Since 1970 non-tariff barriers to trade have burgeoned. A voluntary export restraint (VER) almost inevitably increases export prices. In Discussion Paper No. 324, Programme Director L Alan Winters attempts to quantify the increases, or `policy price wedges', associated with UK restrictions on imports of footwear imposed in the late 1970s. In order to measure these wedges, it is necessary to estimate the prices that would have been charged in the absence of a VER. Comparisons with prices before the VER was agreed are inadequate, due to inflation, while reliable data on production costs are not obtainable. Winters therefore models the relationships between the prices of a country's exports to each of several different national markets. This enables comparisons between the prices of exports to the UK market with those to other countries, provided that exports to other markets are unconstrained, or at least that their degree of restraint remained constant when access to the UK market was altered.
Winters emphasizes the need to determine the degree of substitutability between exports to different national markets. When exporters can easily switch supplies between markets, because the goods are very similar or use the same factor inputs, their prices will be closely related. In the case of low substitutability, the exporter is effectively supplying different goods, so shocks to demand in one market cannot be arbitraged away by diverting goods to or from other markets, and prices to different markets can diverge. In particular, because each export price would vary with the demand conditions, importers' real exchange rates will strongly influence the relative prices of exports to different markets.
Winters's tests suggest that imports from Taiwan are highly substitutable, while Poland and Hong Kong appear to export heterogeneous products. He then explores the pricing of exports to the UK from each of the exporters subject to import restrictions relative to the prices charged to West Germany, Belgium, the Netherlands, Austria and Switzerland. He looks for breaks in the normal relationships among these export prices at the times when access to the UK market changed. Although data difficulties force Winters to use annual observations and only two categories of footwear products, he does find clear evidence of policy price wedges emanating from the principal VERs. They imply price increases of about 12% from Taiwanese exporters, 19% from Poland and 27% from Korea.
Finally Winters calculates approximate welfare costs of these policy price wedges, under the very conservative assumption that no other prices change as a result. The increased transfers to exporters from increased prices are by far the largest component of the welfare costs, outweighing the costs to consumers of reduced footwear purchases and lower tariff revenues. Overall, the costs of the policy price wedges peaked in 1980 at £25 million, falling to £6 million in 1986 as the VERs on Taiwan and Korea expired or ceased to bind. Once other costs of protectionism are added, Winters concludes, it is clear that the VERs on UK footwear imports are a highly expensive form of intervention.

The Effects of Voluntary Export Restraints on the Prices of UK Imports of Footwear
L Alan Winters

Discussion Paper No. 324, July 1989 (IT)