Trade policy and product variety: when is a VER superior to a tariff?

Abstract

Using the Romer [Romer, P., 1994. New goods, old theory, and the welfare costs of trade restrictions. J. Dev. Econ., 43, 5–38.] model of trade policy and product variety, this note shows that a voluntary export restraint (VER) may be superior to an equivalent tariff that results in the same volume of total imports. The explanation for this counterintuitive result is that the VER has less effect on the profitability of foreign firms than the tariff, and hence the reduction in product variety with the VER is less than with the tariff. If the greater product variety with the VER is sufficiently large to compensate for the loss of tariff revenue then the VER is superior to the equivalent tariff.