Do Exporters Gain from VERs

Previous literature has concentrated on the rent transfer accruing to exporting countries when a voluntary export restraint (VER) is binding. This paper studies the efficiency and distributional effects arising when VERs force factors out of industries in which they are most productive. A theoretical model of the industry under the VER is developed to establish qualitative conditions under which a VER will result in: Spillovers of exports to unrestricted markets; industry contraction; and loss in national welfare. Key parameters of demand and supply are estimated for leather footwear exports from Taiwan subject to the U.S. Orderly Marketing Agreement, and their implications explored in a calibrated simulation exercise. The results make a strong indictment of VERs. For most plausible parameter values, VERs distort exports, reduce industry size and cause overall economic losses, especially if the affected industry is large.