Import Quotas and Voluntary Export Restraints

As a rule, quotas and VERs harm consumers by restricting market supply while raising prices. At the same time, they generally tend to raise prices and profits of both the domestic firms and the foreign, quota-constraint firms. This is the case, since the quota acts as a facilitating device for collusion between the domestic and foreign supplier. For the same reason, no profit shifting from the foreign to the domestic firms takes place here and the burden of the quota is borne by domestic consumers. The gain to foreign producers could, in principle be appropriated by the domestic government if it decided to sell the quota rights instead of offering them for free on a first-come, first-served basis. Still the total net welfare effect for all affected countries would be negative. These results generally hold when product characteristics and quality are fixed. In the long run, when adjustments of product qualities as a response to quotas or VERs take place, cases can arise were some profit shifting would take place and foreign firms could actually be harmed by a quota or VER. While a country applying a quota may gain more, its trading partner loses more and again the net welfare effect would be negative. Given these observations, it is probably to be welcomed that quantitative restrictions have continuously been reduced in world trade during recent decades