Definition
A Voluntary Export Restraint (VER) is a trade restriction in which an exporting country voluntarily decreases its export to another nation. It’s usually initiated by the exporting country to avoid more severe trade barriers from the importing country. Essentially, it’s a strategy to appease the importing country and reduce trade friction.
Phonetic
The phonetics for “Voluntary Export Restraint (VER)” would be:/vɒlˈʌnteri ˈɛkspɔːrt rɪˈstreɪnt (viː iː ɑːr)/
Key Takeaways
Voluntary Export Restraints (VERs) are a form of trade restrictions which can significantly impact export policies and international commerce. Here are three key takeaways:
- Economic effect: VERs are often implemented to protect domestic industries from foreign competition. However, while it may help the domestic industry in the short run, in the long run, it can possibly result in decreased competitiveness as there is less incentive for innovation and improvement.
- Political aspect: VERs are sometimes used as a political tool to appease domestic pressures while avoiding a more confrontational approach like tariffs and quotas. Despite being termed ‘voluntary’ , they are often a response to the export country avoiding a threat of more severe restrictions.
- Impact on consumers: VERs may lead to higher prices for consumers as they reduce competitive pressure. The reduced competition can allow domestic companies to raise prices, making products more expensive for consumers.
Importance
Voluntary Export Restraints (VER) are an important concept in the business/finance field as they represent a self-imposed limitation by an exporting country on the volume of its exports of a particular product. VERs can significantly impact international trade, manufacturers, consumers, and overall economic health. By limiting exports, a country can help to prevent oversupply in the international market, potentially stabilizing global prices. However, this form of non-tariff barrier may lead to reduction in the overall volume of trade, limit competition and potentially cause higher prices in the importing country. Thus, understanding the dynamics of VER is crucial for policy makers, investors, and businesses that operate in the global marketplace.
Explanation
Voluntary Export Restraints (VERs) are typically used as a strategy to limit the quantities of certain goods that a country exports to another country. The purpose behind implementing a VER is often to protect domestic industries by curbing competition from foreign manufacturers. It’s a type of trade barrier, though unlike tariffs or import quotas, it is initiated by the exporting country rather than the importing one. Instead of the importing country protecting its industries by imposing restrictions, the exporting country voluntarily reduces its exports.Often, a VER is implemented when the importing country threatens more extreme trade restrictions. In this way, VERs can help maintain a more amicable trade relationship, as they appear less confrontational than levies or outright quotas. Though the act of limiting exports may seem counter-intuitive economically, it may be a strategic choice to ensure the continuance of a trade relationship or to maintain political goodwill. It’s worth noting, however, that while a VER can protect domestic industries, it may also lead to reduced competition, potentially causing higher prices and less product variety for consumers.
Examples
1. U.S. – Japan Automobile VER: In the 1980s, the United States and Japan entered into a VER agreement to limit the number of cars that Japan could export to the United States annually. This was done in response to fears in the U.S. of a rising trade deficit and to protect the U.S. auto industry from advancing Japanese competition.2. U.S. – China Textile VER: In 2005, the United States and China agreed on a VER that limited the growth of textile imports from China into the U.S. for a period of three years. This VER was implemented due to concerns about the damaging effect on the U.S. textile industry from cheap Chinese textile products.3. EU – China Textile VER: In 2005, similar to the US, the EU also concluded a VER with China over textile products, limiting the growth in Chinese textile imports into the EU until the end of 2007. China agreed to this VER to maintain good economic relations with the EU and to preclude the possibility of more restrictive sanctions.
Frequently Asked Questions(FAQ)
What is Voluntary Export Restraint (VER)?
Voluntary Export Restraint (VER) is a trade policy where the exporter voluntarily limits the amount of goods exported to a particular country. This is typically done at the request of the importing country and is supposedly a ‘voluntary’ act.
Why is a Voluntary Export Restraint (VER) imposed?
A VER is imposed to protect domestic industries from foreign competition. The importing country might ask a foreign producer to voluntarily limit their exports to prevent the domestic market from being overwhelmed by cheaper or superior foreign goods.
How does Voluntary Export Restraint (VER) affect businesses?
VER can limit the sales and growth of companies that are good at producing certain goods. If a company is unable to export as many goods as it could sell, it might face decreased profits. However, VERs can provide benefits to companies in the country imposing the restraint by reducing competition.
What are the implications of Voluntary Export Restraint (VER) on consumers?
While VERs protect domestic industries, they can sometimes do so at the expense of consumers. By limiting foreign competition, VERs can lead to higher prices, lower product quality and less variety available to consumers.
Is Voluntary Export Restraint (VER) a common practice?
While it was a common practice in the previous decades, VERs are now relatively rare due to the World Trade Organization (WTO) rules that generally prohibit them. However, they can still be imposed under certain circumstances, usually at the request of the importing country.
Can a Voluntary Export Restraint (VER) be revoked?
Yes, like any trade policy, a VER can be revoked. This generally occurs when the importing country believes that the domestic industry has sufficiently adjusted to competition or if it’s deemed that the VER is causing more harm than good.
Can VERs lead to trade disputes?
Yes, VERs can lead to trade disputes. If an exporting country feels that a VER is arbitrary or unfair, it can bring the issue before the World Trade Organization or another international trade body. The dispute can then be resolved through negotiations or arbitration.
Related Finance Terms
- Trade Barriers
- Import Quota
- International Trade Policy
- Tariffs
- Protectionism
Sources for More Information
