The Welfare Loss of the Voluntary Export Restraint For Japanese Automobiles

Abstract

The welfare loss from the voluntary export restraint (VER) on Japanese automobiles was estimated for the first year of the VER (April 1, 1981 to March 31, 1982). The impact of quantity reductions on the price of Japanese and domestic automobiles was used to estimate the welfare loss. Losses were estimated separately for the domestic small car market and the Japanese market in view of the existence of product differentiation. Welfare losses ranged from $446 million to $1,386 million depending on the price elasticity of demand assumed for Japanese automobiles. The welfare loss for domestic automobiles accounted for only a small proportion of this loss. The VER had a minor impact on the domestic automobile industry where sales remained low due to general economic conditions and limited substitutability between domestic and Japanese cars. However, the limited assistance provided by the VER to the domestic automobile industry entailed considerable costs as demonstrated by the magnitude of the welfare loss. A considerable part of this loss could have been avoided if other forms of trade protection such as tariffs had been used instead of the VER.