Commercial policy:

Introduction:
A commercial policy or trade policy is a governmental policy governing trade with other
countries. This covers tariffs, trade, subsidies, import quotas, voluntary export restraints and
restrictions on the establishment of foreign owned business, regulation of trade in service and
other barriers to international trade.
In modern times, the commercial policy of every country is generally based on the
encouragement of exports and discouragement of imports. The export are encouraged by giving
preferential freight rates on exports, subsidies, etc. imports are hindered by erecting the tariffs
walls, exchange control, quota system, buy at home campaign etc.
Tariffs, or taxes levied to the sale of foreign goods in a home country, is just one element of
commercial policy. Other policies that fall under the heading of commercial policy include
import quotas, export constraints, and restrictions against foreign-owned companies operating
domestically. Another major element of commercial policy is government-provided subsidies to
domestic industries that enable those companies to better compete with their counterparts abroad.

Definition
“The regulations and policies that determine how a country conducts trade with other countries.
A country’s commercial policy includes the use of tariffs and other trade barriers, such as
restrictions on what goods can be imported or exported, and which countries are allowed to
import or export goods to the home country. Countries that are part of an economic union often
have a single commercial policy that determines how member countries can interact with non-
member countries. An example of an organization with a common commercial policy is the
European Union.

A ‘commercial policy’ (also referred to as a trade policy or international trade policy) is a set of
rules and regulations that are intended to change international trade flows, particularly to restrict
imports. Every nation has some form of ‘trade policy’ in place, with public officials formulating
the policy which they think would be most appropriate for their country. Their aim is to boast the
nation’s international trade. The purpose of trade policy is to help a nation’s international trade
run more smoothly, by setting clear standards and goals which can be understood by potential
trading partners.
Trade policy can involve various complex types of actions, such as the elimination of
quantitative restrictions or the reduction of tariffs. According to a geographic dimension, there is
unilateral, bilateral, regional and muliteral liberalization. According to the depth of a bilateral or
regional reform, there may be free trade areas (wherein partners eliminate trade barriers with
respect to each other), ‘custom unions’ (whereby partners eliminate reciprocal barriers and agree
on a common level of barriers against no partners), and free economic areas.
Narration of tools:
1. Tariffs:

A tariff is a tax or duty levied on the traded commodity as it crosses a national boundary. An
import tariff is a duty on the imported commodity, while an export tariff is a duty on the
exported commodity.
Tariffs can be ad valorem, specific, or compound. The ad valorem tariff is expressed as a fixed
percentage of the value of the traded commodity.
The specific tariff is expressed as a fixed sum per physical unit of the traded commodity. Finally,
a compound tariff is a combination of an ad valorem and a specific tariff.

2. Quotas:
An import quota is a direct restriction on the quantity of some good that may be imported. The
restriction is usually enforced by issuing licenses to some groups of individuals or firms.

3. Export subsidies:
An export subsidy is a payment to a firm or individual that ships goods abroad.

4. Voluntary export restraint:

Voluntary export restraint refers to the case where an importing country induces another nation
to reduce its exports of a commodity “voluntarily”, under the threat of higher-all round trade
restriction when these exports threaten an entire domestic industry. The United States negotiated
voluntary export restraint on Japanese auto mobile exports in 1981.

5. Local content requirements:

A local content requirement is a regulation that requires that some specified fraction of a final
good be produced domestically.

6. Export credit subsidies:

This is like an export subsidy except that it takes the form of a subsidized loan to the buyer.

7. Red-tape barriers:
Red tape is an idiom referring to regulations or conformity to formal rules or standards which are
claimed to be excessive, rigid or redundant, or to bureaucracy claimed to hinder or prevent action
or decision-making. It is usually applied to governments, corporations, and other large
organizations.The classic example is the French decree in1982 that all Japanese videocassette
recorders must pass through the tiny customs house at polities-effectively limiting the actual
imports to a handful.

8. Exchange control:
Exchange control refers to the restrictions on the purchase and sale of foreign exchange. It is
operated in various forms by many countries, in particular those who experience shortages of
hard currencies. With non-member countries. For example, member countries of the European
Union have a common commercial policy.
Objective of commercial policy:
Within the context of the compulsions of economic development, commercial policy in
developing countries may pursue the following objectives:
1) Maintaining equilibrium in the balance of payments and balance of trade, or at least
limiting the extent of disequilibrium;

2) Attaining favorable term of trade so that, with the same quantity of exports, the country
is able to import greater quantities of goods and services and thus achieve a net addition
to real income;

3) Promoting exports to derive the full benefits of comparative advantages and also to
finance the country’s import requirements;

4) Import substitution to protect domestic production, accelerate the rate of capital

formation, create employment opportunities, narrow trade and payments gaps, and seek a
certain degree of national self-sufficiency

5) Ensuring adequate availability of imported goods or both development and other

purposes;

6) Keeping the internal and external values of the national currency at desired levels.

7) Preservation of essential raw material for encouraging the domestic industry.

8) Prevent the import of particular goods for giving protection to infant industry.
9) Enter into trade agreements with foreign nations for stabilizing the foreign trade.
Governments usually have a wide range of instruments of commercial policy to achieve
policy goals. The most commonly used tool is the tariff structure consisting of import and
export duties.

Import duties can be used to influence the relative profitability of importing various
commodity groups. (For example, taxing development imports at lower rates than non-
development imports), and to restrict the access of certain commodities to the domestic
market in order to encourage savings and investment.

Export duties may be used to limit the export of commodities in short supply at home and
also sometimes to fill the gap between low domestic prices and high world prices.

Non-tariff measures may be divided into direct and indirect trade restrictions.
Direct measures comprise embargoes on the import or export of certain commodities or
quota restrictions which are often specific to certain commodities, destinations, or
currencies. The imposition of exchange control and the licensing of imports and exports,
common in developing countries, also constitute direct trade restrictions. Licenses may be
issued for the import of certain commodities without much formality and with no
restrictions on quality or source. In Pakistan this is known as the open general license
(OGL) system. But for most imports, a proper licensing system is introduced which may
restrict the importer to make purchases from a specific country or currency area.
 Indirect trade restrictions include various incentives and disincentives designed to influence
the flow of foreign trade or its composition, such as

a) raising or lowering margin requirements for letters of credit to import certain commodities
or categories

b) fiscal incentives for industries using domestic materials aimed at reducing the demand for
imported substitutes, and

c) Subsidies and credit concessions or priorities of certain import-replacing goods or exportable.

A special tool, often used by developing countries but regarded unfavorably by international
monetary and leading institutions, is the multiple exchange rate system. This seeks to
maintain a high external value of the national currency in order to export goods with greater
competitive advantage in the world market while importing high-priority commodities, and to
maintain a low external value to export goods with lesser advantage and to import low-priority
commodities.

Conclusion
Commercial policy is an umbrella term that describes the regulations and policies that dictate
how companies and individuals in one country conduct commerce with companies and
individuals in other country. Commercial policy is sometimes referred to as trade policy or
international trade policy