VERs under imperfect competition and foreign direct investment : a case study of the U.S. - Japan auto VER

In 1981, the United States (U.S.) induced the Japanese to agree to a voluntary export restraint (VER) on their export of autos to the U.S. The countries negotiated the VERagainst a backdrop of falling U.S. production and employment in the auto industry and several legislative attempts to curb Japanese imports. The Japanese agreed to limit their U.S. exports to 1.68 million vehicles a year for a three year period. The study found that U.S. auto dealers captured some of the rents from the VER and that increasing returns to scale in the U.S. auto industry imply that protection has an effect on scale efficiency. From 1984 to 1987, seven Japanese auto manufacturing firms established assembly plants in the U.S. The authors argue that the VER generated pure profits in the domestic auto industry which induced the Japanese producers to enter the U.S. domestic market through foreign direct investment. Their entry then largely eliminated the abnormally high profits. The study sequentially introduces into the model the important elements of the auto industry and the VER, thereby isolating the impact of each on the estimates of the welfare effects of the VER. The impact of foreign direct investment was to lower the costs of the VER because the greater entry into domestic auto manufacturing resulted in a lower quota rent premium for foreign autos.