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7.20 Administration of a Voluntary Export Restraint

Learning Objective

  1. Learn the ways in which a voluntary export restraint (VER) can be implemented to monitor and assure that only the specified amount is exported to the targeted country.

When a government sets a quantity restriction, the government must implement procedures to prevent exports beyond the restricted level. A binding voluntary export restraint (VER) will result in a higher price in the import country and in the case of a large country, a reduction in the price in the exporter’s market. The price wedge would generate profit opportunities for anyone who could purchase (or produce) the product at the lower price (or cost) in the export market and resell it at the higher price in the import market.

Three basic methods are used to administer VERs.

  1. Offer export rights on a first-come, first-served basis. The government could allow exports to exit freely from the start of the year until the VER limit is reached. Once filled, customs officials would prohibit export of the product for the remainder of the year. If administered in this way, the VER may result in a fluctuating price for the product over the year. During the open period, a sufficient amount of imports may flow in to achieve free trade prices. Once the window is closed, prices would revert to the autarky prices.
  2. Auction export rights. Essentially the government could sell quota tickets where each ticket presented to a customs official would allow the exit of one unit of the good. If the tickets are auctioned, or if the price is determined competitively, the price at which each ticket would be sold is the difference in prices that exist between the export and import market. The holder of a quota ticket can buy the product at the low price in the exporter’s market and resell it at the higher price in the importer’s market. If there are no transportation costs, a quota holder can make a pure profit, called a quota rent, equal to the difference in prices. If the government sells the quota tickets at the maximum attainable price, then the government would receive all the quota rents.
  3. Give away export rights. The government could give away the export rights by allocating quota tickets to appropriate individuals. The recipient of a quota ticket essentially receives a windfall profit since, in the absence of transportation costs, they can claim the entire quota rent at no cost to themselves. Many times governments allocate the quota tickets to domestic exporting companies based on past market shares. Thus, if an exporter had exported 40 percent of all exports before the VER, then it would be given 40 percent of the quota tickets. It is worth noting that because quota rents are so valuable, a governmen can use them to direct rents toward its political supporters.

Key Takeaways

  • To administer a VER, countries generally assign export rights, or licenses, with the allowable import quantity limited in total to quota level.
  • The government earns revenue from the quota rents if it allocates the export licenses via auction or sale.
  • If the government gives the export rights away, as it typically does in these cases, the recipients of the rights, typically the export firms themselves, earn the quota rents.

Exercise

  1. Jeopardy Questions. As in the popular television game show, you are given an answer to a question and you must respond with the question. For example, if the answer is “a tax on imports,” then the correct question is “What is a tariff?”

    1. Of domestic or foreign residents, this group receives quota rents when the government sells the right to export.
    2. The term for the quota allocation method in which exports are allowed until the quota limit is reached.
    3. The term used to describe the sale of quota rights to the highest bidder.
    4. The likely recipients if new quota rights are given away by the government.
    5. The term used to describe the profit made by a quota rights holder who can purchase the product cheaper in the export market and sell it for more in the import market.