Commercial policy

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A commercial policy (also referred to as a trade policy or international trade policy) is a government's policy governing international trade. Commercial policy is an all encompassing term that is used to cover topics which involve international trade. Trade policy is often described in terms of a scale between the extremes of free trade (no restrictions on trade) on one side and protectionism (high restrictions to protect domestic producers) on the other.

International trade Exchanges across international borders

International trade is the exchange of capital, goods, and services across international borders or territories.

Free trade Absence of government restriction on international trade

Free trade is a trade policy that does not restrict imports or exports; it can also be understood as the free market idea applied to international trade. In government, free trade is predominantly advocated by political parties that hold liberal economic positions while economically left-wing and nationalist political parties generally support protectionism, the opposite of free trade.

Protectionism Economic policy of restraining trade between states through government regulations

Protectionism is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations. Proponents claim that protectionist policies shield the producers, businesses, and workers of the import-competing sector in the country from foreign competitors. However, they also reduce trade and adversely affect consumers in general, and harm the producers and workers in export sectors, both in the country implementing protectionist policies and in the countries protected against.


A common commercial policy can sometimes agreed by treaty within a customs union, as with the European Union's common commercial policy and in Mercosur.

A common commercial policy is several states coordinating some or all aspects of their trade policy.

Customs union type of trade bloc with a free trade area and common external tariff

A customs union is generally defined as a type of trade bloc which is composed of a free trade area with a common external tariff. Customs unions are established through trade pacts where the participant countries set up common external trade policy. Common competition policy is also helpful to avoid competition deficiency.

A nation's commercial policy will include and take into account the policies adopted by that nation's government while negotiating international trade. There are several factors that can have an impact on a nation's commercial policy, all of which can have an impact on international trade policies.

Theories on international trade policy

Trade policy has been controversial since the days of Mercantilism. Economics (or political economy) has developed in major part as an effort to make clear various effects of trade policies. See International trade theory. Hottest topic in economic policy is upgrading in Global Value Chains.

Mercantilism economic policy emphasizing exports

Mercantilism is a national economic policy that is designed to maximize the exports, and minimize the imports, of a nation. These policies aim to reduce a possible current account deficit or reach a current account surplus. Mercantilism includes a national economic policy aimed at accumulating monetary reserves through a positive balance of trade, especially of finished goods. Historically, such policies frequently led to war and also motivated colonial expansion. Mercantilist theory varies in sophistication from one writer to another and has evolved over time.

International trade theory is a sub-field of economics which analyzes the patterns of international trade, its origins, and its welfare implications. International trade policy has been highly controversial since the 18th century up to our days. International trade theory and economics itself have developed as means to evaluate the effects of trade policies.

Types and aspects of Commercial policy


Regionalism, or Regional Trade Agreements (RTA), are trade policies and agreements that are crafted by the nations in a region for the purposes of increasing international trade in the area. RTAs have been described by supporters as a means of increasing free trade with the goal of eventually merging into larger, either bilateral or multilateral, trade deals. The more relatively local area of RTAs are useful in resolving trade issues as well without causing gridlock in other trade agreements. Critics of RTAs say that they are a hindrance to the negotiation of trade because they can be lopsided or unfairly beneficial to one side over the other sides, particularly if some of the participants are nations that are still in development. [1]

In international relations, regionalism is the expression of a common sense of identity and purpose combined with the creation and implementation of institutions that express a particular identity and shape collective action within a geographical region. Regionalism is one of the three constituents of the international commercial system.

Trade agreement wide ranging taxes, tariff and trade treaty

A trade agreement is a wide-ranging taxes, tariff and trade treaty that often includes investment guarantees. It exists when two or more countries agree on terms that helps them trade with each other. The most common trade agreements are of the preferential and free trade types are concluded in order to reduce tariffs, quotas and other trade restrictions on items traded between the signatories.

As China was rising in economic power and prominence, they turned to regionalism as a strategic method of leveling the playing field with Europe and the United States. In 2000, China signed the Bangkok agreement with the Association of Southeast Asian Nations (ASEAN) to reduce tariffs in the region. The signing of the agreement also began the push for a formal Free Trade Agreement between China and ASEAN. However, strained relations between China and other Asian nations such as Japan have prevented the same level of regional FTAs to be put in place with Northeast Asia. [2]

Economists use several concepts featuring the word power:

The Asia-Pacific Trade Agreement (APTA), previously known as the Bangkok Agreement and renamed 2 November 2005, was signed in 1975. It is the oldest preferential trade agreement between countries in the Asia-Pacific region. Seven Participating States- Bangladesh, China, India, Lao PDR, Mongolia, Republic of Korea, and Sri Lanka are the parties to the APTA. The APTA pact does occupy market for 2921.2 million people [2] and the size of this big market accounts US$14615.86 billion in terms of Gross Domestic Product (GDP) in the Fiscal Year (FY) 2015-2016. APTA’s key objective is to hasten economic development among the seven participating states opting trade and investment liberalization measures that will contribute to intra-regional trade and economic strengthening through the coverage of merchandise goods and services, synchronized investment regime and free flow of technology transfer making all the Participating States to be in equally winsome situation. Its aim is to promote economic development and cooperation through the adoption of trade liberalization measures. APTA is open to all members of the United Nations Economic and Social Commission for Asia and the Pacific, which serves as the APTA Secretariat. Members of APTA are currently participating in the Fourth Round of Tariff Concessions, which are expected to conclude in October 2009.

Association of Southeast Asian Nations international organisation of Southeast Asian countries

The Association of Southeast Asian Nations is a regional intergovernmental organization comprising ten countries in Southeast Asia, which promotes intergovernmental cooperation and facilitates economic, political, security, military, educational, and sociocultural integration among its members and other countries in Asia.

Bilateral Free Trade Agreements

When two countries enter into a bilateral trade agreement, they are essentially giving one another special deals and favorable treatment in the arrangements. These privileges can include lowering tariffs on each others goods and services. The United States has signed such treaties as the North American Free Trade Agreement in 1994 as well as with Israel in the 1980s. Experts who support such free trade agreements argue that these deals help to increase competition and offers larger markets that businesses can reach out to. Critics of bilateral agreements claim that a larger nation, such as the United States, can use these agreements to unfairly push smaller states into much harsher work loads than the World Trade Organization already requires. [3]

North American Free Trade Agreement trade bloc

The North American Free Trade Agreement is an agreement signed by Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994, and superseded the 1988 Canada–United States Free Trade Agreement between the United States and Canada. The NAFTA trade bloc is one of the largest trade blocs in the world by gross domestic product.

United States Federal republic in North America

The United States of America (USA), commonly known as the United States or simply America, is a country comprising 50 states, a federal district, five major self-governing territories, and various possessions. At 3.8 million square miles, it is the world's third or fourth largest country by total area and is slightly smaller than the entire continent of Europe. Most of the country is located in central North America between Canada and Mexico. With an estimated population of over 327 million people, the U.S. is the third most populous country. The capital is Washington, D.C., and the most populous city is New York City.

Relations between the European Union and South Korea have led to both parties signing several bilateral agreements regarding trade policy. In 2009, South Korea and the EU signed the EU-Korea Free Trade Agreement. The signing of the agreement created an FTA that is second only to NAFTA in size. The agreement held the benefits of increased free trade between the participants in the FTA as well as increased challenge to the United States. [4]

Preferential Trade Agreements

Preferential agreements are trade deals that involve nations making deals with specific countries that can aid the interests of one another as opposed to the nondiscriminatory deals that are pushed by the WTO. Nations have been increasingly preferring such deals since the 1950s as they are quicker to show gains for the parties involved in the agreements. A common argument that has been made is that it allows businesses to open up markets that would otherwise be considered closed and therefore falls into the free trade idea that most countries will push for. Countries that have similar levels of GDP and a higher scope in their economies as well as their relative position to one another and the rest of the world are more likely to have preferential trade agreements. PTAs can also be applied to regional areas with unions such as NAFTA, the European Union, and ASEAN being examples of regional PTAs. [5] [6]

Those who opposer PTAs argue that these deals have increased the importance of where a product is made so that tariffs can be applied accordingly. The certification of a product's origin also unfairly holds back smaller countries that have less resources to spend. Others argue that PTAs can hinder negotiations of trade disputes and places an emphasis of which country has more power. [6]

Ways in which commercial policy is affected


Trade tariffs are a tax that are placed on the import of foreign goods. Tariffs increase the price of imports and are usually levied onto the country the goods are being imported from. Governments will use tariffs as a way to promote competition within their own country with businesses of the foreign country that wishes to sell their goods or services. In some instances, a country's government will use them as a means of protectionism for their own interests. In modern history, generally starting at the mid-20th century, the use of tariffs has been largely diminished in favor of the rise of international trade. [7] Beginning in 2017, the Trump administration began to impose tariffs on several of nations that were involved in trade deals with the United States. The countries targeted by the Trump Tariffs then retaliated with their own tariffs on American goods.

Import Quotas

Import quotas are the limitations of the amount of goods that can be imported into the country from foreign businesses. Generally, an import quota is set for a specific period of time with one year being the most common metric. Some versions of the quotas limits the quantity of specific goods being imported into a country while other versions place the limit on the value of said goods. The objectives of quotas can include: the protections of a nations interests, ensuring a balance of trade so as not to create deficits, retaliation to restrictive trade policies of other countries that do business on the international playing field. [8]

Related Research Articles

Free-trade area region encompassing a trade bloc whose member countries have signed a free-trade agreement

A free-trade area is the region encompassing a trade bloc whose member countries have signed a free trade agreement (FTA). Such agreements involve cooperation between at least two countries to reduce trade barriers, import quotas and tariffs, and to increase trade of goods and services with each other. If natural persons are also free to move between the countries, in addition to a free-trade agreement, it would also be considered an open border. It can be considered the second stage of economic integration.

A trade bloc is a type of intergovernmental agreement, often part of a regional intergovernmental organization, where barriers to trade are reduced or eliminated among the participating states.

The ASEAN Free Trade Area (AFTA) is a trade bloc agreement by the Association of Southeast Asian Nations supporting local trade and manufacturing in all ASEAN countries, and facilitating economic integration with regional and international allies. It stands as one of the largest and most important free trade areas (FTA) in the world, and together with its network of dialogue partners, drove some of the world's largest multilateral forums and blocs, including Asia-Pacific Economic Cooperation, East Asia Summit and Regional Comprehensive Economic Partnership.

In international economic relations and international politics, most favoured nation (MFN) is a status or level of treatment accorded by one state to another in international trade. The term means the country which is the recipient of this treatment must nominally receive equal trade advantages as the "most favoured nation" by the country granting such treatment. In effect, a country that has been accorded MFN status may not be treated less advantageously than any other country with MFN status by the promising country. There is a debate in legal circles whether MFN clauses in bilateral investment treaties include only substantive rules or also procedural protections. The members of the World Trade Organization (WTO) agree to accord MFN status to each other. Exceptions allow for preferential treatment of developing countries, regional free trade areas and customs unions. Together with the principle of national treatment, MFN is one of the cornerstones of WTO trade law.

Non-tariff barriers to trade Type of trade barriers

Non-tariff barriers to trade (NTBs) or sometimes called "Non-Tariff Measures (NTMs)" are trade barriers that restrict imports or exports of goods or services through mechanisms other than the simple imposition of tariffs.

Australia–United States Free Trade Agreement

The Australia – United States Free Trade Agreement (AUSFTA) is a preferential trade agreement between Australia and the United States modelled on the North American Free Trade Agreement (NAFTA). The AUSFTA was signed on 18 May 2004 and came into effect on 1 January 2005.

Preferential trading area type of trade bloc

A preferential trade area is a trading bloc that gives preferential access to certain products from the participating countries. This is done by reducing tariffs but not by abolishing them completely. A PTA can be established through a trade pact. It is the first stage of economic integration. The line between a PTA and a free trade area (FTA) may be blurred, as almost any PTA has a main goal of becoming a FTA in accordance with the General Agreement on Tariffs and Trade.

Free trade agreement treaty establishing a free-trade area

A free trade agreement (FTA) or treaty is a multinational agreement according to international law to form a free-trade area between the cooperating states. FTAs, a form of trade pacts, determine the tariffs and duties that countries impose on imports and exports with the goal of reducing or eliminating trade barriers, thus affecting international trade. Such agreements usually "center on a chapter providing for preferential tariff treatment", but they also often "include clauses on trade facilitation and rule-making in areas such as investment, intellectual property, government procurement, technical standards and sanitary and phytosanitary issues".

Trade and Investment Framework Agreement

A Trade and Investment Framework Agreement (TIFA) is a trade pact that establishes a framework for expanding trade and resolving outstanding disputes between countries.

Market access

Market access describes the possibility of an enterprise or a country to sell their goods and services across borders and enter a foreign market. According to the World Trade Organization (WTO), "market access for goods in the WTO means the conditions, tariff and non-tariff measures, agreed by members for the entry of specific goods into their markets." Gaining market access is an indispensable step towards deepening trade relations. However, market access is not synonymous with free trade because the possibility to enter a foreign market is in most cases conditioned by certain requirements, whereas free trade implies a perfect state in which goods and services can be circulated across borders without such barriers. Indeed, tackling market access restrictions proves to be a more achievable goal for trade negotiations as compared to free trade.

Rules of origin

Rules of origin are the rules to attribute a country of origin to a product in order to determine its "economic nationality". The need to establish rules of origin stems from the fact that the implementation of trade policy measures, such as tariffs, quotas, trade remedies, in various cases, depends on the country of origin of the product at hand.

The Comprehensive Economic Partnership for East Asia (CEPEA) is a Japanese led proposal for trade co-operation, free trade agreement, among the 16 present member countries of the East Asia Summit. All those movements and efforts were taken over by the following Regional Comprehensive Economic Partnership.

The ASEAN–India Free Trade Area (AIFTA) is a free trade area among the ten member states of the Association of Southeast Asian Nations (ASEAN) and India. The initial framework agreement was signed on 8 October 2003 in Bali, Indonesia. and the final agreement was on 13 August 2009. The free trade area came into effect on 1 January 2010. India hosted the latest ASEAN-India Commemorative Summit in New Delhi on 26 January 2018. In the financial year 2017-18, Indo-ASEAN bilateral trade grew by almost 14% to reach US$81.3 billion. India's imports from ASEAN were valued at US$47.13 billion while its exports to ASEAN stood at US$34.2 billion.

The spaghetti bowl effect is the multiplication of free trade agreements (FTAs), supplanting multilateral World Trade Organization negotiations as an alternative path toward globalization. The term was first used by Jagdish Bhagwati in 1995 in the paper: “US Trade policy: The infatuation with free trade agreements”, where he openly criticized FTAs as being paradoxically counter-productive in promoting freer and more opened global trades. According to Bhagwati, the too many crisscrossing FTAs would represent a costly complication of World trades, and would allow countries to adopt discriminative trade policies which would, in turns, reduce trade welfare.

South Korea–European Union relations

The Republic of Korea and the European Union (EU) are important trade partners: Korea is the EU's ninth largest export market for goods, and the EU is Korea's third largest export destination. The two have signed a free trade agreement which came into effect at end of 2011.

EU Gateway Programme

The EU Gateway | Business Avenues is an initiative funded by the European Union (EU), created and managed by the Service for Foreign Policy Instruments under the Partnership Instrument. The programme acts as a bridgehead to provide business support services to European enterprises interested to develop their business in Asia. The initiative is rebranded EU Gateway | Business Avenues following the successful implementation of a pilot to South East Asia. It organises one-week business missions to Japan, Korea, Singapore, Malaysia, Vietnam, Thailand, Indonesia, Philippines and China, encouraging the establishment of long-lasting business collaborations with local companies. EU Gateway | Business Avenues focuses on five technological sectors: Environment & Water, Green Energy, Construction & Building, Healthcare & Medical, Information & Communication; and three other sectors: Contemporary European Design, Food & Beverage and Services.

The Commerce and Trade Group (CTG) is a branch of the Central Superior Services of Pakistan. The Commerce and Trade Group is responsible for the commercial diplomacy and economic development of Pakistan. In order to safeguard Pakistan's commercial interests and enhance market access, the CTG was created in 1973 to help Pakistan in developing Pakistan trade ties abroad and to cater the modern needs of specialized officer for trade policy and implementation.


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