Background Information

In the early 1980s, the United States, under the Reagan administration, implemented a system of Voluntary Export Restraints (VERs) primarily aimed at limiting imports from Japan. The most notable example was the restriction on automobile exports from Japan to the U.S., which began in 1981. This system was designed to protect domestic industries from foreign competition without resorting to more confrontational measures such as tariffs or quotas. The policy allowed only 1.68 million Japanese cars into the U.S. each year. The cap was raised to 1.85 million cars in 1984, and to 2.30 million in 1985, before the program was scrapped in 1994.

Economic Theory Behind the Policy and Intended Impact

VERs are a type of non-tariff trade barrier where the exporting country agrees to limit the quantity of goods exported to the importing country. The theory behind VERs is to provide temporary relief to domestic industries facing significant competition from imports, giving them time to restructure and become more competitive. Key components and intended impacts included:

Protection of Domestic Industries: By limiting imports, VERs aimed to protect U.S. industries, particularly the automobile industry, from a surge in Japanese imports that threatened domestic jobs and production.

Avoiding Tariffs and Quotas: VERs were seen as a more diplomatic alternative to imposing tariffs or quotas, which could lead to retaliatory trade measures.

Market Stability: The VERs aimed to stabilize the market for domestic producers by controlling the supply of foreign goods, thus preventing market disruption and potential job losses in the U.S.

Intended Impact: The primary goals were to protect domestic industries, particularly the auto industry, preserve jobs, and give U.S. companies time to improve their competitiveness without the immediate pressure of foreign competition.

Unintended Consequences and Evaluations of Effectiveness

While VERs were intended to support domestic industries, they also led to several unintended consequences:

Increased Prices: Limiting the supply of Japanese cars led to higher prices for consumers in the U.S., as the reduction in competition allowed domestic manufacturers to raise prices.

Encouraging Foreign Investment: Japanese car manufacturers responded by setting up production facilities in the U.S. to circumvent the export restrictions, which led to significant foreign direct investment but also created competition for domestic car makers within the U.S.

Trade Diversion: The restrictions on Japanese imports led to an increase in imports from other countries, such as South Korea, which were not subject to the same limitations, thereby not significantly reducing the overall trade deficit.

Evaluations of Effectiveness: The VERs provided temporary relief to the U.S. auto industry, allowing it to restructure and improve productivity. However, the overall impact on the trade deficit with Japan was limited, and the policy led to higher costs for consumers. The policy also encouraged Japanese automakers to increase their presence in the U.S. through local manufacturing, which had long-term implications for the domestic industry.

In conclusion, the voluntary export restraint system in the 1980s aimed to protect U.S. industries by limiting imports from Japan, particularly in the auto sector. While it provided short-term benefits to domestic producers, it also resulted in higher consumer prices and significant foreign direct investment in U.S. manufacturing by Japanese companies.