Instruments of Commercial Policy

Instruments of Commercial Policy

1. Tariff

A tariff is a tax or duty levied on the traded commodity as it crosses a national boundary. An import tariff is a duty on the imported commodity, while an export tariff is a duty on the exported commodity.

Tariffs can be ad valorem, specific, or compound. The ad valorem tariff is expressed as a fixed percentage of the value of the traded commodity.

The specific tariff is expressed as a fixed sum per physical unit of the traded commodity. Finally, a compound tariff is a combination of an ad valorem and a specific tariff.

2. Quotas

An import quota is a direct restriction on the quantity of some good that may be imported. The restriction is usually enforced by issuing licenses to some groups of individuals or firms.

For example, the United States has a quota on imports of foreign cheese.

The only firms allowed to import cheese are certain trading companies, each of which is allocated the right to import a maximum number of pounds of cheese each year.

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3. Export Subsidies

An export subsidy is a payment to a firm or individual that ships a good abroad.

4. Voluntary Export Restraint

Voluntary export restraint refers to the case where an importing country induces another nation to reduce its exports of a commodity “voluntarily,” under the threat of higher-all round trade restriction when these exports threaten an entire domestic industry.

The United States negotiated voluntary export restraint on Japanese automobile exports in 1981.

5. Local Content Requirements

A local content requirement is a regulation that requires that some specified fraction of a final good be produced domestically.

6. Export Credit Subsidies

This is like an export subsidy except that it takes the form of a subsidized loan to the buyer. The United States has a government institution, the Export-Import Bank, that is devoted to providing at least slightly subsidized loans to aid exports.

7. Red-tape Barriers

Sometimes a government wants to restrict imports without doing so formally. It is easy to twist normal health, safety, and customs procedures to place substantial obstacles in the way of trade.

The classic example is the French decree in 1982 that all Japanese videocassette recorders must pass through the tiny customs house at Poitiers- effectively limiting the actual imports to a handful.

8. Exchange Control

Exchange control refers to the restrictions on the purchase and sale of foreign exchange. It is operated in various forms by many countries, in particular tho$e who experience shortages of hard currencies.

A government can use exchange controls to limit the number of products that importers can purchase with a particular currency. For example, in 1985, China placed strict restrictions on foreign exchange spending.