Voluntary export restraints provide for rich interplay between economics and politics. Let’s look at two examples. In the first, the United States forced one key exporter, Japan, to limit its exports of automobiles.

In the second, a small VER, again between the United States and Japan, grew to become a wide-ranging set of export limits that covered many textile and clothing products, involved many countries, and lasted for decades.

AUTO VER: PROTECTION WITH INTEGRITY?

Before the mid-1970s import totals of automobiles into the United States were minuscule. Then, in the late 1970s sales of Japanese-made automobiles accelerated in the United States. American buyers were looking for smaller cars in the wake of substantial increases in the price of oil. Japanese manufacturers offered good-quality smaller cars at attractive prices. Japanese cars were capturing a rapidly growing share of the U.S. auto market, U.S. production of cars was declining, American autoworkers were losing their jobs, and the U.S.

auto companies were running low on profits.

In early 1981 the protectionist-pressure tachometer was in the red zone. Japanese auto exports were caught in the headlights, with Congress ready to impose strict import quotas if necessary.

Ronald Reagan, the new U.S. president, had a problem. In March 1981, his cabinet was discussing auto import quotas. Reagan’s autobiography later explained his thinking at that moment:

As I listened to the debate, I wondered if there might be a way in which we could maintain the integrity of our position in favor of free trade while at the same time doing something to help Detroit and ease the plight of thousands of laid-off assembly workers . . .

I asked if anyone had any suggestions for striking a balance between the two positions.

[Then–Vice President] George Bush spoke up:

“We’re all for free enterprise, but would any of us find fault if Japan announced without any request from us that they were going to voluntarily reduce their exports of autos to America?”*

A few days later Reagan met with the Japanese foreign minister.

Foreign Minister Ito . . . was brought into the Oval Office for a brief meeting . . .

I told him that our Republican administration firmly opposed import quotas but that strong sentiment was building in Congress among Democrats to impose them.

“I don’t know whether I’ll be able to stop them,” I said. “But I think if you voluntarily set a limit on your automobile exports to the country, it would probably head off the bills pending in Congress and there wouldn’t be any mandatory quotas.” *

The Japanese government got the message and “voluntarily” agreed to make sure that Japanese firms put the brakes on their exports to the United States. Maximum Japanese exports to the United States for each of the years 1981 through 1983 were set at a quantity of 1.8 million vehicles per year, about 8 percent less than what they had exported in 1980. As total automobile sales in the United States increased substantially after the 1981–1982 recession, the export limit was raised in 1984 to 2 million and in 1985 to 2.3 million. The export restraint continued to exist until 1994, but from 1987 on actual Japanese exports to the United States were less than the quota quantity. By 1987 Japanese firms were producing large numbers of cars in factories that they had recently built in the United States.

As a result of the VER, the profits of U.S. auto companies increased, as did production and employment in U.S. auto factories. What did the VER cost the United States? One study estimated that the VER cost U.S. consumers \($13\) billion in lost consumer surplus and that it imposed a net loss to the United States of \($3\) billion. Other estimates of these costs are even higher. “Protection with integrity” does not come cheap.

TEXTILES AND CLOTHING: A MONSTER In 1955, a monster was born. In the face of rising imports from Japan, the U.S. government convinced the Japanese government to “voluntarily” limit Japan’s exports of cotton fabric and clothing to the United States. In the late 1950s, Britain followed by compelling India and Pakistan to impose VERs on their clothing and textile exports to Britain.

The VERs were initially justified as “temporary”

restraints in response to protectionist pleas from import-competing firms that they needed time to adjust to rising foreign competition. But the monster kept growing.

The 1961 Short-Term Arrangement led to the 1962 Long-Term Arrangement. In 1974, the Multifibre Arrangement extended the scheme to include most types of textiles and clothing. The trade policy monster became huge. A large and rising number of VERs, negotiated country by country and product by product, limited exports by developing countries to industrialized countries

(and to a number of other developing countries).

The monster even had its own growth dynamic.

A VER is, in effect, a cartel among the exporting firms. As they raise their prices, the profit opportunity attracts other, initially unconstrained suppliers. Production of textiles and clothing for export spread to countries such as Bangladesh, Cambodia, Fiji, and Turkmenistan. As these countries became successful exporters, the importing countries pressured them to enact VERs to limit their disruption to the managed trade.

The developing countries that were constrained by these VERs pushed hard during the Uruguay Round of trade negotiations to bring this trade back within the normal WTO rules

(no quantitative limits, and any tariffs to apply equally to all countries—most favored nation treatment, rather than bilateral restrictions). The Agreement on Textiles and Clothing came into force in 1995 and provided for a 10-year period during which all quotas in this sector would be ended. On January 1, 2005, after almost a half century of life, the monster mostly died.

We say “mostly” because for a few more years a small piece of the monster lived on. As part of its accession agreement to the World Trade Organization, China accepted that other countries could impose China-specific “safeguards”

if its rising exports of textiles or clothing harmed import-competing producers. As the United States phased out VERs, the U.S.

government imposed such safeguards on some imports from China. By late 2005 a comprehensive agreement limited imports of 22 types of products from China. Similarly, the European Union imposed safeguard limits on imports from China on 10 types of products. Then, the monster finally took its last breaths. The EU limits expired at the end of 2007 and the U.S.

limits expired at the end of 2008. (Still, we do not have free trade in textiles and clothing because many countries continue to have relatively high import tariffs in this sector. But the web of VERs has ended.)

Consumers are the big winners from the liberalization.

Prices generally fell by 10 to 40 percent when the VERs ended. Another set of winners is countries, including China, India, and Bangladesh, that have strong comparative advantage in textiles and clothing but whose production and exports had been severely constrained by the VERs. On the other side, with rising imports, textile and clothing firms and workers in the United States and other industrialized countries have been harmed.

Another set of losers is those developing countries, apparently including Korea and Taiwan, that do not have comparative advantage in textile and clothing production but that had become producers and exporters of textiles and clothing because the VERs had severely restricted the truly competitive countries. (This shows another type of global production inefficiency that resulted from the VERs.) These uncompetitive countries lost the VER rents that they had been receiving, and their industries shrank as those in countries such as China expanded.

DISCUSSION QUESTION In late 1981, your father went to a Honda dealer in his home state and paid about \($1\),000 more for a Civic than he would have paid the year before.

Why?

Ronald Reagan (1990), pp. 253–254 and 255.

Emphasis in the original.