Commercial Policy Meaning, Objectives and Instruments

Table of Contents:-

1. Commercial Policy Meaning
2. Objectives of Commercial Policy
3. Commercial Policy Instruments

Commercial Policy Meaning

The commercial policy is also known as Trade policy. It is a collection of rules and regulations which refer to international trade. Every nation has some trade policy in place, with public officials formulating the policy they think would be most appropriate for their country. Trade policy aims to help a nation’s international trade run more smoothly by setting clear standards and goals that potential trading partners can understand. In many regions, groups of countries are working together to create mutually beneficial trade policies.

Import and export taxes, inspection regulations, tariffs, and quotas are all part of a nation’s trade policies. Some nations attempt to protect their local industries with trade policies which place a heavy bürden on importers, allowing domestic producers of goods and services to get ahead in the market with lower prices or more availability. Others eschew trade barriers, which ultimately promote free trade; in free trade, domestic producers are given no special treatment, and international producers are free to bring their products into the country.

When nations import and export goods regularly with each other, they usually establish trade agreements. Trade agreements smooth the way for trading, spelling out the desires of both parties to create a stronger, more effective trading relationship. Many trade agreements within nations are designed to accommodate a desire for free trade, with signatories to such agreements making certain concessions to each other to establish a good trading relationship. Regular meetings are also held to discuss changes in the financial climate and to make adjustments to trade policies accordingly.

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Objectives of Commercial Policy

The following are the main objectives of commercial policy:

1) Diversification in Exports

To remove the deficit imbalance of payments not only exports should be boosted, but diversification in exports be also brought. The quality of exports is improved. New markets for exports be discovered and the share of manufactured goods in exports will be increased for this, and the exporters be encouraged. They are provided with subsidies and rebates. The cheap credit policy is initiated for the exporter Tax holidays are granted for the exporters. In this way, the quantity and quality of exports would be improved.

2) To Increase Exports

Underdeveloped countries are prey to the “Trade Gap”. It means that these countries have a trade imbalance, where their imports exceed their exports. This results in a deficit in their balance of payments. Therefore, the primary objective of the commercial policy is to address this imbalance and eliminate the deficit in their balance of payments. This can be done by enhancing exports. In this respect, the export duties are abolished and subsidies on exports are provided, concessions are granted to those companies which produce domestic raw material, and a multiple exchange rate system is pursued, whereby a lower rate of exchange is adopted for exports, and a high rate of exchange be followed for imports, mainly for luxurious imports.

3) Commercial Links

The commercial policy can be applied to make commercial connections with other nations. For this purpose, trade delegates can be sent abroad. Trade fairs and exhibitions can be arranged. In this way, a country can popularise its products and exports. Consequently, the exports are boosted and the balance of payments will improve.

4) Ensuring Stability in the Internal and External Value of Currency

When a country experiences a deficit in its balance of payments, the external value of the currency tends to decline. This not only leads to a fall in the international value of the currency but also generates inflation in the country. Thus commercial policy can be implemented to stabilize the value of the currency, both internally and externally. For this purpose, governments may choose to impose import duties, establish import quotas, or ration foreign exchange. By doing so, the external value of the currency can improve, and when the external value of the currency improves, as a result, the internal value of the currency also improves. In other words, commercial means can be used to achieve both internal and external balance. Maintaining stability in the value of a currency is important as it impacts the overall economic health of a country.

5) Improvement in Terms of Trade

The terms of trade refer to the proportion between the prices of exports and imports. For developing countries, the terms of trade decline, meaning they have to export more to cover the cost of their imports. This results in a fall in export prices and an increase in import prices. Therefore, commercial policies can be implemented to improve the terms of trade. Commercial measures may improve the terms of trade, such goods should be exported that can command higher prices in the global market. To improve the terms of trade, it is recommended that a country should shift its focus from exporting agricultural goods to manufactured goods. Buffer stocks should be established for agricultural goods to mitigate price fluctuations. Moreover, the country should prioritize the preparation of required raw materials and industrial goods domestically. By implementing these measures, countries can improve their economic stability and competitiveness in the global market.

6) Protection of new Industries

The objective of import policy is to protect the infant domestic industries. As the industries of underdeveloped countries like Pakistan cannot compete with the industries of developed countries. Therefore if the domestic markets are supplied with foreign products the process of industrialisation in the home country will never start. The country will remain backward. Therefore to protect the new industries, the commercial policy aims to impose a quota system, import duties, exchange control, etc. The cheaper credit facilitates be granted to those enterprises which engage in import substitutions. By implementing this method, where on the one hand imports will decrease. On the other side, import substitutes will be produced in the nation. Consequently, the balance of payments of the nation will improve the process of capital accumulation and will start leading to an increase in employment and income.

Commercial Policy Instruments

International business/trade means the exchange of goods and services. This exchange usually occurs between two parties from different countries or between countries located anywhere on the globe. If international trade takes place between two parties, it is known as bilateral trade and if the trade takes place between more than two parties, it is known as multi-lateral trade.

Three types of international trade policy instruments/ trade barriers are used by the countries, and they are as follows:

1) Tariff Barrier/ Measures

This barrier is in the form of duties, taxes, quotas etc, Because of this barrier, imports decrease and the price of imported products increases which results in a fall in the demand giving a boost to domestic products.

2) Non-tariff Barrier/ Measures

Usually, this type of barrier is imposed by a country on imports, so the quantity of imported articles is restricted. Due to this, the availability of imported items or items is restricted in the domestic market and the price too is very high.

3) Voluntary Constraint

This is a type of international trade barrier wherein a nation voluntarily restricts or stops imports from coming in. This barrier is usually used to limit the impact of imports on domestic industries by limiting the level of competition they may face.

Whenever a country starts international trade with other countries, these three barriers to international trade are always taken into account. It has been seen that less developed countries and developing countries tend to favour these three barriers to international trade as these countries can earn foreign exchange by introducing tariff and non-tariff barriers, the local industries are protected from competition by foreign companies and industries and as less imported goods are available in the country, consumers tend to buy local products giving the local industries a boost.

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