Friday, August 28, 2009

Commercial Policy, its Instruments and Objectives

It is an economic policy which is concerned with those decisions, strategies and instruments which influence the foreign trade sector of an economy. In the commercial policy it is to be decided that what will be the exports and imports of the country, whether the foreign trade sector will be consisting of consumer gods or the producer goods and whether the trade will be free or restricted. All this means that commercial policy can be decomposed into (1) Export and import Policy (2) Foreign exchange policy and (3) Tarrif Policy. In case of Pakistan the commercial policy is also consist of above mentioned policies.

Instruments of Commercial Policy:

The commercial policy is consisted of following instruments.

1. Tarrif (Import Tax)

2. Quota System

3. Exchange Control

4. Export subsidies

5. Voluntary Export Restraints

6. State Trading

7. Multiple Exchange rate system

Objectives of Commercial Policy:

Following are the main objectives of commercial policy.

1. To increase Exports: The under developed countries are preys to “Trade Gap”. It means that their exports are less than their imports. As a result they have to face deficit in their balance of payments. Therefore, the main objectives of commercial policy in these countries are to remove deficit in balance of payments. This can be done by enhancing exports. In this respect the export duties are abolished and subsidies on exports be provided, the concessions be granted to those firms which produce domestic raw material, and multiple exchange rate system be pursued, whereby low rate of exchange be adopted for exports, and a higher rate of exchange be followed for imports, particularly for luxurious imports.

2. Diversification in Exports: To remove deficit in balance of payments not only the exports should be boosted up, but a diversification in exports be also brought. The quality of exports is improved. The new markets for exports be discovered the share of manufactured goods in exports be increased for this all, the exporters be encouraged. They be provided with subsidies and rebates. The cheap credit policy be initiated for the exporters. Tax holidays be granted for the exporters. In this way the quantity and quality of exports would be increased.

3. Protection to Infant Industries: The purpose of import policy is to protect the infant domestic industries. As the industries of under developed countries like Pakistan can not compete with industries of developed countries. Therefore if the domestic markets are supplied with foreign products the process of industrialization in home country will never start. The country will remain backward. Therefore in order to protect the infant industries, the commercial policy aims at imposing import duties, quota system and exchange control etc. The cheaper credit facilitates be granted to those industries which engage in import substitutions. In this way on the one side the imports will come down. On the other side import substitutes will be produced in the country. Consequently the balance of payments of the country will improve the process of capital accumulation will start leading to increase income and employment.

4. Improvement in Terms of Trade: The ratio between the prices of exports and prices of imports is known as terms of trade The terms of trade of developing countries like Pakistan goes on to fall. It means that they have to give more exports against their imports. In other words the prices of exports go on to fall while the prices of imports go on to increase in case of developing countries. Therefore to check the falling tendency of terms of trade the commercial policy helps us. Through commercial measures such goods be exported which could command rising prices in the world markets. As rather agriculture goods, the manufactured goods are exported. The buffer stocks for agri goods be set up so that fluctuations in their prices could be avoided. The necessary raw material and industrial goods be prepared at country level. With such all measures terms of trade could be improved.

5. Stability in Internal and External Value of Currency: Whenever a country faces deficit in its balance of payments, the external value of the currency goes on to fall. This not only leads to decrease the international value of the currency but inflation is also generated in the country. Thus commercial policy can be applied to bring internal and external stability in the value of currency. For this purpose the import duties be imposed on the imports, the quotas of the imports be fixed and rationing of foreign exchange can be made. When the external value of the currency improves the internal value of the currency will also improve. In other words, with the help of commercial instruments both internal and external balances can be attained.

6. Commercial Links: The commercial policy can be applied to make commercial links with other countries. For this purpose the trade delegates can be sent abroad. The trade fairs and exhibitions can be arranged. In this way, a country can popularize its products and exports. Consequently the exports are boosted up and balance of payments will improve.


6 Responses to “Commercial Policy, its Instruments and Objectives”

Anonymous said...
May 24, 2012 at 6:32 AM

Thanks for this piece...

Anonymous said...
June 18, 2012 at 11:33 AM

same material in abdul hamid shahid book of international economics....

abid ghuari said...
April 21, 2013 at 8:13 AM

very good material to understand the commercial policy for a lay man like me !

November 13, 2013 at 10:20 PM


muhammad hazrat said...
January 30, 2016 at 6:11 PM

It is very good information.we must understand the concept.
Lay Person

muhammad hazrat said...
January 30, 2016 at 6:12 PM

I am Lay person

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