Page 89 - Introduction to Business

CHAPTER 2 The Environment of Business 63

shoot up and Porsches could possibly end up selling for double or triple the free trade
price. Again it is the consumer who loses out in the bargain! Many developing coun-
tries impose quotas on various goods that result in a high cost for the domestic con-
sumer and fat profits for domestic producers of import-competing products as well
as importers. The Multi Fiber Arrangement (MFA) deals with global trade in textiles
and apparel and sets import quotas (gradually eliminated starting in 2005) for vari-
ous products exported to industrialized countries in Europe and the United States.
The net result is that apparel is a lot more expensive in Europe and the United States
than in the developing world where it is produced. Global trade in textile and apparel
is anything but free! This contributes to stagnant income levels in many developing
countries.

Voluntary Restraints. Self-imposed quotas by exporters (or the exporting
country) are called voluntary restraints. For political reasons, some countries that voluntary restraints Self-imposed
are very competitive in the manufacture of certain products will voluntarily limit export quotas on specific sensitive
products (autos, steel, etc.), to a
their exports of specific goods to another country for a set period of time. The phi- specific country or countries for a
losophy behind these voluntary restraints is to provide some breathing time for set period of time
domestic producers to retool and restructure operations and adjust to the realities
of import competition. An excellent example of voluntary restraint is the restrictions
that Japan imposed on its car exporters to the United States in the early 1980s. Japan,
as you probably know, has a comparative advantage in the production of competi-
tively priced, well-built, relatively small, fuel-efficient cars. In 1980, soon after the
Iranian revolution (which led to the doubling of crude oil prices), gasoline prices in
the United States shot up and the U.S. consumers’ appetite for fuel-efficient, well-
built Japanese cars increased tremendously as the consumers moved away from the
“gas guzzlers” produced by Detroit. The U.S. automobile manufacturers were losing
market share and had huge inventories of unsold cars. They appealed to the U.S.
government. In the early 1980s Japan’s government came to an agreement with the
U.S. government to limit car exports to the United States (to 1.68 million cars per
year). Because of this voluntary restraint quota, Japanese cars, which were in great
demand, commanded premium prices. Just as in the case of quotas, it was the
consumer (the U.S. consumer in this case) who ended up paying a high price for
Japanese cars. As you can see, voluntary restraints operate similarly to quotas. By the
mid-1980s President Ronald Reagan lifted the voluntary restraint and allowed open
trade in automobiles. Since that time, Japanese automobile companies like Toyota and
Honda have been setting the global benchmark for automobile value.

Counter Trade. During the Cold War period (and even today in several coun-
tries of the former Soviet bloc and in some developing countries) the Soviet bloc
countries practiced counter trade—a barter system of exchange. As you can imag- counter trade A barter system of
ine, counter trade is an extremely inefficient form of trade between countries. Coun- exchange in which trade between
specific countries is conducted without
tries participate in counter trade especially when they do not have adequate amounts
the use of monetary transactions
of foreign currency (e.g., the U.S. dollar, the euro, etc.) to pay for their imports.
Another reason why countries pursue counter trade is that they may not be capable
of producing goods of international quality to sell and earn the needed foreign
exchange for imports. Generally, under a system of counter trade, countries exchange
one substandard product for another. Obviously, consumers in both countries would
be better off with a system of open trade. During the Soviet days, the government of
India imported Soviet fighter jets and other defense hardware in exchange for Indian-
made consumer goods. The terms of trade (number of copy machines or tubes of
toothpaste per fighter aircraft!) are generally worked out between the countries. How-
ever, achieving balanced trade between counter trade partners is always a challenge.

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