Part 8 - Non-tariff barriers to trade

Question 1

A voluntary export restraint (VER) is

Answer 1

a quota on trade imposed by the exporting country’s side (and works like an import quota).

Question 2

Voluntary export restraints are generally imposed …

Answer 2

at the request of the importer and are agreed to by the exporter to forestall other trade restrictions.

So, the restraint is usually not “voluntary” in a strict sense but rather aims at avoiding or mitigating a trade dispute.

Question 3

Is a voluntary export restraint more or less costly to the importing country compared to a tariff? explain it.

Answer 3

A voluntary export restraint is always more costly to the importing country than a tariff that limits imports by the same amount.

Profits or rents from this policy are earned by foreign governments or foreign producers(that sell a restricted quantity at a higher price).

Question 4

When and to whom is the voluntary export restraint beneficial? short or long run? to the exporting or importing country?

Answer 4

A voluntary export restraint (for a perfectly competitive market) might be beneficial in the short-run for the exporting country, if it is large relative to the importing country.

Question 5

What is the main logic about the tariffs and VER?

Answer 5

With tariffs the government can at least collect tariff revenues but when it comes to the VER the profits are earned by foreign governments or foreign producers which sell a restricted quantity at a higher price.

So, prices will rise.

Question 6

The most famous example for a voluntary export restraint is

Answer 6

the limitation of Japanese auto exports to the United States in the 1980s

Question 7

Explain the limitation of Japanese auto exports to the US:

Answer 7

• U.S. cars produced faced little import competition in the 1960s and 1970s, since U.S. buyers preferred much larger cars (in part due to low taxes on gasoline).
• In 1979, the so-called second oil crisis lead to a sharp oil price increase and a sharp increase in demand for smaller, more fuel-efficient Japanese cars.
• The Japanese market share in the United States soared (see Table 3 below) and political pressures in the U.S. mounted.
• The U.S. government asked the Japanese government to limit its exports, since it did not want to risk a trade war by acting unilaterally.
• In 1981 [1984], a first [second] agreement limited Japanese exports to the U.S. to 1.68 [1.85] million automobiles per year.

Question 8

According to Barry, Levinsohn and Pakes (1999), the voluntary export restraint:

Answer 8

Notes: The VER limit has not been binding in all years
• From 1973 to 1981, Japanese market share in the U.S. increased from 4% to 21%
• While domestic car prices were fairly constant from 1973-79, they started to increase around 1981
• Large welfare-loss for U.S. consumers ($13 billion) due to Voluntary Export Restraint, substantial welfare-gain for U.S. producers and rather moderate net welfare losses for United States ($3 billion)
• Little effect on profits of Japanese producers

Question 9

When was the first time that the voluntary export restraint was established?

Answer 9

1981

Question 10

First two years the VER was biding which means:

Answer 10

that the total per celling was exploiting for Japanese exporters - economic effects on prices were the largest

The VER was not biding on all years.

Question 11

How the VER was applied to Japanese firms?

Answer 11

VER only applied to cars build abroad and shipped to the US BUT the VER did not apply for cars build in the US by Japanese firms.

Question 12

Explain the VER on Chinese solar panel producers

Answer 12

A recent example for a voluntary export restraint Chinese solar panel producers“agreeing” to limit their exports of solar panels to EU countries below 7 gigawatts-worth of solar panels per year, along with a minimum price floor for those units.

Question 13

Who are the main losers of the VER on Chinese solar panel producers

Answer 13

Main losers of this policy are European consumers.

Question 14

Explain the renegotiation of the US to resemble forbidden voluntary export restrains:

Answer 14

Some recent renegotiations of the United States resemble forbidden voluntary export restraints.

During the renegotiations of the Free Trade Agreement Between the United States of America and the Republic of Korea (KORUS), Korea agreed to “an arrangement with respect to steel imports: to reduce its exports of steel to the United States to 70% of the average of the previous three years” (Vidigal, 2019).

Question 15

Voluntary export restraints are no longer allowed under WTO rules, but this only applies to an agreement between governments and imposed onto exporters.

TRUE OR FALSE

Answer 15

TRUE

Question 16

A local content requirement is

Answer 16

a regulation that requires some specified fraction of a final good to be produced domestically.

It may be specified in value terms, i.e., as a minimum share of the value of a good representing home value added, or in physical units.

Question 17

viewpoint of domestic producers for local content requirements

Answer 17

From the viewpoint of domestic producers of inputs, a local content requirement provides protection in the same way that an import quota would.

Question 18

viewpoint of domestic of firms for local content requirements

Answer 18

From the viewpoint of firms that must buy home inputs, however, the requirement does not place a strict limit on imports, but allows firms to import more if they also use more home parts.

Question 19

Does the LCR provides government revenue? what about quota rents?

Answer 19

Local content requirement (LCR) provides neither government revenue (as a tariff would) nor quota rents.

Question 20

Who is affected by the LCR when it comes to price ?

Answer 20

The difference between the prices of home goods and imports is averaged into the price of the final good and is passed on to consumers. Which means the domestic producers benefits.

Question 21

Suppose that imported car parts under free trade: USD 6,000.

The same parts produced domestically would cost USD 10,000 and local content requirements define a minimum of 50 percent domestic parts.

What is the average costs for these intermediate inputs:?

Answer 21

USD 8,000 (50% x USD 6,000 + 50% x USD 10,000).

In this case, the costs of the final good (here: car) will increase by USD 2,000 due to the higher intermediate input prices, triggered by the local content requirement.