbia University estimates the
per-vehicle price increase at $1,100 between 1980 and 1984 while Robert Crandall of the
Brookings Institution estimates a $940 increase between 1981 and 1982. In stead of being
guilty of dumping, as US manufacturers sometimes complain, the Japanese actually charge
lower prices for automobiles in the domestic market than in the US market.
This information on price increases, coupled with published estimates of the responsiveness
of foreign car sales to price, can be used to estimate the quantitative effect of the VER. I
estimate that absent the VER, 2.3 65 million Japanese cars would have been sold in the
United States between April 1, 1984 and April 1, 1985, as compared to the quota of 1.92
million cars. Thus the net effect of the quota in that year was 445,000 fewer Japanese cars
sold in the United States. As Japanese auto sales in the United States have slacked off in the
last year, the effect of the VER on imports has been diminishing.
Chapter 4
REMOVEING VOLUNTARY EXPORT RESTRAINT
What would occur if the VER were removed?
At this point, the removal of the VER would have a rather small effect on total imports. The
reason is that for the first time since 1981, Japanese car sales in the United States have
actually fallen somewhat, down 5 percent in 1987; recent price increases due to the yen
revaluation should continue this decline. Most Japanese auto makers sold fewer vehicles than
permitted under their quota limits last year, and for these companies, removing the quotas
would have no effect on price and sales. However, several firms (including Daihatsu, Toyota,
and Honda) could easily sell more cars in the United States. In these cases the quotas are
restricting the availability of cars and raising their prices.
While removal of the VER would have a relatively limited effect on total imports, it
nevertheless would accomplish two goals. First, it would eliminate the excessive profits
earned by Japanese and American companies under the VER, and management could devote
more of its attention to competitive strategy and less to lobbying. Second, it would eliminate
the distortion of relative prices and the resulting interference with consumer preferences.
CONCLUSION
Trade restrictions such as the VER are ultimately ineffective in enabling domestic industry to
prepare itself better for foreign competition.
The foreign competition never sits still.
Further, such restrictions relieve domestic firms and labor unions from the greatest impetus
for making the difficult choices necessary to adapt to changing market conditions-the push of
free competition and its substantial rewards and penalties.
Circumstances now favor American firms competing with the Japanese.
If American car-buyers are ever going to be allowed to make free choices among
competitively priced Japanese and American cars, this is the time to remove the protective
barrier.
Absent compelling foreign policy reasons to the contrary, the US government should insist
on the removal of the VER.