Voluntary Export Restraints

PROJECT REPORT ON
INTERNATIONAL FACTOR MOVEMENTS- AN OVERVIEW
MASTERS OF COMMERCE DEGREE
SEMESTER- I
ACADEMIC YEAR:2014-15
SUBMITTED BY
MISS. ANJUTHAKUR
ROLL NO: 51

N.E.S. RATNAM COLLEGE OF ARTS, SCIENCE AND COMMERCE,

N.E.S. MARG, BHANDUP (WEST), MUMBAI-400078

Voluntary Export Restraints

PROJECT REPORT ON
INTERNATIONAL FACTOR MOVEMENTS- AN OVERVIEW
MASTERS OF COMMERCE DEGREE
SEMESTER- I
ACADEMIC YEAR:2014-15
SUBMITTED BY
IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF MASTER
DEGREE OF COMMERCE
MISS. ANJUTHAKUR
ROLL NO: 51

N.E.S. RATNAM COLLEGE OF ARTS, SCIENCE AND COMMERCE,

N.E.S. MARG, BHANDUP (WEST), MUMBAI-400078

Voluntary Export Restraints

N.E.S. RATNAM COLLEGE OF ARTS, SCIENCE

AND COMMERCE,
N.E.S. MARG, BHANDUP (WEST), MUMBAI- 400078

CERTIFICATE
This is to certify that the project report on INTERNATIONAL FACTOR
MOVEMENTS- AN OVERVIEW is bonafide record of project worked done by
MISS. ANJUTHAKUR submitted in partual fulfillment of the requirement of the
award of the Master of Commerce Degree University of Mumbai during the period
of his/her study in the academic year 2014-15

INTERNAL EXAMINER:

EXTERNAL EXAMINER:
Principal
Mrs. Rina Saha

Voluntary Export Restraints

DECLARATION

I hereby declare that this Project Report entitled INTERNATIONAL FACTOR

MOVEMENTS- AN OVERVIEW submitted by me for the the award of Masters Of
Commerce Degree; University of Mumbai is a record of Project work done by me during the
year 2014-15. this is entirely my own work.

NAME: ANJUTHAKUR

ROLL NO : 51

Place: Mumbai, Bhandup (W)

Date: APRIL 3rd 2014

Signature

Voluntary Export Restraints

ACKNOWLEDGEMENT
I owe a great many thanks to great many people who helped and supported
me doing the writing of this book.
My deepest thanks to lecturer, Prof. DR. C KRISHNA KUMAR of the
project for guiding and correcting various documents of mine with attention and
care. She/ he has taken pains to go through my project and make necessary
corrections as and when needed.
I extend my thanks to the principal of NES Ratnam College of Arts Science
and Commerce, Bhandup (w), for extending her support.
My deep sense of gratitude to Principal Mrs. Rina Saha of NES Ratnam
College of Art, Science and Commerce for support and guidance. Thanks and
appreciation to the helpful people at NES Ratnam College of Arts, Science and
Commerce , for their support.

I would also thank my institution and faculty members without whom this
project would have been a distant reality. I also extend my heartfelt thanks to my
family and well-wishers.

Candidate Name:

ANJUTHAKUR

INDEX

Voluntary Export Restraints

RS.NO.

TOPICS

PAGE NO.

1
2
3
4
5

Introduction to VER
How VER agreement works
Economic effect of agreement
VER agreement
Case study on Japnese automobile

7-9
10
11
12-14
15-16

6
7
8
9
10
11
12

company
The Genesis of the VER (origine)
The making of the cartel
Analyzing the 1981 VER
Amercian auto stock
The japense response
Removing VER
Conclusion

17-18
19-20
21-22
23-26
27-28
29
30

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

Voluntary Export Restraints

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

Voluntary Export Restraints

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

Voluntary Export Restraints

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 outcompete 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.

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10

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 Restraints

11

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'

Voluntary Export Restraints

12

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.

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13

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.

Voluntary Export Restraints

14

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

Voluntary Export Restraints

15

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

Voluntary Export Restraints

16

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,

Voluntary Export Restraints

17

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

Voluntary Export Restraints

18

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

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19

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.

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20

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

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21

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.

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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 Americanmade 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.

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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.

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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)

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US

Auto MITI

Announces Reagan

25

Announces

Company

VER(4/21/81)

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.

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THE JAPENSE RESPONSE

Unfortunately for American car-buyers, the VER was voluntarily extended by the
Japanese government in 1985 and continued each year since. This government

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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

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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.

REMOVEING VOLUNTARY EXPORT RESTRAINT

What would occur if the VER were removed?

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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.

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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.

Bibliography

www.businessmonitor.com

Voluntary Export Restraints

www.forex.com

www.moneyinvestment.com

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