Question

Voluntary export restraints provide for rich interplay between economics and politics. Let's look at two examples. In the first, the United States forced one key exporter, Japan, to limit its exports of automobiles. In the second, a small VER, again between the United States and Japan, grew to become a wide-ranging set of export limits that covered many textile and clothing products, involved many countries, and lasted for decades.

TEXTILES AND CLOTHING: A MONSTER

In 1955, a monster was born. In the face of rising imports from Japan, the U.S. government convinced the Japanese government to “voluntarily” limit Japan's exports of cotton fabric and clothing to the United States. In the late 1950s, Britain followed by compelling India and Pakistan to impose VERs on their clothing and textile exports to Britain. The VERs were initially justified as “temporary” restraints in response to protectionist pleas from import-competing firms that they needed time to adjust to rising foreign competition. But the monster kept growing.

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The 1961 Short-Term Arrangement led to the 1962 Long-Term Arrangement. In 1974, the Multifibre Arrangement extended the scheme to include most types of textiles and clothing. The trade policy monster became huge. A large and rising number of VERs, negotiated country by country and product by product, limited exports by developing countries to industrialized countries (and to a number of other developing countries).

The monster even had its own growth dynamic. A VER is, in effect, a cartel among the exporting firms. As they raise their prices, the profit opportunity attracts other, initially unconstrained suppliers. Production of textiles and clothing for export spread to countries such as Bangladesh, Cambodia, Fiji, and Turkmenistan. As these countries became successful exporters, the importing countries pressured them to enact VERs to limit their disruption to the managed trade.

The developing countries that were constrained by these VERs pushed hard during the Uruguay Round of trade negotiations to bring this trade back within the normal WTO rules (no quantitative limits, and any tariffs to apply equally to all countries—most favored nation treatment, rather than bilateral restrictions). The Agreement on Textiles and Clothing came into force in 1995 and provided for a 10-year period during which all quotas in this sector would be ended. On January 1, 2005, after almost a half century of life, the monster mostly died.

We say “mostly” because for a few more years a small piece of the monster lived on. As part of its accession agreement to the World Trade Organization, China accepted that other countries could impose China-specific “safeguards” if its rising exports of textiles or clothing harmed import-competing producers. As the United States phased out VERs, the U.S. government imposed such safeguards on some imports from China. By late 2005 a comprehensive agreement limited imports of 22 types of products from China. Similarly, the European Union imposed safeguard limits on imports from China on 10 types of products. Then, the monster finally took its last breaths. The EU limits expired at the end of 2007 and the U.S. limits expired at the end of 2008. (Still, we do not have free trade in textiles and clothing because many countries continue to have relatively high import tariffs in this sector. But the web of VERs has ended.)

Consumers are the big winners from the liberalization. Prices generally fell by 10 to 40 percent when the VERs ended. Another set of winners is countries, including China, India, and Bangladesh, that have strong comparative advantage in textiles and clothing but whose production and exports had been severely constrained by the VERs. On the other side, with rising imports, textile and clothing firms and workers in the United States and other industrialized countries have been harmed. Another set of losers is those developing countries, apparently including Korea and Taiwan, that do not have comparative advantage in textile and clothing production but that had become producers and exporters of textiles and clothing because the VERs had severely restricted the truly competitive countries. (This shows another type of global production inefficiency that resulted from the VERs.) These uncompetitive countries lost the VER rents that they had been receiving, and their industries shrank as those in countries such as China expanded.

Create a convincing case to justify DC's such as the United States and Britain imposing VERS on imported textiles and apparel. On the other hand beyond merely repeating the points already made in the text, make the case as an international economist, that VERS in textiles and apparel have been bad for global welfare.

Answer 1

Imposition of VERs by the developed countries has been simply done in order to protect the domestic business that produce competing goods while as it has also led to well-being, though, as there is decreased competition, increased price, profits, and employment which has helped the developed countries to address many issues.

                                                                               But on the other hand internationally it has harmed many countries who had competitive advantage in many industries over the countries as these countries were the direct targets which suffered from VERs. It has also effected the wellbeing of exporting countries. VERs have also resulted in the reduction in world production and consumption efficiency.