Shorter Papers Automobile Quotas Revisited: The Costs of Continued Protection

Abstract

This paper examines the loss to the U. S. economy and consumers from the third year of the Voluntary Export Restraint (VER) for Japanese automobiles. Losses due to product differentiation were estimated separately for the domestic car market and Japanese car market. Consideration was given to profit taking as well as product upgrading. The welfare loss ranged from $1.8 billion to $2.8 billion which is higher than loss estimates reported for the first year of the VER. The higher welfare loss reflects the impact of improved economic conditions which resulted in higher prices for manufacturers and dealers and the emergence of product upgrading due to quantity restraints. The total loss to consumers ranged from $2.6 billion to $5.3 billion with more than 80 percent of the loss representing transfers from consumers to producers (domestic and foreign). The high cost of the VER has not been offset by employment gains since Detroit responded to the VER by making fewer cars and increasing its reliance on off ‐ shore production.