[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

of resources resulting from the cost of domestic production exceeding the costs
of purchasing the good abroad, as the economy expands production because of
the tariff.
QUOTAS
Rather than setting tariffs, many countries impose quotas—limits on the amount of
foreign goods that can be imported. For instance, in the 1950s, the United States
imposed a quota on the amount of oil that could be imported, and until 2005 strict
quotas controlled imports of textiles.
Producers often prefer quotas. Because the quantity imported is limited,
the domestic price increases above the international price. Quotas enable domestic
producers to know precisely the magnitude of the foreign supply. If foreign
producers become more efficient or if exchange rates change in their favor,
they still cannot sell any more. In that sense, quotas provide domestic producers
with greater certainty than do tariffs, insulating them from the worst threats
of competition.
Quotas and tariffs both succeed in raising the domestic price above the price at
which the good could be obtained abroad. Both thus protect domestic producers.
There is, however, one important difference: quotas enable those possessing permits
to import to earn a profit by buying goods at the international price abroad
and selling at the higher domestic price. The government is, in effect, giving away
its tariff revenues. These profits are referred to as quota rents.
VOLUNTARY EXPORT RESTRAINTS
In recent years, international agreements have reduced the level of tariffs and
restricted the use of quotas. Accordingly, countries have sought to protect themselves
from the onslaught of foreign competition by other means. One approach that
became popular in the 1980s was the use of voluntary export restraints (VERs). Rather
than limiting imports of automobiles, for example, the United States persuaded
Japan to limit its exports.
There are two interpretations of why Japan might have been willing to go along
with this VER. One is that it worried the United States might take a stronger action,
such as imposing quotas. From Japan’s perspective, VERs are clearly preferable to
quotas, because VERs allow the quota rents to accrue to Japanese firms. A second
interpretation is that VERs enable Japanese car producers to act collectively in
their self-interest to reduce production and raise prices, engaging in a kind of collusion
otherwise illegal under American antitrust laws. The VER “imposed” output
reductions on the Japanese car producers that they would have chosen themselves
if they had been permitted to under law. No wonder, then, that they agreed to go
along! The cost to the American consumer of the Japanese VER was enormous.
American consumers paid more than $100,000 in higher prices for every American
job created.
436 ∂ CHAPTER 19 INTERNATIONAL TRADE AND TRADE POLICY