Voluntary Export Restraints and Trade Diversion

Abstract

SUMMARYIt has been shown that when voluntary export restraints are applied against a non‐Member of a trade club, such as the EC and EFTA in Europe, the partner's exports will increase in absolute terms although overall imports are reduced; the trade barrier ‘leaks’ and leads to a misallocation of resources from a global point of view. The partner prefers such a leaking trade barrier to free trade. Compared to traditional customs union theory, where the analysis concentrates on a move from global discrimination to preferential treatment of one foreign country, in this paper the move is in the opposite direction: from free trade with all foreign countries to discrimination against one foreign country (typically a developing one) and retained free trade with the remaining one. Reference was made to international trade in textile, clothing and footwear (TCF). The trade diversion effect of VERs were found to be particularly strong for France and Sweden, less so for Italy and Germany, and non‐existent for the UK. A comparison was made with changes in non‐European countries' integration with LDC exports of TCF (Australia, Canada, Japan and the USA). Finally, the trade diversion effect was illustrated with an analysis of changes in the supply composition of Sweden's home demand for clothing between 1974–82.