Regional integration under VERs : when trade diversion is unambiguously beneficial

The author argues that trade diversion based on tariff preferences can be welfare-reducing because there is a tradeoff between improved resource allocation and a loss in terms of trade - where the latter loss equals the lost tariff revenue of the importing country. With trade diversion based on rent-transferring quotas such as voluntary export restraints (VERs), however, there is no such tradeoff. On the contrary, not only does the importing country improve its resource allocation but it also improves its terms of trade. So for the importing country, trade diversion under VERs is unambiguously beneficial. For exporting countries outside the regional trading bloc there is an unambiguous loss. They continue to sell the VER constrained quantity in the importing country, but at a reduced price. Therefore, they unambiguously lose on their trade in VER-constrained products from the creation of a regional trading bloc.