Voluntary Export Restraint (VER)

Understanding VER

An export restriction known as a voluntary export restraint (VER) is one that a country's government applies to limit the quantity of a certain commodity or set of goods that may be exported to another country. The limitation could take the form of an established cap, a decrease in the volume of exports, or an outright ban.

The only difference between a VER and an import tariff or quota is that a VER is imposed by the exporting country rather than the importing one.

Background of VERs

Since the 1930s, voluntary export restrictions have been applied to an extensive range of traded goods. Since it adhered to the GATT's (General Agreement on Trades and Tariffs) requirements, this particular trade limitation gained popularity in the 1980s. However, in 1994, WTO (World Trade Organization) members decided not to impose any fresh voluntary export restraints (VERs) and to progressively stop using any already in place.

The Operation of a Voluntary Export Restraint (VER)

The broad category of non-tariff trade barriers, which includes stringent trade obstacles, including quotas, bans, levies, embargoes, and other limitations, includes voluntary export restraints (VERs). Although these agreements can also be established at the industry level, VERs are typically the outcome of requests made by the importing country to offer a certain amount of protection for its local enterprises that manufacture rival goods.

VERs' Effectiveness

Studies on the efficacy of VERs indicate that they are not beneficial over a longer period. As an illustration, consider Japan's voluntary export restriction on exporting vehicles made in Japan into the U.S. as a result of American pressure in the 1980s. Although the domestic sector was mostly dominated by affordable and fuel-efficient Japanese cars, the U.S. government intended to protect American automakers. However, this was a short-lived approach.

Due to the establishment of Japanese automakers' U.S. manufacturing plants, the constraint proved ineffective. Japanese automakers have begun selling more opulent vehicles to raise enough money while still complying with the export cap established by its government.

VERs on Fabrics

Southeast Asian nations began competing more against US-based textile manufacturers in the 1950s and 1960s. Numerous Southeast Asian nations agreed to the U.S. government's request for VER establishment. Because of their intense rivalry, European textile manufacturers also agreed to voluntary export restrictions.

Eventually, the exporting and importing parties in the textile sector came to an agreement, which gave rise to the Multi-Fibre Agreement in the 1970s. In essence, the agreement was a framework for multilateral voluntary export restrictions. After a ten-year transition period following the 1994 GATT, the agreement was terminated in 2005 and is no longer in effect.

The Limits of a Voluntary Export Ban

A corporation has options for avoiding a VER. For instance, a corporation from the exporting nation might always establish a production facility in the destination nation. By doing this, the business will no longer need to export products and won't be subject to the nation's VER. That is why the approach of VERs has historically been ineffective in protecting domestic producers.

The Benefits and Drawbacks of a Voluntary Export Ban (VER)

When VERs are working properly, producers in the importing nation enjoy greater prosperity because there is less competition, which should lead to higher prices, profits, and employment.

These benefits for producers and the labour market, however, are also significantly constrained by the fact that VERs reduce national welfare through negative trade effects, negative consumer distortions, and negative production distortions.

Comparing Voluntary Import Expansion and Voluntary Export Restrictions

When a nation decides to bring in more imports, it is said to have expanded its imports voluntarily. It is put into practice by lowering constraints like import tariffs. A voluntary import expansion, like a VER, is carried out at another country's request and adversely affects the country that volunteered to establish the agreement.

Voluntary Export Restriction (VER) Example

The most notorious instance is when, in response to American pressure, Japan slapped a VER on its auto exports to the U.S. in the 1980s. The VER subsequently provided some protection for the American auto industry against a wave of foreign competition.

However, this relief was only temporary, as it ultimately led to an increase in the export of more expensive Japanese cars and the growth of Japanese assembly plants in North America and its nearby regions.