International Trade Theory and Policy
by Steven M. Suranovic

Trade 90-18

Administration of a Voluntary Export Restraint

When a quantity restriction is set by a government it must implement procedures to prevent exports beyond the restricted level. A binding 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.

There are three basic methods used to administer VERs.

1) First-Come, First-Served - 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 - The government could auction the export rights. Essentially the government sells quota tickets where each ticket, presented to a customs official, allows the exit of one unit of the good. If the tickets are auctioned, or if the price is determined competitively, the price each ticket would be sold for 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 quota rents, equal to the difference in prices. If the government sells the quota tickets at the maximum attainable price, then the government would receive all of 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 share. Thus, if an exporter had exported 40% of all exports before the VER, then they would be given 40% of the quota tickets. It worth noting that because quota rents are so valuable, governments can use them to direct rents towards its political supporters.

International Trade Theory and Policy - Chapter 90-18: Last Updated on 2/25/97

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