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Commercial Policy Meaning
Trade policy is another name for Commercial policy. It refers to a set of regulations and guidelines that govern trade. Every country has its policies for trade, which are formulated by public officials to suit their nation’s needs. The primary objective of trade policy is to facilitate the international trading environment by establishing clear standards and objectives that can be easily understood by potential trading partners. In many regions, various countries collaborate to develop mutually beneficial trade policies. Trade policies play an important role in a country’s economic growth and development.
What is Commercial Policy?
Trade policies encompass a variety of measures, such as import and export tariffs, taxes, inspection regulations, and quotas, that a country may implement to regulate its trade relations. These policies can either promote free trade or protect local industries. Some countries with the help of trade policies try to protect the local industries that place a heavy burden on importers, allowing domestic producers of goods and services to get ahead in the market with lower prices or better availability. This approach is favoured by countries seeking to safeguard their domestic industries from foreign competition. On the other hand, some nations opt for free trade policies that do not provide any special treatment to domestic producers.
When nations regularly trade with each other, they often establish agreements to facilitate trade. Trade agreements clarify the expectations and goals of both parties, which ultimately leads to a stronger and more effective trading relationship. They take you to the side. Many trade agreements prioritize the desire for free trade, with signatories making concessions to each other to establish a mutually beneficial partnership. Trade agreements are important for promoting economic growth and stability, as they provide a framework for fair and transparent trade practices. Regular meetings may also be held to discuss changes in the financial climate and to make adjustments to trade policy accordingly.
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. The new markets for exports be discovered and the share of manufactured goods in exports is increased for this all, 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 be provided, concessions be 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 links with other countries. 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 ratio 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
When international business/trade is concerned it is meant the exchange of goods and/or services. This exchange usually takes place between two parties from different countries or between two 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 that the quantity of imported items 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.