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[KTQT] Mid-term revision

Kinh tế quốc tế (Đại học Kinh tế Quốc dân)

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Week 1: Introduction to the course International Economics

Labour productivity and comparative advantage, absolute advantage

International economics?

 International economics deals with economic Interactions that occur between independent
nations.
o The role of governments in regulating international trade and investment
 The economics of the international economy can be divided into two broad subfields: the
study of international trade and the study of international money.

International trade

 International trade analysis focuses primarily on the real transactions in the international
economy, that is, transactions involving a physical movement of goods or a tangible
commitment of economic resources.
 Example: conflict between the United States and Europe over Europe's subsidized exports of
agricultural products

International Monetary

 International monetary analysis focuses on the monetary side of the international economy,
that is, on financial transactions such as foreign purchases of U.S. dollars
 Example: dispute over whether the foreign exchange value of the dollar should be allowed to
float freely or be stabilized by government action.

Why do we study IE?

 Globalizations: providing many opportunities and major challenges to the nations and people
of the world
 Nations are more closely linked than ever before through trade in goods and services. flows of
money, and investment in each other's economies
 Many goods we consume are either made abroad or have many imported parts and
components.
 Millions of workers at all skill levels have migrated around the world
 We can invest in companies anywhere in the world and part financial instruments (stocks and
bonds) from any company
 Internationalization and regionalization of the economy

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INTERNATIONAL ECONOMICS: Main themes

 The gain from trade

 Pattern of trade
 How much trade Balance of payment
 Exchange rate determination
 International Policy coordination
 International Capital market

THE gain from trade

 The debate: Is trade harmful?

 Developing vs Developed countries POV
 How could a country that is the most (least) efficient producer of everything gain from trade?

 Countries can specialize in production, while consuming many goods and services through
trade.
 Trade is predicted to benefit a country by making it more efficient when it exports goods
which use abundant resources and imports goods which use scarce resources.
 When countries specialize, they may also be more efficient due to large scale production.
 Countries may also gain by trading current resources for future resources (lending and
borrowing)

Pattern of trade

 Attempts to explain the pattern of international trade-who sells what to whom-have been a
major preoccupation of international economists.
 Climate and resources (Brazil exports coffee and Saudi Arabia exports oil)
 Differences in labor productivity may explain why some countries export certain products

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 How relative supplies of capital, labor and land are used in the production of different
goods may also explain why some countries export certain products

How much trade?

 Governments have worried about the effect of international competition on the prosperity of
domestic industries and have tried either to shield industries from foreign competition by
placing limits on imports or to help them in world competition by subsidizing exports
 Since 1990s: FTA, GATT, WTO
 Anti-globalization wave

BALANCE OF PAYMENT (năm ngoái có thiii nè!!)

 The balance of payments (BOP) transactions consist of imports and exports of goods, services,
and capital, as well as transfer payments, such as foreign aid and remittances.

Exchange rate determination

 For much of modern economic history, exchange rates were fixed by government action rather
than determined in the marketplace.
 Before World War I, the values of the world's major currencies were fixed in terms of gold; for
a generation after World War II, the values of most currencies were fixed in terms of the U.S.
dollar. (nước nào nhiều vàng hơn thì more powerful before ww1; after ww1 us dollar is
accepted in almost every country)
 The analysis of international monetary systems that fix exchange rates remains an important
subject

ex: Chinese currency depreciates in its value after pandemic while US dollar appreciates

International Policy coordination

 The international economy comprises sovereign nations, each free to choose its own economic
policies. Unfortunately, in an integrated world economy, one country's economic policies
usualy affect other countries as well

International Capital market

 In any sophisticated economy, there is an extensive capital market: a set of arrangements by

which individuals and firms exchange money now for promises to pay in the future
 Since 1960s: international trade has been accompanied by a growth in the international capital
market links the cap markets of individual countries

INTRODUCTION TO INTERNATIONAL TRADE THEORY

Framing questions

 Why do countries trade?

 Who trade with whom?
 The gain from trade?

Why do countries trade?

 Countries trade because they are different from each other. Nations, like individuals, can
benefit from their differences by reaching an arrangement in which each does the things it
does relatively well.
 Countries trade to achieve economies of scale in production. If each country produces only
a limited range of goods, it can produce each of these goods at a larger scale and hence more
efficiently than if it tried to produce everything.

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→ In the real world, patterns of international trade reflect the interaction of both these motives.

Ex: table of “total US trade with major partners, 2015”

→ Ưu tiên với những quốc gia có GDP cao, thuận lợi về geography (close border with the nation)

Who trades with whom?

Gravity model (Textbook)

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 Gravity model: the value of trade between any two countries is proportional, other things
equal, to the product of the two countries’ GDPs and diminishes with the distance between
the two countries
 One of the principal uses of gravity models is that they help us to identify anomalies in trade.
Indeed, when trade between two countries is either much more or much less than a gravity
model predicts, economists search for the explanation

→ The gravity model relates the trade between any two countries to the sizes of their economies.
Using the gravity model also reveals the strong effects of distance and international borders

Mercantilist view

 Trade based on Absolute ADVANTAGE

 TRADE based on Comparative advantage

Mercantilist’ view (Textbook)

 Gold and silver are used as currencies in payments between countries.

 Gold and silver are considered wealth, representing the wealth of the nation.
 Accumulating a lot of gold and silver helps the nation get the resources it needs to wage war.

 Only gold, silver and precious metals create the wealth of nations
 The power and wealth of a nation will increase if it exports more than it imports
 Exporting goods abroad leads to gold and silver gains
 Importing goods leads to the leakage of gold and silver abroad
 To achieve goals and prosperity:
 The state must intervene in the economy through laws and economic policies
 Implement trade protection policies (tariffs, quotas, export support, etc.)

Trade based on Absolute ADVANTAGE: Adam Smith

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 When one nation is more efficient than (or has an absolute advantage over) another in the
production of one commodity but is less efficient than (or has an absolute disadvantage with
respect to) the other nation in producing a second commodity, then both nations can gain by
each specializing in the production of the commodity of its absolute advantage and
exchanging part of its output with the other nation for the commodity of its absolute
disadvantage
 We can use absolute advantage to trade with the thing which is our disadvantage

Trade based on Absolute ADVANTAGE Adam Smith

If US exchanges 6W for 6C of the UK

 US gains: 6C-40=2C (or saves 1/2 hour of labor time) UK: 6W that the UK receives from the
US = 6 hours of labor time
 6 hours can produce 30C in the UK
 By being able to exchange 6C (requiring a little over one hour to produce in UK) for 6W with
the US, the UK gains 30C-6C = 24C (or saves almost 5 labor-hours)

Example: The case of VN-US

Source: https://vinatex.com.vn/cotton-day-vietnam-ngay-hoi-nganh-bong-lon-nhat-taiviet-nam/
https://baochinhphu.vn/dien-tich-trong-bong-vai-se-tang-den-76000-ha-vaonam-2020

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 Trade between two nations is based on absolute advantage.

 Adam Smith (and the other classical economists who followed him) believed that all nations
would gain from free trade and strongly advocated a policy of laissez-faire.
 Question: What happened if country A doesn’t have absolute advantage compared to
country B?

Trade based on Comparative ADVANTAGE: David Ricardo

 Even if one nation is less efficient than (has an absolute disadvantage with respect to) the
other nation in the production of both commodities, there is still a basis for mutually beneficial
trade. The first nation should specialize in the production and export of the commodity in
which its absolute disadvantage is smaller (this is the commodity of its comparative
advantage) and import the commodity in which its absolute disadvantage is greater (this is
the commodity of its comparative disadvantage).
 Trade between two countries can benefit both countries if each country exports the goods in
which it has a comparative advantage

 The UK has an absolute disadvantage in the production of both wheat and cloth with respect
to the US.
 The US has an absolute advantage in both wheat and cloth with respect to the UK, but since
its absolute advantage is greater in wheat (6:1) than in cloth (4:2), the United States has a
comparative advantage in wheat and the United Kingdom has a comparative advantage in
cloth
 If US exchanges 6W for 6C of the UK

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 US gains: 6C - 4C = 2C (or saves 1/2 hour of labor time)

 UK: 6W that the UK receives from the US = 6 hours of labor time
 6 hours can produce 12C in the UK
→ By being able to exchange 6C (requiring 3 hour to produce in the UK) for 6W with the US,
the UK gains 12C - 6C = 6C (or saves 3 labor – hours)

Comparative advantage and opportunity cost

 Opportunity cost theory: The cost of a commodity is the amount of a second commodity that
must be given up to release just enough resources to produce one additional unit of the first
commodity

In the absence of trade

 US must give up two-thirds of a unit of cloth to release just enough resources to produce one
additional unit of wheat domestically OC of wheat is 2/3 of aunit of cloth (i.e., 1W = 2/3C in
the United States).
 In the UK: 1W = 2C the OC of wheat is lower in the US than in the UK, and the US would
have a comparative (cost) advantage over the UK in wheat.
 UK would then have a comparative advantage in cloth.

Case study: USain BOLT

During the Bejing Olympic, Jamaican team took part in the relay race, which include 4
runners taking turn, the fastest team to cross the finish line will be the winning team.
a. Which person has absolute advantage in both third-leg and fourth- leg position?
b. According to the law of comparative advantage, which person should be assigned the third-leg
position?

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Week 2: Economies of scale and firms in the global economy

Why do countries trade?

 Countries trade because they are different from each other. Nations, like
individuals, can benefit from their differences by reaching an arrangement in which
each does the things it cos relatively well
 Countries trade to achieve economies of scale in production! Each country
produces only a limited range of goods, it can produce each of these goods at a larger
scale and hence more efficiently than if it tried to produce everything

→ In the real world, patterns of international trade reflect the interaction of both these
motives

Introduction

 The model of comparative advantage assumes constant returns to scale:

o When inputs to an industry increase at a certain rate, output increases at the
same rate.
o If inputs were doubled, output would double as well

Economies of scale and firms in the global economy

1. Economies of scale (nền kinh tế quy mô)

 The more you make of something, the less it costs

o bulk inputs
o spread fixed costs
o specialization
o cheaper loans
o improved processes

 When inputs increase at a certain rate, output increases at a faster rate.

 Cost/unit of output falls as a firm/industry increases output

 Mutually beneficial trade can arise as a result of economies of scale

 International trade permits each country to produce a limited range of goods without
sacrificing variety in consumption

 With trade, countries can take advantage of economies of scale

ex: US vs. UK, US specialize in producing 1,2,3 and UK focus on producing 4,5,6.

Internal economies of scale

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 measure a company's efficiency of production and occur because of factors controlled

by its management team.

 occur when the cost per unit of output depends on the size of a firm

ex: large firms more money to invest; advance in technologies → will have advantage
in price

 not fair → imperfect competition (large firms can produce more output → advantage
in price)

External economies of scale

 happen because of larger changes within the industry, so when the industry grows, the
average costs of business drop

 occur when cost per unit of output depends on the size of the industry

ex: policies, tax, not affect only one firms but all firms…

Economies of scale and market structure

 Both external and internal economies of scale are important causes of international
trade
 Different implications for the structure of industries:
o An industry where economies of scale are purely external will typically consist
of many small firms and be perfectly competitive
o Internal economies of scale result when large firms have a cost advantage over
small firms, causing the industry to become imperfectly competitive.

Theory of External economies of scale

1. Specialized equipment or services maybe needed for the industry, but are only
supplied by other firms if the industry is large and concentrated

 Silicon Valley has a large concentration of silicon chip companies, serviced by

companies that make special machines for manufacturing silicon chip

1. Labor pooling: a large and concentrated industry may attract a pool of workers,
reducing employee search and hiring costs for each firm
2. Knowledge spillovers: workers from different firms may more easily share ideas that
benefit each firms when a large and concentrated industry exists

 Assume that the larger the industry, the lower the industry's costs.
 Forward-falling supply curve: the larger the industry's output the lower the price at
which firms are willing to sell

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 What will happen when the countries open up the potential for trade in buttons?
 The Chinese button industry will expand, while the U.S. button industry will contract.
 This process feeds on itself: As the Chinese Industry's output rises, its costs will fall
further; as the U.S. industry's output falls, its costs will rise.
 In the end, all button production will be in China.

EES and pattern of trade

What might cause one country to have an initial advantage from having a lower price?

 Comparative advantage
 Historical “accident”

RECAP

1. Trade need not be the result of comparative advantage. It can result from economies of
scale, that is, from the tendency of unit costs to be lower with larger output.
2. Economies of scale give countries an incentive to specialize and trade even in the
absence of differences in resources or technology between countries
3. Economies of scale can be internal (depending on the size of the firm) or external
(depending on the size of the industry).
4. External economies give an important role to history and accident in determining the
pattern of international trad
5. When external economies are important, countries can potentially lose from trade.
o Also, the free trade price can fall below the price before trade in both
countries.

Internal economies of scale

 Internal economies of scale imply that a firm’s average cost of production decreases
the more output it produces.
o Example: a firm may hold a patent over a mass production machine → lower
its average cost of production more than other firms

 When economies of scale exist, large firms may be more efficient than small
firms, and the industry may consist of a monopoly or a few large firms.
o Production may be imperfectly competitive in the sense that excess or
monopoly profits are captured by large firms.

 Internal economies of scale result when large firms have a cost advantage over
small firms, causing the industry to become uncompetitive.

 In most sectors, goods are differentiated from each other and there are other
differences across firms.

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 Product differentiation and internal economies of scale lead to trade between similar
countries with no comparative advantage differences between them (intra-industry
trade) → a very different kind of trade than the one based on comparative advantage,
where each country exports its comparative advantage good.

Export Decision

 Most U.S. firms do not report any exporting activity at all — sell only to U.S.
customers.
 In 2002, only 18% of U.S. manufacturing firms reported any sales abroad.
 Even in industries that export much of what they produce, such as chemicals,
machinery, electronics, and transportation, fewer than 40% of firms export.

DUMPING

 Dumping is the practice of charging a lower price for exported goods than for goods
sold domestically.

 Dumping is an example of price discrimination:

the practice of charging different customers different prices.

Multinationals and Outsourcing

 Foreign direct investment refers to investment in which a firm in one country

directly controls or owns a subsidiary in another country.
 If a foreign company invests in at least 10% of the stock in a subsidiary, the two
firms are typically classified as a multinational corporation.
o In U.S. statistics, a U.S. company is considered foreign-controlled, and
therefore a subsidiary of a foreign-based multinational, if 10 percent or more
of its stock is held by a foreign company
o Similarly, a U.S.-based company is considered multinational if it owns more
than 10 percent of a foreign firm.
 10% or more of ownership in stock is deemed to be sufficient for direct control of
business operations.
 The controlling (owning) firm is called the multinational parent (công ty mẹ đa
quốc gia), while the "controlled" firms are called the multinational affiliates (các chi
nhánh đa quốc gia)

Outflow of FDI:

 Brownfield FDI: when a U.S. firm buys more than 10% of a foreign film
 Greenfield FDI: when a U.S. firm builds a new production facility abroad

→ That 2 way investment is considered a U.S. outflow of FDI

→ Conversely, investments by foreign firms in production facilities in the United States are
considered U.S. FDI inflows.

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 Greenfield FDI is when a company builds a new production facility abroad. (do
công ty mẹ quản lý)
o Greenfield FDI là khi một công ty xây dựng cơ sở sản xuất mới ở nước ngoài.

 Brownfield FDI (or cross-border mergers and acquisitions) is when a domestic firm
**buys a controlling stake in a foreign firm. (**mua cổ phần kiểm soát của một công
ty nước ngoài)

Brownfield FDI (hoặc mua bán và sáp nhập xuyên biên giới) là khi một công ty trong
nước mua cổ phần kiểm soát của một công ty nước ngoài. (>10%)

 Greenfield FDI has tended to be more stable, while cross-border mergers and
acquisitions tend to occur in surges.

Why would a firm choose to operate an affiliate in a foreign location?

 Two main types of FDI:

o Horizontal FDI when the affiliate replicates the production process (that
the parent firm undertakes in its domestic facilities) elsewhere in the world.
- sao chép quy trình sản xuất làm thành sp hoàn chỉnh - phổ biến ở các nước
pt - nếu mà giá vận chuyển lưu thông cao hơn fixed cost thì ngta sẽ cân nhắc
vc xây hẳn chi nhánh
 FDI theo chiều ngang khi công ty liên kết sao chép quy trình sản
xuất (mà công ty mẹ thực hiện tại các cơ sở trong nước) ở nơi khác
trên thế giới.
o Vertical FDI when the production chain is broken up, and parts of the
production processes are transferred to the affiliate location. - để công ty
con sản xuất một phần linh kiện - phổ biến ở các nước dang phát triển dưới
hình thức đầu tư FDI
 FDI dọc khi chuỗi sản xuất bị phá vỡ và một phần của quy trình sản
xuất được chuyển giao cho địa điểm liên kết.

 Vertical FDI is mainly driven by production cost differences between countries (for
those parts of the production process that can be performed in another location).

 Vertical FDI is growing fast and is behind the large increase in FDI inflows to
developing countries.

 Horizontal FDI is dominated by flows between developed countries.

o Both the multinational parent and the affiliates are usually located in
developed countries.

 The main reason for this type of FDI is to locate production near a firm’s large
customer bases.
o Hence, trade and transport costs play a much more important role than
production cost differences for these FDI decisions.

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Firms’ decision regarding FDI

 The horizontal FDI decision involves a trade-off between the per-unit export cost t and
the fixed cost F of setting up an additional production facility.

 If t(Q) > F, costs more to pay trade costs t on Q units sold abroad than to pay fixed
cost F to build a plant abroad. ➢ When foreign sales large Q > F/t, exporting is more
expensive and FDI is the profit-maximizing choice.

 The vertical FDI decision also involves a trade-off between cost savings and the fixed
cost F of setting up an additional production facility.

 Cost savings related to comparative advantage make some stages of production

cheaper in other countries.

 Substitute for horizontal FDI: a parent could license an independent firm to

produce and sell its products in a foreign location
o vd: Mixue

 Substitute for vertical FDI, a parent could contract with an independent firm
(supplier) to perform specific parts of the production process in the foreign
location with the best cost advantage → foreign outsourcing

 Offshoring represents the relocation of parts of the production chain abroad and
groups together both foreign outsourcing and vertical FDI

 Internalization occurs when it is more profitable to conduct transactions and

production within a single organization. Reasons for this include:

o Technology transfers: transfer of knowledge or another form of technology

may be easier within a single organization than through a market transaction
between separate organizations.

➢Patent or property rights may be weak or nonexistent. ➢Knowledge may not

be easily packaged and sold.

 Vertical integration involves consolidation of different stages of a production

process.
o Consolidating an input within the firm using it can avoid holdup problems and
hassles in writing complete contracts.
o But an independent supplier could benefit from economies of scale if it
performs the process for many parent firms.

RECAP

1. Internal economies of scale imply that more production at the firm level causes
average costs to fall.

2. Dumping may be a profitable strategy when a firm faces little competition in its
domestic market and faces heavy competition in foreign markets.

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3. Multinational corporations undertake foreign direct investment when proximity is

more important than concentrating production in one location. ➢ Firms produce where
it is most cost-effective — abroad if the scale is large enough. They replicate entire
production process abroad or locate stages in different countries. ➢ Firms also decide
whether to keep transactions within the firm or contract with another firm.

Tutorial

For each of the following examples, explain whether it is a case of external or internal
economies of scale: a. Almost all Hermes products are manufactured in France. b. Apple has
its displays mainly made in Japan and some made in Korea. c. All Toyota Land Cruiser and
Prius sold in the United States market are assembled in Japan. d. Gerber used to be an
American-owned company, now a subsidiary of the Nestlé Group, headquartered in Fremont,
Michigan. e. Cranbury, New Jersey, is the artificial flavor capital of the United States.

Which of the following are foreign direct investments? a. A Chinese company pays $6.49
million for a stake in the Hilton. b. A Russian businessman buys $44 billion on FOREX. c. An
American company buys another American company; stockholders in the bought U.S.
company sell their shares on FOREX. d. A Turkish company builds a factory in Ethiopia and
manages the factory as a contractor to the Turkish government.

Suppose Mike and Johnson produce two products—hamburgers and T-shirts. Mike produces
10 hamburgers or 3 T-shirts a day and Johnson produces 7 hamburgers or 4 T-shirts. Assuming
they can devote time to making either hamburgers or T-shirts.

a. Who enjoys the absolute advantage of producing both?

b. Who has a higher opportunity cost of making T-shirts?

c. Who has a comparative advantage in producing hamburgers?

Trade game

 WORLD SITUATION : Ukraine war: Russia has launched the attack upon Ukraine
and the other country has imposed economic sanctions.
 OUTCOME: The price of oils increased by 2 points, potatoes and rice prizes increases
by 1 points.

Trade game

 WORLD SITUATION : New diamond mines discovered: Nigeria has discovered new
diamonds mines.
 OUTCOME: (Nigeria acquires 4 diamonds) but the value of diamonds decreases to 18
(due to the new abundance).

Trade game

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 WORLD SITUATION: Disasters struck many countries in the world, destroying

buildings and factories.
 OUTCOME: The price of car, bike, telephones, electronics, clothes increase by 2.

Trade game

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Week 3: The instruments of trade policy

Why do nations trade?

 Countries trade because they are different from each other. Nations, like individuals,
can benefit from their differences by reaching an arrangement in which each does the
things it does relatively well.
 Countries trade to achieve economies of scale in production. If each country produces
only a limited range of goods, it can produce each of these goods at a larger scale and
hence more efficiently than if it tried to produce everything.

→ In the real world, patterns of international trade reflect the interaction of both these
motives.

1. Tariff

WHAT IS A TARIFF?

 Is a tax levied when a good is imported.

 The simplest of trade policies

Types of tariffs

1. A specific tariff is levied as a fixed charge for each unit of imported goods.

 For example: a country could levy a $15 tariff on each pair of shoes imported.

2. An advalorem tariff is levied as a percentage of the value of imported goods.

 An example: an advalorem tariff would be a 70% tariff levied by Vietnam on EU cars

WHY DO COUNTRIES IMPOSE TARIFF?

 To protect domestic producers from foreign competition. In extreme cases, a tariff

could be so high that it effectively prohibits imports.
 To raise Revenue for Government
 For environmental and health purposes, to discourage the consumption of goods
that are harmful for environment or health. (tariffs on cigarettes and liquors)

EFFECTS OF A TARIFF

SUPPLY, DEMAND AND TRADE IN A SINGLE INDUSTRY

 Suppose there are 2 countries: Home and Foreign

 Both of countries consume and produce wheat, transportation is free.

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 Suppose that without trade, the price of wheat in Home is higher than in Foreign.
.With trade, wheat will be shipped from Foreign to Home until the price difference is
eliminated.

SUMMARY: EFFECTS OF A TARRIF

 increase the price of imported goods

 protect domestic business
 raise government revenue

2. Costs and benefits of tariffs

Consumer surplus

 Measures the amount that

 Consumers gain from purchase. It is calculated by the difference between the
consumers’ willingness to pay for a product and the actual price they pay

PRODUCER SURPLUS

 Measures the amount that producers gain from sales by computing the difference in
the price received from the minimum price at which they would be willing to sell.

EXAMPLE

McDonald’s maybe willing to sell a Big Mac for $4. Customers are willing to pay $7 for it.

=> McDonald’s is receiving a producer surplus of $3 – as this is the difference between what
the company is willing to sell for, and what the consumer actually pays.

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MEASURING THE COSTS AND BENEFITS

SUMMARY: COSTS AND BENEFITS OF TARIFFS

 Domestic producers will gain because a tariff raises the price

 The domestic consumers will lose
 There is also gain in Government revenue

3. Other instruments of trade policy

EXPORT SUBSIDY

 A direct payment (or the granting of tax and subsidized loans) to a firm or individual
that ships a good aboard.
 It can be fixed or proportional.
 Export subsidies encourage exporters to export more.
 The effects on prices are reversed with Tariff.
 Example: US subsidy on cotton
 The European Common Agriculture Policy (CAP)

The European Common Agriculture Policy (CAP)

 Removed all tariffs in EU.

 Made an effort to guarantee high prices to EU farmers by having EU buy agriculture
products whenever prices fell below supported level.
 1970s, supported price in EU was so high that EU became an importer of agricultural
products.
 1985, EU bought and stored huge quantities of food
 An export subsidy is offered to export the products surplus in EU.
 Estimated that the welfare cost to EU consumers exceeded the benefits to farm
producers

IMPORT QUOTAS

 The most important nontariff trade barrier.

 A direct restriction on the quantity of some goods that maybe imported
 No revenue for Government

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 Usually enforced by issuing licenses to some group of individual or firms and Gov
collects
 revenue from Import license (quota rents)
 Eg: US has a quota on imports of foreign cheese.

EXAMPLES

 Japan – limited exports to 1.85 mm vehicles/year

 Cost to consumers - $1B/year between ‘81 - 85.
 Money went to Japanese producers in the form of higher prices
 Encourages strategic action by firms in order to circumvent quota

VOLUNTARY EXPORT RESTRAINTS

 Works like an import quota

 Quota on trade imposed by
 exporting country, typically at the request of the importing country.
 Usually requested by the
 Importing country.

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