Voluntary Export Restraint

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21 Aug, 2024

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Voluntary export restraints (VERs) are a type of non-tariff trade barrier in which a country voluntarily chooses to restrict the quantity or value of its exports to another country. It is implemented in response to the importing nation's request to curtail such cross-border trade to safeguard its domestic industries.

These restrictions are negotiated and mutually agreed upon by both the exporting and importing nations to stabilize the domestic market in the importing country. However, the World Trade Organization (WTO) discourages VERs and promotes free and fair-trade practices. Since it believes that VER can disrupt global supply chains, hinder competition, and provoke retaliatory trade actions from other nations.

What Is Voluntary Export Restraint (VFR)?

Voluntary export restraint (VER) refers to a cross-border trade policy restriction that an exporting country willfully implements to limit the number of goods it exports, often in response to the request from the importing nation.
The World Trade Organization (WTO) has passed rules restricting governments from implementing VERs.
VERs are different from quotas whereby the importing country imposes a limit on the quantity of goods imported from other nations.
It is the opposite of Voluntary Import Expansion (VIE), where countries willfully choose to increase their imports from a particular exporting country under a political or economic agenda.

Voluntary Export Restraint Explained

Voluntary export restraint agreements are generally regarded as protectionism. It is because they curtail trade and give preferential treatment to domestic industries over foreign competitors. VERs are commonly employed in industries where the importing country perceives unfair competition or faces challenges due to a surge in imports. By constraining the volume of exports, the importing government seeks to shield its domestic industries from foreign competition and stabilize the domestic market.

Under a VER, the exporting country establishes a cap on the goods exported to the importing country. The specific limit is typically negotiated between the two countries, aiming to balance the importing country's desire to restrict imports and the exporting country's export capacity. The exporting government agrees to this constraint voluntarily, often as an alternative to more stringent trade measures such as tariffs or quotas imposed by the importing country.

Historically, VERs were introduced in the 1930s when France negotiated with the supplying countries to limit the export to the nation. Then between 1936 and 1940, Japan imposed VER on exporting textile goods to the US. Since then, VERs have been employed by various countries, particularly during the 1970s and 1980s, in response to trade imbalances and the need to manage specific industries. VERs are often viewed as temporary fixes until a more permanent solution can be reached. Nevertheless, they can significantly impact trade flows, leading to expensive products and few choices for consumers in the importing country.

Examples

Let’s look at some of the real-world and hypothetical scenarios of VERs.

Example #1

Suppose country A dominated the global market with its affordable smartphone exports, posing challenges to the domestic smartphone manufacturers in Country B. Concerned about the impact on their local industry, the government of Country B engaged in negotiations with Country A. As a result, both countries agreed to a VER that placed limits on the number of smartphones Country A could export to Country B.

By implementing the VER, Country B protected its domestic industry from excessive competition. It also fostered a more sustainable environment for its smartphone manufacturers to thrive.

Example #2

During the 1950s, Japan dominated the export of cotton textiles to the US, negatively impacting the profitability of US textile producers. In response, the US government negotiated with Japan and established a voluntary export restraint agreement.

However, this restriction created an opportunity for textile producers from other countries, such as South Korea and Taiwan, who seized the chance to increase their textile exports to the US.

In the 1960s, US synthetic textile producers faced a similar challenge as Japanese exporters entered the synthetic textile market. As a result, the US government again negotiated a new VER agreement with Japan to address this issue, focusing on limiting synthetic textiles’ export.

Example #3

In 1996, Canada was a major exporter of softwood lumber to the United States, which impacted the local forest product producers in the US. As a result, the US government engaged in VER with the Canadian government to address this issue, establishing the Softwood Lumber Agreement.

Under this agreement, the export of softwood lumber from Canada to the US was restricted to a specific volume, set at 14.7 billion board feet.

Pros And Cons

While there are arguments for and against VERs, the following are some commonly discussed advantages and disadvantages associated with this trade policy measure:

Pros	Cons
VERs protect domestic industries from foreign competition by limiting imports, enabling them to grow and maintain their market share. It is a mutually agreeable solution that allows bilateral negotiation between the importing and exporting nations. Thus, it helps avoid potential trade conflicts or implement more restrictive measures like tariffs or quotas. Such non-tariff trade barriers encourage employment opportunities within the domestic industries, making them more competitive by retaining their top talent and preventing potential job losses. Implementing VERs can reduce trade deficits by restricting the inflow of imports. It contributes to a more balanced and cordial trade relationship between exporting and importing countries.	The voluntary export restraints distort the principles of free trade by deliberately restricting the flow of goods. It shrinks the market competition for the domestic industries enabling them to raise prices without fear of losing market share, thus making the local products expensive for the consumers. VERs limit consumer choices to the extent of locally produced goods which may not be as competitive as imported goods. Such impositions can hinder the optimal allocation of resources by safeguarding less competitive domestic industries, thus hindering their innovative ability, productivity, and long-term economic growth. It may provoke retaliatory actions from exporting countries since following one importing nation, the other countries may respond with similar measures, leading to a cycle of protectionist policies that harm global trade.

Pros

Cons

VERs protect domestic industries from foreign competition by limiting imports, enabling them to grow and maintain their market share.

It is a mutually agreeable solution that allows bilateral negotiation between the importing and exporting nations. Thus, it helps avoid potential trade conflicts or implement more restrictive measures like tariffs or quotas.

Such non-tariff trade barriers encourage employment opportunities within the domestic industries, making them more competitive by retaining their top talent and preventing potential job losses.

Implementing VERs can reduce trade deficits by restricting the inflow of imports.

It contributes to a more balanced and cordial trade relationship between exporting and importing countries.

The voluntary export restraints distort the principles of free trade by deliberately restricting the flow of goods.

It shrinks the market competition for the domestic industries enabling them to raise prices without fear of losing market share, thus making the local products expensive for the consumers.

VERs limit consumer choices to the extent of locally produced goods which may not be as competitive as imported goods.

Such impositions can hinder the optimal allocation of resources by safeguarding less competitive domestic industries, thus hindering their innovative ability, productivity, and long-term economic growth.

It may provoke retaliatory actions from exporting countries since following one importing nation, the other countries may respond with similar measures, leading to a cycle of protectionist policies that harm global trade.

Voluntary Export Restraint vs Quota

VERs and quotas are two specific trade policy measures restricting the volume of goods exported from one country to another. However, despite their commonalities, they have considerable differences, as stated below:

Basis	Voluntary Export Restraint	Quota
Meaning	VERs involve agreements between exporting and importing nations, where the exporting country voluntarily limits its exports to a specific quantity or value on the request or pressure of the importing country.	Quotas are quantitative limitations on imports established by the importing country by setting a predefined limit on the volume or value of imported goods from a particular country or altogether.
Imposed by	Exporting nation in negotiation with the importing country	Importing nation
Implementation	It is implemented in cooperation with the exporters or the industry associations. The exporting nation may regulate exports by assigning specific quotas to individual exporters or imposing export licenses.	The importing nation determines the quota levels and enforces them at its borders via customs and import control procedures under government regulations.
Negotiation	Such non-trade barriers are bilaterally imposed through negotiation and mutual agreement between the importing and exporting countries.	The importing country unilaterally undertakes these measures without negotiating or agreeing with the exporting nation.
Flexibility	VERs are a less restrictive form of non-trade barriers that allows more flexibility in imposition and can be terminated through negotiation.	Quotas are comparatively rigid since they entail fixed limits established by the importing country.
WTO Intervention	Prohibits the imposition of VERs by the governments	Permits the imposition of quotas under specific circumstances

Voluntary Export Restraint (VER) vs Voluntary Import Expansion (VIE)

VER and Voluntary Import Expansion are the two different forms of international trade agreements that countries can employ to influence the movement of goods across borders. The following are the significant differences between VER and VIE:

Basis	Voluntary Export Restraint (VER)	Voluntary Import Expansion (VIE)
Meaning	A VER is imposed by an exporting country on its exports in response to pressure or request from an importing country.	A voluntary import expansion refers to a policy initiated by an importing country to encourage increased imports from a specific exporting country.
Objective	It aims to protect the domestic industries of the importing country, address various trade-related issues, or manage the trade balance.	VIE targets trade stimulation and economic cooperation between the two countries, often driven by specific economic or political objectives.
Measures	Imposes self-control measures through VER agreements, quotas, or other trade control mechanisms	Relaxation of import restrictions and decreasing trade barriers for a specific nation
Benefit Received	The importing country receives the benefits of reduced imports or protection for domestic industries.	The exporting country benefits from this expansion through increased market access and trade opportunities.
Trade Impact	Increase in the prices of domestic goods, and the consumers have little variety to choose from	Consumers have more choices of goods at lower prices.
Motivation	Maintaining a positive trade relation, preventing conflict, and avoiding more severe trade measures, such as import tariffs, imposed by the importing country	Trade promotion and market access to foster economic cooperation, strengthen diplomatic ties, or address specific economic needs.

Frequently Asked Questions (FAQs)

1. How do voluntary export restraints affect the prices of goods?

The imposition of VERs leads to an increase in the prices of domestic goods, bringing down the nation's consumer surplus. However, the limited quantity of imported goods results in their price rise.

2. Who imposes voluntary export restraints?

A VER is self-imposed by the exporting nation to limit its cross-border sale of particular goods to an importing country. However, both countries mutually agree upon such not tariff trade barriers.

3. Does the WTO allow voluntary export restraints?

The World Trade Organization (WTO) has framed rules for prohibiting the use of VERs by governments. Instead, the countries engaged in cross-border trading are advised to negotiate the price undertakings. This also includes the imposition of import price minima.

4. What are the effects of voluntary export restraints?

The VERs obstruct the free trade practices among the nations while disturbing the global supply chain. Also, it leaves the consumers in the importing country with limited product options to choose from.