Commercial Policy Instruments

• A commercial policy or trade policy is a government policy governing

trade with other countries.
• 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 another country.
• Commercial policy includes tariff, import quotas, export constraints and
restrictions against foreign owned companies operating domestically.

Commercial Policy Instruments

Trade Contraction Trade Expansion

Price Quantity Price Quantity

1. Import Quota 1. Voluntary

1. Tariff 2. Voluntary 1. Import Subsidy Import Expansion
2. Export Tax Export Restraint 2. Export Subsidy (VIE)
(VER)

Tariff and Non-Tariff Measures

1. Tariff:
• It refers to taxes or duties imposed on internationally traded commodities
when they cross national border.
• Tariff are also a policy tool to protect domestic industries.
• Tariffs are in the form of custom duties and operate as a price
mechanism.
• It raises the prices of imported goods relative to domestic goods.

Tariff serves the following Functions:

❖ Act as a source of Revenue
❖ Protection to Domestic Industries
❖ Remedy to Trade Distortion
Classification of Tariff:
I. On the basis of Purpose:
i. Revenue Tariff – Imposed by government with an intention of
earning revenue to government.
ii. Protection Tariff – imposed in order to protect infant industries by
restricting or eliminating competition from foreign companies.
iii. Anti-dumping duties – imposed to remove the effect of dumping
and re-establish fair trade.
iv. Countervailing duties – imposed in order to counter the negative
impact of import subsidies to protect producers.

II. On the basis of trade relations:

i. Single Column Tariff – When only one rate of duty is imposed on
goods imported irrespective of its origin.
ii. Double Column Tariff – It is a tariff which has two different duty
rates for a particular product. In this system import tariff rate
depends upon the country of origin.
iii. Triple column Tariff – under the triple column tariff rate three
different rates exist.
• General Rate
• International Rate
• Preferential Rate
III. On the basis of Criteria:
i. Specific Duty – It is the fixed amount of tariff per physical unit or
according to the rate or measurement of the commodity imported or
exported.
ii. Ad valorem Duty – the Latin phrase dictates Ad Valorem “as
according to value”. When the duty is levied as a fixed percentage
of the value of the traded commodity, it is called as valorem tariff.
iii. Compound Duty – when a commodity to subject to both specific
and Ad valorem duty, levying such duty is called compound duty.
IV. On the basis of origin and destination:
i. Import Duty – represents a tax which is applied to the imported
goods by the custom authorities of a country.
ii. Export Duty – represents a tax which is applied to the exported
goods by the custom authorities of a country.
iii. Transit Duty – duties levied in commodities that originate in one
country cross another and are consigned to a third country.
2. Non -Tariff
• Non-tariff trade barriers are laws or regulation which a country enacts to
protect domestic industries against foreign competition.
• A non-tariff barrier is any barrier other than a tariff that raises an obstacle
to free flow of goods in overseas market.
• Non-tariff barriers do not affect the price of the imported goods but only
the quantity of imports.

Classification of Non-Tariff:
i. Licenses – Countries may use licenses to limit imported goods to specific
businesses. If a business is granted a trade license, it is permitted to import
goods that would otherwise be restricted for trade in the country.
ii. Quotas – Under this system the maximum quantity of different
commodities which would be allowed to be imported over a period of time
from various countries is fixed in advance.
iii. Embargoes – When a country or several countries officially ban the trade
of specified goods and services with another country, it is termed as
Embargoes.
iv. Sanctions – Sanctions are trade restrictions imposed on other countries to
limit their trade activities. It includes increasing administrative actions or
additional customs and trade procedures that slow or limit a country’s
ability to trade.
v. VER – VER is a self-imposed trade restriction by the exporting country.
Basically, Voluntary Export Restraint is a restriction set by a government
on the quantity of goods that can be exported out of a country during a
specified period of time.