Abstract
Japan has agreed with the EC to put a voluntary export restraint (VER) on cars. Policies in the EC toward foreign direct investment (FDI) by Japanese firms remain under national jurisdiction. The VER benefits producing countries and hurts non-producing countries. FDI reverses these effects. The combination of a VER and FDI is an equilibrium outcome between conflicting countries, and results from uncoordinated EC policies and the strength of producing countries in EC decision-making. It can be second best for both camps, but third best for the EC as a whole, inferior to both a prohibitive VER and free trade.
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