Unit 2: Trade Policy & Commercial Instruments
Instruments of Commercial Policy
Commercial policy refers to government measures that regulate international trade to protect domestic industries and promote economic growth.
A. Tariffs
Tax imposed on imported goods.- Ad Valorem Tariff: Percentage of import value (e.g., 10% of $1,000 = $100)
- Specific Tariff: Fixed amount per unit (e.g., $50 per ton)
- Compound Tariff: Combination of both
Example (Numerical)
- Import of 100 laptops at $500 each, tariff = 10%
- Tariff Amount = 100 × 500 × 10% = $5,000
B. Quotas
- Definition: Limit on the quantity/value of goods imported.
- Purpose: Protect domestic industries by controlling supply.
- Example: Only 50,000 tons of wheat can be imported per year.
C. Subsidies
- Definition: Financial assistance by the government to domestic producers.
- Purpose: Reduce cost of production and make domestic goods competitive internationally.
- Example: Government gives ₹5,000 per ton subsidy to domestic sugar producers.
D. Non-Tariff Barriers (NTBs)
Restrictions other than tariffs that limit imports.- Licensing requirements
- Import/export bans
- Technical standards and regulations
- Voluntary export restraints
E. Economic Multiplier Effects
Impact of trade policy on overall economic activity.Where MPC = Marginal Propensity to Consume
Numerical Example
- Suppose a tariff increases domestic production by ₹1,00,000 and MPC = 0.8
- Multiplier = 1 / (1 - 0.8) = 5
- Total economic impact = 1,00,000 × 5 = ₹5,00,000
Shows how trade policies can stimulate domestic economic growth.
F. Trade Protectionism
Policy of protecting domestic industries from foreign competition.-
Methods: Tariffs, quotas, subsidies, NTBs
- Pros: Protects employment, infant industries
- Cons: Can lead to higher prices for consumers, retaliation, and inefficiency
India’s Foreign Trade Policy (FTP)
- Objective: Promote exports, reduce trade deficit, and enhance global competitiveness.
Key Features
- Export Promotion Schemes: MEIS, SEIS
- Duty Drawback Scheme: Refund of duties on exported goods
- Special Economic Zones (SEZs): Tax and export incentives
- Focus on MSMEs & Start-ups for global trade
- Time Frame: Policies revised every 5 years (latest FTP 2023-28)
Make in India Initiative
- Launch Year: 2014
- Objective: Transform India into a global manufacturing hub, promote FDI, generate employment.
- Key Sectors: Automobiles, electronics, textiles, defense, renewable energy.
- Trade Link: Boosts exports and reduces dependency on imports.
LPG Policy Framework
- LPG = Liberalization, Privatization, Globalization
- Objective: Open Indian economy to global competition, attract FDI, enhance technology, improve efficiency.
Key Outcomes
- Reduction of trade barriers
- Greater integration with global markets
- Increased foreign investment in manufacturing and services
- Encouraged Make in India and export promotion
Summary Table
| Instrument / Initiative | Purpose / Objective | Example / Note |
|---|---|---|
| Tariff | Protect domestic industries, raise revenue | 10% duty on imported laptops |
| Quota | Limit imports | 50,000 tons wheat/year |
| Subsidy | Reduce production cost | ₹5,000/ton for sugar producers |
| Non-Tariff Barriers | Restrict imports via regulation | Licensing, technical standards |
| Economic Multiplier | Stimulate domestic economy | ₹1,00,000 × multiplier (5) = ₹5,00,000 |
| Trade Protectionism | Protect domestic market | Combination of tariffs, quotas, NTBs |
| FTP | Promote exports, reduce trade deficit | Duty Drawback, SEZs, MEIS/SEIS |
| Make in India | Boost manufacturing & employment | Focus sectors: automobiles, electronics |
| LPG Policy | Economic reforms for global integration | Liberalization, Privatization, Globalization |
In Short
- Instruments of commercial policy like tariffs, quotas, subsidies, and NTBs are used to protect domestic industries and stimulate growth.
- India’s FTP, Make in India, and LPG reforms aim to integrate India with the global economy, promote manufacturing, and enhance exports.