Since 1977, by agreement of the Japanese and UK motor industries, the Japanese share of the UK car market has been held at 11%; similarly, the Japanese share of the French market has been restricted to 3% since 1977 and Japanese sales to Italy have been negligible since the 1960s. In Discussion Paper No. 249, Caroline Digby and Research Fellows Alasdair Smith and Anthony Venables estimate the effects of such `voluntary' export restrictions (VERs) on sales of Japanese cars to European markets. They use a numerical model based on the theory of quantitative trade restrictions in a market with imperfect competition and economies of scale in production.
The effect of removing the VER in the UK market is to lower the prices of Japanese cars, and to a lesser extent of other cars too. The authors estimate that removal of the VER would benefit the UK by between £95m and £130m per year. These estimates are lower than the £180m estimate previously obtained by Hindley. In the model described in the Discussion Paper, Japanese sales rise by 55% when the VER is removed, whereas Hindley assumed they would double. The model indicates that VERs are a very expensive way of preserving UK employment: the annual cost is £50,000 to £70,000 per job saved.
In order to provide a measure of `excess' cost of the VER the authors estimate the effects of a tariff which is equivalent to the VER, in the sense of achieving the same level of UK output and employment. (Such a tariff is not currently available as a policy instrument, the authors note, nor do they advocate its adoption.) The equivalent tariff is much less costly than the VER: at least half of the costs associated with the VER can be eliminated by the shift to the tariff. A comparison of the VER with an `equivalent' production subsidy indicates that the effects of the VER on employment could be obtained using a subsidy, with essentially none of the welfare costs of the VER.
Digby, Smith and Venables find that the gains to France and Italy from removal of their VERs are larger than those estimated for the UK, because the restrictions in France and Italy are much more stringent. Replacement of the individual national VERs with a higher common external tariff on imported Japanese cars affects EC countries in very different ways. French and Italian consumers enjoy large price reductions and UK consumers small price reductions. Consumers in Germany and the rest of the EC face price rises because of the increased tariff. French, Italian and UK producers lose profits but their losses are outweighed by consumer gains; German producers and US multinationals gain from higher prices, but the losses to German consumers are greater than the producer gains. These results imply that there are likely to be considerable political obstacles to the creation of a single European motor car market.
The analysis suggests that VERs are an inefficient instrument of industrial policy. Quantitative restrictions and market-sharing arrangements appear increasingly attractive to policy-makers. It is essential that they should be more aware that such measures may have large hidden costs, the authors conclude.

Counting the Cost of Voluntary Export Restrictions in the European Car Market Caroline Digby, Alasdair Smith & Anthony Venables

Discussion Paper No. 249, June 1988 (IT)