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ABSTRACT
A commercial policy (also referred to as a trade policy or international trade policy)
is a set of rules and regulations that are intended to change international trade
flows, particularly to restrict imports. From its beginnings the international trading
system has been shaped by a blend of principle and pragmatism.
Trade relations cannot be determined solely on the basis of simple, inviolate
principles that are defined and agreed upon at the outset. Practical considerations,
politics and particular expressions of the national interest inevitably intervene to
determine positions taken by governments. Some commentators reflect this reality
when they refer to a government measure or policy approach as bad economics
but good politics. Yet much of the strength and historical success of the multilateral
trading system has rested on the willingness of governments to pre-commit to a set
of principles and rules, underpinned by binding arrangements for settling trade
disputes.
The following report contains the brief introduction to the topic of trade, kinds of
trade exchanges, barriers to trade, promotion of trade, government intervention to
trade
and
the
policies
to
handle
trade.
In this report cases from different parts of the world have also been included to
provide the better insight of why government intervenes in trade and why
developing a national trade policy is important.

INTRODUCTION TO TRADE

What is a 'Trade?'
Trade is a basic economic concept involving the buying and selling of goods and
services, with compensation paid by a buyer to a seller, or the exchange of goods or
services between parties. The most common medium of exchange for these
transactions is money, but trade may also be executed with the exchange of goods
or services between both parties known as barter.
Regardless of the complexity of the transaction, trading is facilitated through three
primary types of exchanges.
1.

CURRENCY AS A MEDIUM OF EXCHANGE:

Money, which also functions as a unit of account and a store of value, is the most
common medium of exchange, providing a variety of methods for fund transfers
between buyers and sellers, including cash, ACH transfers, credit cards and wired
funds. Moneys attribute as a store of value also provides assurance that funds
received by sellers as payment for goods or services can be used to make
purchases of equivalent value in the future.
2.

BARTER TRANSACTIONS:

Cashless trades involving the exchange of goods or services between parties are
referred to as barter transactions. While barter is often associated with primitive or
undeveloped societies, these transactions are also used by large corporations and
individuals as a means of gaining goods in exchange for excess, underutilized or
unwanted assets. For example, in the 1970s, PepsiCo Inc. set up a barter agreement
with the Russian government to trade cola syrup for Stolichnaya vodka. In 1990, the

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deal was expanded to $3 billion dollars and included 10 Russian-built ships, which
PepsiCo leased or sold in the years following the agreement.

VIRTUAL CURRENCIES:

3.

As the newest medium of exchange, virtual currencies do not expose holders to

foreign exchange risks, provide anonymity between trading partners if desired and
avoid the often-significant processing fee for credit cards. The most popular virtual
currency is bitcoin, which was introduced in 2009. Bitcoins are held in virtual wallets
and can be used with a growing number of merchants, including WordPress.com and
Overstock.com. The virtual currency is also popular with small businesses, due in
part to the lack of processing fees.

INTRODUCTION TO TRADE POLICY

Trade policy is a collection of rules and regulations which relate to trade. Every
nation has some form of trade policy in place, with public officials formulating the
policy which they think would be most appropriate for their country. The purpose is
to help a nations international trade run more smoothly, by setting clear standards
and goals which can be understood by potential trading partners. Things like import
and export, taxes, inspection regulations etc. are part of a nations trade policy.
Ministry of commerce usually is responsible for formulating trade policies in Pakistan
and the purpose of these policies according to ministry of commerce is to;

Develop and effectively implement a national export competitiveness

program.
Provide the reference to different trade measures by the Ministry of
Commerce
To achieve sustainable high economic growth through exports with the help of
policy
Protection and promotion of SME sector.

Enabling Pakistani exporting companies to overcome the negative effects of

global demand.
Environmental protection.
Poverty improvement.
For promoting private sector as engine of growth.

There are two kinds of trade policies:

1. National trade policy. (Powered by National Government)
2. International trade policy. (Powered by WTO)

RATIONALES FOR TRADE INTERVENTIONS

The word rationale means a set of reasons or a logical basis for a course of action or
belief while intervention means interference or involvement. Rationales for trade
interventions overall means the set of logical reasons of why trade is being
interfered or mediated particularly by the government of one state.
Businessmen and economist have been debating over the government intervention
towards trade for centuries. The two principles issues that have been shaped due to
this debate are,
1.
Should a national government intervene to protect the countrys domestic
firms by taxing foreign goods entering the domestic market or constructing other
barriers against imports?
2.
Should a national government directly help the countrys domestic firms
increase their foreign sales through export subsidies, government-to-government
negotiations, and guaranteed loan programs?
These arguments have lead towards governments to further debate on the issue of
FREE TRADE & FAIR TRADE. With free trade having the minimal influence from
government and fair trade comprising the active intervention from government also
called managed trade.
Economists and politicians alike debate the relative merits of free trade and fair
trade. Although both concepts refer to a comprehensive approach to commercial
activity, people who favour one approach over the other are often guided by
ideological concerns that affect the political regulation of trade activity. Free trade
and fair trade address the same subject but from very different perspectives.
Almost no government takes a purely free trade or fair trade approach to its
commercial policy. Instead, countries blend policies in various ways. For example,
the United States, Mexico and Canada are members of the North American Free
Trade Agreement, which slashed protectionist barriers among the three countries.
However, the U.S. also supports certain fair trade policies. For example, the U.S.

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Trade Representative works with the United Nations to provide preferential access to
business resources to women and minorities in markets around the world

ARGUMENTS FOR GOVERNMENT INTERVENTION IN

INTERNATIONAL TRADE

So the question that remains is that why government intervenes? In this section we
will discuss the arguments on which the economist and businessmen agree with the
government that the policy of trade must be implied.
1.

INDUSTRY-LEVEL ARGUMENTS

in d u s try le v e l a rg u m e n ts

the national defense argument

the infant industry argument

maintenance of existing jobs

strategic trade theory

Proposed by Adam smith, this argument for free trade follows the outline that
voluntary exchange makes both parties to the transaction better off and allocates
resources to their highest valued use. Commonly known as the arguments in trade
interventions following or industry-level arguments that are proposed in the support
of why government intervenes in trade.
National-level needs Governments also intervene as part of the economic
development programs.
a.

NATIONAL SECURITY ARGUMENT:

Each nation protects some industries to guard its national security. The most
obvious examples are weapons, aerospace, advanced electronics, semiconductors,
and strategic minerals (e.g., exotic ores used in jet aircraft), etc. Protection for the
sake of making available specific minerals or resources does not appear to be an
optimal policy. A better alternative is to stockpile such resources during peacetime
when they are cheap.
Characters of national security argument claim that a nation should be Self-reliant
and be ready to pay for inefficiency when the case relates to national security.
Recently, Pentagon has pressed for development of flat-panel industry even though
the same can be bought much cheaper from Asian countries. One must remember
that in todays world no nation can be fully self-reliant.
b.

INFANT INDUSTRY ARGUMENT:

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One of the most notable arguments for protection is known as the infant industry
argument. The argument claims that protection is warranted for small new firms
especially in less developed countries. New firms have little chance of competing
head-to-head with the established firms located in the developed countries.
Developed country firms have been in business longer and over time have been
able to improve their efficiency in production. They have better information and
knowledge about the production process, about market characteristics, about their
own labor market, etc. As a result they are able to offer their product at a lower
price in international markets and still remain profitable.
A firm producing a similar product in less a developed country, on the other hand,
would not have the same production technology available to it. Its workers and
management would lack the experience and knowledge of its developed country
rivals and thus would most likely produce the product less efficiently. If forced to
compete directly with the firms in the developed countries these firms would be
unable to produce profitably and thus could not remain in business.
The solution suggested by the infant industry argument is to protect the domestic
industries from foreign competition in order to generate positive learning and
spillover effects. Protection would stimulate domestic production and encourage
more of these positive effects. As efficiency improves and other industries develop,
economic growth is stimulated. Thus by protecting infant industries a government
might facilitate more rapid economic growth and a much faster improvement in the
country's standard of living relative to specialization in the country's static
comparative advantage goods.
c.

MAINTENANCE OF EXISTING JOBS:

The jobs in high-wage countries are threatened by imports from low-wage countries.
Some countries, particularly high-wage ones, may be pressured to protect industries
to avoid a potential job loss if companies are driven out of business by foreign
competitors
d.

STRATEGIC TRADE THEORY:

National government can make its country better off if it adopts trade policies that
improve the competitiveness of its domestic firms in oligopolistic industries
The theory argues that an industry has economies of scale and the world market
will profitably support only few firms. Countries may predominate in export of
certain products simply because they had firms who were able to capture firstmover advantages. The dominance of Boeing in the commercial aircraft industry is
attributed to such factors.

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According to strategic trade policy argument, a government should use subsidies to
support such firms; the second argument is that it might pay government to
intervene in an industry if it helps its domestic firms overcome the barriers to entry
created by foreign firms that have already reaped the first-mover advantages. This
has been the logic of government support of Airbus Industries.

N a tio n a l tra d e p o lic ie s

The governments of Britain, France, Germany and Spain had given a subsidy of
$13.5 billion to Airbus. The US government had also given huge R&D grant to
Boeing during 1950w and 1960s. Japanese government did the same for Japanese
semi-conductor industry to compete with the first-mover advantage-holder semiconductor industry of the US.

2. NATIONAL TRADE POLICIES ARGUMENT:

Economic development
programs

industrial policy

public choice analysis

In addition to focusing on the needs of particular industries, governments may also

implement broad policies designed to consider the needs of the economy and
society as a whole. These broad national policies are then followed by specific
industry policies.
a.

ECONOMIC DEVELOPMENT PROGRAMS:

In many countries, the focus of broad national policies is economic development.

Some countries that depend on a single export commodity will attempt to diversify
their economies to minimize risk. Some countries will follow an export-promotion
strategy as a means of achieving higher levels of economic development. An
export-promotion strategy encourages a country's businesses to compete in foreign
markets by capitalizing on a particular advantage the country possesses. An importsubstitution strategy encourages the growth of domestic manufacturing industries

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through the erection of high barriers to imported goods. This policy was used by
Australia, Argentina, India, and Brazil after World War II. The export-promotion
strategy has been more successful at stimulating economic development than the
import-substitution strategy.
b.

INDUSTRIAL POLICY

Industrial policy is used by a government to promote the competitiveness of key

products and industries with high growth prospects in international markets. The
policies are formulated based on the needs of the national economy. The text
provides an example of how Japans Ministry of International Trade and Industry
(MITI) has played a role in managing the economy. Critics of industrial policy argue
that such programs may not improve the global competitiveness of a country since
bureaucrats cannot perfectly identify the right industries to favor. Critics further
suggest that political clout, rather than potential international competitiveness, may
play a role in determining which industries are selected. Governments struggle to
identify what the role of government should be in a market economy. The text
notes, for example, that while the Reagan and Bush administrations believed that
governments role in the economy should be limited, and thus did not formally
adopt an industrial policy, the Clinton administration believed that the government
should play a much larger role, and consequently selected five key areas to receive
increased federal support.

c. PUBLIC CHOICE ANALYSIS:

Public choice theory is a branch of economics that developed from the study of
taxation and public spending. It emerged in the fifties and received widespread
public attention in 1986. Public choice takes the same principles that economists
use to analyze people's actions in the marketplace and applies them to people's
actions in collective decision making. Economists who study behavior in the private
marketplace assume that people are motivated mainly by self-interest. Although
most people base some of their actions on their concern for others, the dominant
motive in people's actions in the marketplacewhether they are employers,
employees, or consumersis a concern for them. Public choice economists make
the same assumptionthat although people acting in the political marketplace have
some concern for others, their main motive, whether they are voters, politicians,
lobbyists, or bureaucrats, is self-interest.

THE TRADE BARRIERS AND PROMOTIONS

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the following are the pros and cons or promotions and barriers to international trade
due to the imposition of national trade policy

CONS OF NATIONAL TRADE POLICIES: BARRIERS TO

INTERNATIONAL TRADE
export tariff

ad valorem tariff

import tariff

specific tariff

BARRIERS TO
INTERNATIONAL TRADE

tariff barriers

compound tariff
product and testing
standards

non-tariff barriers

numeric quots

restricted access to
distribution networks

numerical export
controls

public-sector
procurement policies

other non-tariff
barriers

local-purchase
requirements
regulatory controls
currency controls
investment controls

1)

TARIFF BARRIERS:

In simplest terms, a tariff is a tax placed on a good that is traded internationally. It

adds to the cost of imported goods and is one of several trade policies that a
country can enact.
There are two types of major tariffs export and import tariffs.

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a) EXPORT TARIFFS:
A transit duty, or transit tax, is a tax levied on commodities passing through a
customs area en route to another country. Similarly, an export duty, or export tax, is
a tax imposed on commodities leaving a customs area. Finally, some countries
provide export subsidies; import subsidies are rarely used.

b) IMPORT TARIFFS:
A tax imposed on imported goods and services. Tariffs are used to restrict trade, as
they increase the price of imported goods and services, making them more
expensive to consumers. A specific tariff is levied as a fixed fee based on the type of
item. It is further classified into three major types;

I.

Ad valorem tariff
Specific tariff
Compound tariff

AD VALOREM TARIFF:

The phrase ad valorem is Latin for "according to value", and this type of tariff is
levied on a good based on a percentage of that good's value. An example of an ad
valorem tariff would be a 15% tariff levied by Japan on U.S. automobiles. The 15% is
a price increase on the value of the automobile, so a $10,000 vehicle now costs
$11,500 to Japanese consumers. This price increase protects domestic producers
from being undercut, but also keeps prices artificially high for Japanese car
shoppers.

II.

SPECIFIC TARIFFS:

A fixed fee levied on one unit of an imported good is referred to as a specific tariff.
This tariff can vary according to the type of good imported. For example, a country
could levy a $15 tariff on each pair of shoes imported, but levy a $300 tariff on each
computer imported.

III.

COMPOUND TARIFF:

The Ad valorem tariff plus another specified rate is called a compound tariff. It is
also called mixed tariff.
One of the important points to note in tariff is the Harmonized Tariff Schedule it is
the primary resource for determining tariff (customs duties) classifications for goods
imported into the country. However the use is minimized due to the complexity of
use.

WHY ARE TARIFFS IMPOSED?

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Tariff raises revenue for the national government.

A tariff acts as trade barrier. Since tariff raise the price for foreign goods, the
demand for domestic goods increase saving ones economy. the main reasons
for this barrier are:
Protecting Domestic Employment
Protecting Consumers
protection of Infant Industries
National Security

Why Are Tariffs and Trade Barriers Used?

Tariffs are often created to protect infant industries and developing economies, but
are also used by more advanced economies with developed industries

2)

NONTARIFF BARRIERS

A nontariff barrier is a form of restrictive trade where barriers to trade are set up
and take a form other than a tariff. Nontariff barriers include quotas, embargoes,
sanctions, levies and other restrictions and are frequently used by large and
developed economies.

a) IMPORT QUOTAS
An import quota is a restriction placed on the amount of a particular good that can
be imported. This sort of barrier is often associated with the issuance of licenses.
For example, a country may place a quota on the volume of imported citrus fruit
that is allowed.

b) NUMERICAL EXPORT CONTROLS:

This is also called Voluntary Export Restraints (VER). This type of trade barrier is
"voluntary" in that it is created by the exporting country rather than the importing
one. A voluntary export restraint is usually levied at the behest of the importing
country, and could be accompanied by a reciprocal VER. For example, Brazil could
place a VER on the exportation of sugar to Canada, based on a request by Canada.
Canada could then place a VER on the exportation of coal to Brazil. This increases
the price of both coal and sugar, but protects the domestic industries.

c) OTHER NON-TARIFF BARRIERS:

A nontariff barrier is a form of restrictive trade where barriers to trade are set up
and take a form other than a tariff. Nontariff barriers include quotas, embargoes,
sanctions, levies and other restrictions and are frequently used by large and
developed economies. These include;

Product and testing standards

P R O M O T IO N O F
IN T E R N A T IO N A L T R A D E

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Restricted access to distribution networks

Public-sector procurement policies
Local-purchase requirements
Regulatory controls
Currency controls
Investment controls

PROS OF NATIONAL TRADE POLICIES: PROMOTION

OF INTERNATIONAL TRADE

subsidies
foreing trade zones
export financing
programs

Trade promotion (international trade) Trade promotion (sometimes referred to as

export promotion) is an umbrella term for economic policies, development
interventions and private initiatives aimed at improving the trade performance of an
economic area.

1) SUBSIDY
A subsidy is a benefit given by the government to groups or individuals, usually in
the form of a cash payment or a tax reduction. The subsidy is typically given to
remove some type of burden, and it is often considered to be in the overall interest
of the public

2) FREE TRADE ZONES

A free trade area is a group of countries that have few or no price controls in the
form of tariffs or quotas between each other. Free trade areas allow the agreeing
nations to focus on their comparative advantages and to produce the goods they
are comparatively more efficient at making, thus increasing the efficiency and

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profitability of each country. One of the most well-known and largest free trade
areas was created by the signing of the North American Free Trade Agreement
(NAFTA) on January 1, 1994. This agreement between Canada, the United States
and Mexico encourages trade between them.

3) EXPORT FINANCING PROGRAMS

It is a financial institution that offers financing to domestic companies for
international export operations. It offers loans and insurance to such companies to
help remove the risk of uncertainty of exporting to other countries and underwrite
political risks and commercial risks of overseas investments, thus encouraging
exportation and international trade. There is not a mold for such programs; some
operate from government departments, and others operate as private companies.

CONTROLLLING UNFAIR TRADE PRACTICES

An unfair trade practice consists of using various deceptive, fraudulent or unethical

methods to obtain business. Unfair trade practices include misrepresentation, false
advertising, tied selling and other acts that are declared unlawful by statute. It can
also be referred to as deceptive trade practices.

COUNTERVAILING DUTIES
An import tax imposed on certain goods in order to prevent dumping or counter
export subsidies.

ANTIDUMPING REGULATIONS
What is an 'Anti-Dumping Duty' An anti-dumping duty is a protectionist tariff that a
domestic government imposes on foreign imports that it believes are priced below
fair market value.

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SUPER 301
Section 301 of the U.S. Trade Act of 1974 authorizes the President to take all
appropriate action, including retaliation, to obtain the removal of any act, policy, or
practice of a foreign government that violates an international trade agreement or
is unjustified, unreasonable, or discriminatory, and that burdens or restricts U.S.
commerce. Section 301 cases can be self-initiated by the United States Trade
Representative (USTR) or as the result of a petition filed by a firm or industry group.
If USTR initiates a Section 301 investigation, it must seek to negotiate a settlement
with the foreign country in the form of compensation or elimination of the trade
barrier. For cases involving trade agreements, the USTR is required to request
formal dispute proceedings as provided by the trade agreements.

CASE STUDIES RELATED TO TRADE POLICIES

CASE STUDY 1: AIR TRANSPORT SERVICES: ETHIOPIA

Air transport services directly contribute more than US$ 2 billion annually to the
Ethiopian economy. As with all air carriers, Ethiopian Airlines (EAL) has primarily
exported air transport services through Mode 1: international passenger and cargo
flights (cross border transport).

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However, EAL also exports services via Mode 2 (servicing foreign aircraft arriving in
Ethiopian airports and training foreign pilots) and Mode 3 (investing abroad as a
partner in foreign airlines). Recently, EAL has invested in joint ventures in Togo
(ASKY) and Malawi (Malawi Airlines). Lastly, EAL sends pilots and experts to
implement trainings outside of Ethiopia (Mode 4). According to a 2014 report by the
International Air Transport Association (IATA),
EAL was ranked as the largest airline in Africa in revenue and profit, as well as the
fastest growing.
EAL now flies to more than 56 destinations in Africa, Europe, the Americas, the
Middle East, and Asia; it plans to expand to 90 destinations by 2025. Trade in air
transport services generates twice the amount of foreign exchange for Ethiopia as
the countrys major export commodity, coffee. The air transport sector is estimated
to generate more than 200,000 direct and indirect (induced) full-time jobs; the
500,000 visitors EAL brings into the country annually also generate tourism
revenues.

Government Policies that Made a Difference

Many Ethiopian government policies have contributed to the success of the air
transport sector.
EALs technical assistance agreement with Trans World Airlines (TWA) was
fundamental in transferring technology, skills, and work and management practices
in its 30 years of operation.
The governments decision to liberalize air transport services through the
Yamoussoukro
Decision on Open Skies in Africa (agreement among 44 African countries to
deregulate air services and promote regional air markets) was also instrumental in
the creation of a liberal and open regulatory framework for the sector. Though a
state-owned enterprise, EAL has long operated both independently and
competitively: the government permits a free market for air transport services as
well as autonomous managerial and operational practices.

CASE STUDY 2: BPO AND ICT SERVICES: SENEGAL

The information and communications technology (ICT) sector is a young one in
Senegal, dating back only to the late 1990s. It is estimated that trade in ICT sectorrelated services was worth
US$ 372 million in 2010, approximately 43% of the countrys total services exports.
ICT-related trade grew 6% annually from 2005 to 2010, constituting a large and
growing export market for

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Senegal. These exports consisted primarily of computer and information services
(growth averaging 50% per year), communication services, and other business
services (various trade related and business support services).
ICT offshoring service exports have been primarily through Mode 1: Senegalese
firms electronically export these services to other countries cross-border. One
Senegalese firm has also begun to invest in these activities abroad (Mode 3),
opening subsidiaries in five other West African countries. Senegalese ICT expert also
likely travel regionally to supply their expertise to both the parent company and its
subsidiaries, as well as through consulting work (Mode 4), but this has been difficult
to document.

Government Policies that Made a Difference

Policies targeting the domestic ICT ecosystem in Senegal greatly contributed to ICT
providers export success. Key policy steps included;

Liberalizing the sale of computer terminals in 1997 and lowering tariffs on

computer imports from 26% to 5% in 1999.
Introduction of a new telecommunication code in 1996.
The privatization of the incumbent telecommunications provider (Sonatel) in
1997.
the pre-commitments on telecommunications services undertaken by
Senegal at the WTO in 1997 under the World Trade Organizations (WTOs)
General Agreement on Trade in Services (GATS) Protocol IV.

The adoption of the WTO Reference Paper on Basic Telecoms, adding an

independent telecommunications regulator to the economy was also the key
(Senegal is one of only seven Sub-Saharan African countries to do so.) These
policies all helped develop the necessary layer of telecommunication network
operators and Internet service providers (ISPs) to support the export of BPO and ICT
services. These reforms also allowed ICT and BPO service providers to access
relatively competitively priced, robust electronic infrastructure to facilitate
international viability.
The Government of Senegal supplemented trade policy reform with reform policies
in other areas. The Investment Code included proactive foreign investment policies
to provide incentives to BPO/ICT firms. The Labor Code was amended to eliminate
the distinction between day and night labor rates, enabling workers to work an
around-the-clock
call
Centre
schedule.
A
2011
amendment
to
the
Telecommunications Code required the regulator to define and maintain a list of
value-added service categories. These policies and an associated Action Plan
constitute a long-term, coherent strategy to develop the BPO/ICT sector.