What Are Voluntary Export Restraint Agreements?

Written by chris malcolm
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What Are Voluntary Export Restraint Agreements?
The U.S. has relied on Voluntary Export Restraint Agreements to shield the domestic steel industry from foreign competition. (Comstock/Comstock/Getty Images)

For much of the twentieth century, Voluntary Export Restraint Agreements allowed trading nations to protect vulnerable domestic industries against competition from cheaper foreign imports. VERs had their heyday in the 1970s and 1980s before 1994 changes in international trade rules strictly limited their use.

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How Voluntary Export Restraint Agreements Work

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.

Examples of Voluntary Export Restriction Agreements

One of the most famous VERs involved Japan's agreement to cap 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.

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