Commercial Trade Policy

In one line

A commercial or trade policy is the whole set of rules by which a State decides what may cross its borders, on what terms, and at what price.

In the wording a student can write in an exam: commercial policy, or trade policy, is the body of measures by which a State regulates its trade with the rest of the world, comprising tariffs, quantitative restrictions, subsidies and incentives, trade remedy duties, exchange control, non tariff measures and trade agreements; its objectives are revenue, the protection of domestic industry, the correction of the balance of payments, employment, self sufficiency in strategic goods and bargaining power in negotiations; and the central debate in the subject is between free trade, defended on the ground of comparative advantage, and protection, defended chiefly on the infant industry argument.

What a commercial policy is and what it is for

The objectives, and an examiner expects them listed:

1. Revenue. Customs duty is easy to collect at a port, which is why it is the first tax of every developing State and why its importance falls as income taxes and a goods and services tax develop.
2. Protection of domestic industry, whether infant, declining or strategic.
3. Correcting the balance of payments, by restraining imports, as [Correcting a Disequilibrium] describes.
4. Employment, by shifting demand towards domestically produced goods.
5. Self sufficiency in essentials: food, energy, defence equipment, pharmaceuticals.
6. Bargaining power. A tariff that can be lowered is something to trade in a negotiation; a country with no tariffs has nothing to offer.
7. Non economic objectives: health and safety standards, environmental protection, and prohibitions on particular goods.

Free trade

The theoretical case is the theory of comparative advantage. Even a country that produces everything less efficiently than another gains by specialising in what it produces relatively best and trading for the rest. The gain does not require any absolute superiority; it requires only that opportunity costs differ, which they always do.

The arguments in full.

1. Specialisation and efficiency. Resources move to their most productive use, and world output rises.
2. Wider choice and lower prices for consumers, which is a real gain to real incomes and is regularly left out of protectionist arithmetic.
3. Competition disciplines cost. A firm exposed to imports must reduce cost and improve quality, which is exactly what [India's Foreign Trade Before 1991] shows Indian industry was not required to do.
4. Economies of scale. A world market allows a plant of a size a domestic market cannot support.
5. Transfer of technology and ideas, which travel with goods, capital and people.
6. Optimum use of world resources, since production locates where it is cheapest in real terms.
7. It removes rent seeking. Where nothing is rationed, nothing is worth lobbying for.