Japanese Car VERs

In class we spoke about Voluntary Export Restrictions (VERs) in relation with rent seeking and efficiency losses. This article evaluates the effects of Voluntary Export Restriction (VER) on Japanese cars that was in place from 1981-1994. In these years between 1.68 million and 2.30 million Japanese cars were allowed into the US. This caused the prices of Japanese cars sold in the US to average about $1,200 (or 14%) higher than what they would have been.  This resulted in increased car sales and profits of U.S. firms by about $2 billion per year. However, US consumers suffered because of higher prices and the entire US economy suffered welfare losses of about $3 billion.

VERs are often put in place instead of import tariffs (which would result in government revenue) for political considerations; VERs give the exporting government power (and potential revenue) over the exports instead of the other way around. However, in this case the negative impact on Japanese car sales was completely offset the profit-enhancing effects of higher prices. Japan was no better and no worse off than before the VER. However, had a tariff been implemented, Japan would have lost money.

Welfare loss doesn’t only result from foregone foreign production, but also because import restrictions result in the inefficient use of domestic resources. The article mentions that many Japanese manufacturers set up shop in the US to not be restricted by the VER. The cars could have been produced more efficiently in Japan, so while it might have been contributed positively to the US economy, for the world economy as a whole this caused a loss.