Instruments of Trade Policy
Trade policy refers to government actions that influence international trade by restricting or
encouraging imports and exports. While many nations advocate for free trade, they often impose
various trade policies to protect their domestic industries, maintain economic stability, and
support politically significant groups. The modern international trading system is largely based
on the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization
(WTO). Various instruments of trade policy include tariffs, subsidies, import quotas, export
restrictions, local content requirements, administrative policies, and antidumping measures.
1. Tariffs
Tariffs are taxes levied on imports and are one of the oldest and most commonly used trade
policy instruments. They serve multiple purposes, including generating government revenue and
protecting domestic industries from foreign competition. Tariffs can be classified into two main
types:
Specific Tariffs: These are fixed charges applied per unit of imported goods.
Ad Valorem Tariffs: These are taxes imposed as a percentage of the value of imported
goods.
Impact of Tariffs
Increase government revenues.
Make imported goods more expensive for consumers.
Provide protection to domestic producers from foreign competition.
Reduce overall efficiency by distorting market forces.
Although tariffs benefit domestic producers, they are generally considered to be pro-producer
and anti-consumer, as they raise prices for imported goods and limit consumer choices.
2. Subsidies
Subsidies refer to government financial support given to domestic producers to help them
compete against foreign imports and increase their share in export markets. Subsidies can take
various forms, including:
1. Cash Grants: Direct financial assistance to businesses.
2. Low-Interest Loans: Favorable borrowing conditions provided to domestic firms.
3. Tax Breaks: Reduction or exemption from certain taxes to ease financial burdens.
4. Government Equity Participation: Government investments in domestic companies to
strengthen their competitive position.
Impact of Subsidies
Provide domestic producers with a competitive advantage in both local and global
markets.
Reduce costs for domestic businesses, enabling them to grow.
Place a financial burden on taxpayers, as government subsidies are funded through public
funds.
May result in trade disputes if other countries view subsidies as unfair trade practices.
3. Import Quotas and Voluntary Export Restraints (VER)
Import quotas directly restrict the quantity of a specific good that can be imported into a country.
A tariff rate quota allows a certain quantity of imports at a lower tariff rate, while anything
beyond that quantity is subjected to a higher tariff.
A Voluntary Export Restraint (VER) is a self-imposed limitation by an exporting country on
the volume of its exports to a particular nation, often as a result of political agreements.
Impact of Import Quotas and VERs
Reduce competition from foreign producers.
Create scarcity in the market, which can lead to higher prices for consumers.
Generate quota rent, which refers to the extra profits that domestic producers earn due to
artificially restricted supply.
4. Export Tariffs and Export Bans
An export tariff is a tax imposed on goods being exported, designed to discourage exports and
ensure an adequate domestic supply of essential products.
An export ban is a restriction on the export of specific goods to prevent shortages in the home
market. One notable example is the 1975 U.S. crude oil export ban, which aimed to secure
domestic energy supplies.
Impact of Export Tariffs and Bans
Ensure that essential goods remain available for domestic consumption.
Can lead to tensions in international trade relations.
May reduce overall trade revenue for exporters.
5. Local Content Requirements and Administrative Policies
Local content requirements mandate that a certain percentage of a product must be produced
domestically. This can be measured in physical terms (e.g., percentage of components made
locally) or value terms (e.g., percentage of final product cost derived from local inputs).
Administrative policies involve bureaucratic rules and procedures designed to make importing
more difficult. These may include excessive documentation requirements, lengthy approval
processes, or restrictive health and safety standards.
Impact of Local Content Requirements and Administrative Policies
Protect domestic industries and encourage local production.
Increase costs for manufacturers and consumers.
Reduce market efficiency and limit consumer choices.
Can be used as a disguised form of trade protectionism.
6. Antidumping Policies
Dumping occurs when a company sells goods in a foreign market at prices below their cost of
production or below their "fair" market value. This is often done to eliminate competition and
gain market dominance.
To counteract this practice, antidumping policies impose penalties on foreign firms engaging in
dumping. These penalties, known as countervailing duties, aim to protect domestic industries
from unfair foreign competition.
Impact of Antidumping Policies
Protect domestic producers from aggressive foreign pricing strategies.
Ensure fair competition in the market.
Can lead to retaliatory trade measures from affected countries.
