Introduction

One of the most common criticisms of voluntary export restrictions (VERs) and the way that quotas are currently allocated is that they allow foreigners to reap the rents associated with the quantitative constraints. It has been suggested that auctioning import quotas would remedy this. However, it is by now well understood that this policy may not raise significant revenues in the presence of market power on the part of producers. The reason is that in such environments, prices are chosen by producers, i.e. there is no supply curve and the response of producers to the constraint must be taken into account when determining the price of an auctioned license. For example, foreign producers can reduce the value of a license by raising their own price. Since this allows them to appropriate potential rents, they do so. This leads to low prices for licenses in equilibrium.

Krishna (1990a), Takacs (1987), and Helpman and Krugman (1989) analyze the response of producers to quotas, and the effects of this on license prices. Krishna considers a foreign monopolist who has other markets, while Takacs focuses on a single market. Helpman and Krugman look at foreign oligopoly. They use perceived marginal revenue and marginal cost tools applied to a model of price competition to argue that the license price is zero unless the quota is quite restrictive. They then work out a linear demand, foreign duopoly model with price competition and differentiated products. For this model they show that welfare, even when the quota is set optimally and licenses are auctioned, is below that under free trade.

Introduction

The post–World War II era is often hailed as a period of great trade liberalization, which led to gains for all parties through free trade. Owing to a series of negotiations conducted under the auspices of GATT, tariffs have been negotiated steadily downward, and at present they are at an average level of about 4 percent on manufactured goods. However, this figure does not necessarily indicate that protection has fallen over time. Since 1970, a new kind of protectionism involving nontariff barriers (NTBs) has arisen.

The leading instruments of this “new protectionism” have been the socalled voluntary export restraint (VER) and its relative, the orderly marketing arrangement (OMA). Although the articles of GATT explicitly forbid quotas since they are inherently discriminatory, the proportion of total world trade that moves under some kind of quantitative restraint is thought to be between 30 and 50 percent.

The rise in the new protectionism coincided with the slow economic growth and higher unemployment of the early 1970s, and is often linked causally to the adverse economic environment faced by established industries in this period. The popularity of VERs stems from their legal, political, and economic advantages over more traditional protectionist measures. This is likely to make them even more popular in the future. VERs, however, tend to be socially inefficient ways of providing protection, although they do have advantages for certain groups.