Commercial Policy Instruments – Tariff and Non-tariff Measures

Commercial Policy

A commercial policy, also known as trade policy, is a governmental policy that helps to regulate international and national trade by imposing restrictions and extending financial support in the form of credit facility and subsidies. A commercial policy includes tariffs, subsidies, quotas, voluntary export restraints, other barriers, etc., to international trade.

In the words of Haberler, “By commercial policy or trade policy is meant all measures regulating the external economic relations of a country that is measures taken by a territorial government which has the power of assisting or hindering the exports or imports of goods and services.

A commercial policy is an economic policy that is related to those strategies, decisions and instruments which affect the foreign trade sector of an economy. In an economy, a commercial policy helps in deciding what to export and what to import. A commercial policy decides whether the trade will be free or restricted. Commercial policy includes:

• Export and import Policy
• Foreign exchange Policy
• Tariff Policy

Objectives of Commercial Policy

Let us discuss the objectives of commercial policy as follows:

• To enhance the exports for reducing trade gap: Export helps a country to increase its foreign reserves and expand market. Under-developed or developing countries usually have fewer exports because industries of these countries are unable to produce goods as per international standards.
  
  People prefer to buy the products manufactured by foreign companies, which increase import. BOP statement of a country indicates whether the country has a surplus or a deficit of funds, i.e., when a country’s export is more than its import, its BOP is said to be in surplus.
  
  
  On the other hand, BOP deficit indicates that a country’s imports are more than its exports. Through a commercial policy, the government gives subsidies to domestic companies for producing higher quality products and exporting to other countries which also helps in removing the deficit in BOPs.
  
  
• To bring diversification in exports for improving the quality in export: The aim of a commercial policy is to find out new markets for exports. This encourages the exporter who manufactures goods for the export purpose. An exporter is given subsidies and rebates along with the cheap credit policy and tax holidays.
  
  ‰
• To protect infant domestic industries: The aim of a commercial policy is to protect domestic industries from international competition through an import policy. There are some underdeveloped countries that are not in the state of competing with the developed countries. So, import duties and quota system are imposed to decrease the supply of foreign products.
  
  
• To improve terms of trade: The terms of trade of developing countries are improved by increasing exports against imports. A commercial policy helps in checking the falling tendency of terms of trade.
  
  
  ‰
• To bring stability in the value of currency (both internal and external value): The external value of currency tends to fall when a country encounters deficit in B.O.P. This reduces the international value of the currency and brings inflation. A commercial policy helps in stabilising the internal and external value of currency through imposition of trade restrictions.
  
  
• To make commercial links: The commercial policies are established to develop commercial links with other countries. Trade delegates are sent to other countries and trade fairs and exhibitions are organised in the country for popularising its products and exports.

Importance of a Commercial Policy

A commercial policy helps in:

• Improving and extending the international support/co-operation with the help of exchange of goods and entering into an agreement with different countries.
  
  
• Establishing an international market for domestic and local products to increase exports.
  
  
• Participating in trade fair organised globally and introducing domestic products with the help of government or private initiatives.
  
  
• Promoting the export of non-traditional items.
  
  
• Extending support by providing export facilities to the exporters Minimising the import of luxurious goods.
  
  
• It helps in importing the raw materials, machinery, parts, and accessories needed for manufacturing goods. ‰‰
  
  
• It enables the promotion and development of export-oriented industries. ‰
  
  ‰
• It helps in meeting the need for essential goods. ‰
  
  ‰
• It helps in encouraging the participation of government and private sector industry for foreign trade. ‰‰
  
  
• It helps in stabilising the foreign exchange rate. ‰
  
  ‰
• It helps in increasing the foreign currencies. ‰
  
  ‰
• It encourages domestic and foreign investment and also helps in developing small and cottage industries. ‰‰
  
  
• It helps in developing agro-based and agro-supportive industries. ‰‰
  
  
• It helps in motivating the investment in the intermediate and basic industries. ‰
  
  ‰
• It develops opportunities to revitalise and rehabilitate controlling the quality of products. ‰
  
  ‰
• It enables countries to control the internal and external trade and other commercial activities of the economy.

India’s Commercial Policy

The commercial policy includes export and import policy called Exim Policy or Foreign Trade Policy. The Director General of Foreign Trade (DGFT) is the governing body for EXIM policy and is responsible for making guidelines and instructions in matters concerned with the import and export of goods and services in India.

The Foreign Trade Policy of India is regulated by the Foreign Trade (Development and Regulation) Act, 1992. The Foreign Trade (Development and Regulation) Act was made with the objective of developing and regulating foreign trade by facilitating imports into, and increasing exports from India.

Earlier, there was Import and Export (Control) Act, 1947, which was replaced by the Foreign Trade Act. In India, the Trade Policy is created and announced by the Union or Central Government (Ministry of Commerce).

The objectives of the policy are to:

• Create the export potential
• Improve export performance
• Encourage foreign trade
• Create favourable balance of payments position

The Indian government aims to control the import of non-essential items with the help of the EXIM Policy and promote exports at the same time. On 1st April 2020, the Foreign Trade Policy for 2015-2020 was launched that provided a framework for increasing the export of goods and services. It was also launched with the aim to generate employment and maximum value addition in India.

Let us discuss the features of Foreign Trade Policy (2015-2020).

• Service Exports from India Scheme (SEIS) and Merchandise Export from India Scheme (MEIS) were launched for increasing exports of notified goods and services.
  
  
• Incentives (MEIS & SEIS) to be available for SEZs also.
  
  
• E-commerce of handicrafts, handlooms, books, etc., eligible for benefits of MEIS.
  
  
• FTP to be aligned to ‘Make in India’, ‘Digital India’, and ‘Skills India’ initiatives.
  
  
• Nomenclature of Export House, Star Export House, Trading House, and Premier Trading House certificate changed to 1, 2, 3, 4, 5 Star Export House.

Commercial Policy Instruments

A commercial policy encompasses all the instruments which a government can use for promoting and restricting imports and exports. There are three approaches to a commercial policy, which are regional trade agreements, bilateral free trade agreements and preferential trade agreements. Regionalism or regional trade agreements are the agreements made under trade policies to increase free international trade in the particular region or area of a nation.

Two or more countries enter in an agreement called Bilateral trade agreement to promote free movement of goods and services across borders of its members. The two countries will reduce or eliminate tariffs, import quotas, export restraints, and other trade barriers to encourage trade and investment.

A bilateral free trade agreement is the exchange of goods between two countries for increasing trade and economic growth. On the other hand, preferential trade agreement is the formal agreement related to trade among specific countries.

Let us understand the instruments of commercial policy.

• Tariff: It is a tax or duty which is levied on traded commodities which crosses the national boundary. Tariff is of two types, i.e., import and export tariff.
  
  
• Quotas: These are the restrictions on the quantity of some good swhich may be imported. The import restrictions are enforced by issuing licenses to a few individuals, groups or firms. For instance, the U.S. imposes quota restrictions on imported cheese.
  
  ‰
• Export subsidies: There is a government policy for encouraging export of goods by giving subsidies to the firms or individuals that export goods abroad rather than selling goods on the domestic market.
  
  
• Voluntary export restraints or restrictions: These are trade restrictions or limitations on the quantity of goods that are exported by another country. The importing country induces other countries to minimise their exports of a commodity voluntarily. ‰‰
  
  
  
• Local content requirements: Under this, the government demands for a specific fraction of goods to be manufactured or produced in the domestic country. The requirements can be in physical term, i.e., 60 per cent of components parts of the product to be manufactured locally. ‰‰
  
  
• Export credit subsidies: These are similar to export subsidy but here the government provides a subsidised loan to the buyer. ‰‰
  
  
• Red-tape barriers: These are measures other than tariffs which have potential to impact international trade. Red tape barriers include boycott, license, standards and quotas, etc.
  
  
• Exchange control: It refers to the limitations on the purchase and sale of foreign exchange. Exchange control is implemented in different forms by many countries but mainly on those countries that experience shortages of hard currencies. This tool is used to restrict the number of products which importers are able to buy from a particular currency.

Trade Restrictions

To limit or restrict the free movement of goods and services across national borders, the government imposes certain trade restrictions. The advantage of the trade restrictions is that these restrictions protect the small, medium and large domestic industries from international competition and protect the citizens from inferior, harmful and dangerous products. In the short run, trade restrictions protect corporate profits and workers’ jobs.

The disadvantage of trade restrictions is that they may lead to:

• Reduction in economic freedom
• Distort markets
• Generate risk retaliation.

Trade Barriers

Trade barriers are the government policies that put restrictions on the foreign trade. Barriers which are imposed on import are called import barriers and barriers which are imposed on export are called export barriers. The export and import barriers are the part of tariff barriers. For example, the U.S. imposes trade embargoes, a form of trade restrictions on Cuba when Fidel Castro came to power.

Tariff Barriers

Tariff barriers are restrictions or duties that are authorised by territorial government on certain commodities to limit the free flow of trade. Tariff includes transit duties, import duties and export duties. The duties that are imposed upon merchandise passing through a country and consigned for another country are called transit duties. It is the instrument which is levied to raise money for the government.

Import duties are imposed on goods brought into the country. These are imposed for generating revenue or for protecting local industries. These are the duties which are levied upon those goods which are sent out of the country. These duties are known as export duties which aimto restrict export of certain products.

Non-Tariff Barriers

Non-tariff barriers are the restrictions on import or export of goods with the help of import licensing, quotas, embargoes, etc. Licenses are? the instruments that are given to the specific person or industries to import particular commodities listed in the licensed goods. Quotas are imposed to restrict the number of goods which can be exported or imported. Embargoes refer to complete restrictions on trade of particular commodities on a temporary basis.