The use of quantitative restrictions in international trade has burgeoned. In the 1970s, for example, the UK footwear industry experienced great pressure on its output and prices as a result of rising imports of non-leather items from the Far East and of leather footwear from Comecon and Italy. As EC members, the Italian suppliers have had unfettered access to the UK market, but the others have been subject to non-tariff import restrictions. In Discussion Paper No. 283, Programme Director L&nbspAlan Winters and Paul Brenton examine the welfare effects of the `voluntary export restraints' (VERs) on leather footwear negotiated in the 1970s with Czechoslovakia, Poland and Romania.
Previous studies have assumed that prices rise so as to clear the market following the imposition of quantitative restrictions; Winters and Brenton depart from this practice by allowing for non-price rationing in response to NTBs. They use the Rotterdam model of consumer demand to describe the geographical allocation of imports, since it provides a theoretically consistent but general system of demand equations and admits the simultaneous estimation of regimes in which quantity is determined endogenously and in which it is constrained. In the analysis all types of leather footwear are combined into a single aggregate and examined in isolation from other types of footwear. The authors also use information from the quantity-constrained period to improve the explanatory power of the model of consumer demand, allowing estimation over the whole period 1971-86.

Winters and Brenton define a method for evaluating the welfare effects of the VER. If it is assumed that actual prices are unaffected by the VER, then the degree of rationing may be represented as the difference between the actual and the `virtual' price (the price which, at the actual level of utility, would lead to the observed quantities being voluntarily chosen). This raises a problem: ultimately only consumers experience utility, but we cannot observe directly the prices they face. If competition keeps all margins fixed, and suppliers keep prices down when the VER is imposed, so too do subsequent stages of the chain and rationing is passed directly through to consumers. If, however, profit margins are increased as a result of the VER somewhere along the domestic distribution chain, consumer prices may reach the market-clearing level. Though the consumer in this case is no longer rationed, Winters and Brenton argue that someone in the distribution chain is, so that the model of quantity rationing still pertains.
Various tests for the presence of rationing reveal a change in the allocation of footwear expenditure in mid-1977. Once allowance is made for the resulting quantity constraint, the virtual price of imports of leather footwear from Comecon is seen to exceed the actual price substantially, from a factor of around 2 in 1977 to 15 in 1986, indicating significant rationing. The estimates suggest that, but for the VER, Comecon could have been the largest supplier of the UK market in volume terms with a share of around 30%. The VER does not, however, lead to a strong increase in demand for leather footwear produced in the UK because of relatively low substitution between Comecon and UK footwear. Finally, Winters and Brenton estimate that the VER inflicted enormous losses on UK consumers, ranging from £2.9m in 1977 to £263m (approximately 25% of total expenditure on leather footwear) in 1986. This large increase in the costs of rationing reflects the restrictiveness of a constant quota at a time of rising demand

Voluntary Export Restraints: UK Restrictions on Imports of Leather Footwear from Eastern Europe
L Alan Winters and P A Brenton

Discussion Paper No. 283, November 1988 (IT)