Foreign Trade of India PDF

1 10 Foreign Trade of India Introduction : Types of foreign trade : Before 1947, the pattern of India's foreign Foreign trade is divided into the following trade was typically colonial. India was a...

1 10 Foreign Trade of India Introduction : Types of foreign trade : Before 1947, the pattern of India's foreign Foreign trade is divided into the following trade was typically colonial. India was a three types. supplier of raw materials to the industrialized 1) Import Trade, 2) Export Trade, 3) Entrepot Trade nations, particularly England and importer of 1) Import Trade : Import trade refers to manufactured goods. This dependence on foreign purchase of goods and services by one trade did not permit industrialization at home. country from another country or inflow of As a result the indigenous handicrafts suffered goods and services from foreign country a severe blow. However, many underdeveloped to home country. For example, India countries that won independence in the post imports petroleum from Iraq, Kuwait, Saudi World War II period, viewed foreign trade as an Arabia, etc. investment. 2) Export Trade : Export trade refers to the Meaning of Internal Trade : sale of goods by one country to another Buying and selling of goods and services country or outflow of goods from one within the boundaries of a nation are referred country to foreign country. For example, to as ‘Internal Trade’ or ‘Domestic Trade’ or India exports tea, rice, jute to China, Hong ‘Home Trade’. For example, if goods produced Kong, Singapore etc. in Maharashtra are sold to states like West 3) Entrepot Trade : Entrepot trade refers to Bengal, Uttar Pradesh, Tamil Nadu etc, then it purchase of goods and services from one is known as internal trade. country and then selling them to another country after some processing operations. For example, Japan imports raw material required to make electronic goods like, radio, washing machine, television etc. from England, Germany, France etc. and sells them to various countries in the world after processing them. Role of Foreign Trade : Trade is an engine of growth of an economy, Fig. 10.1 because it plays an important role for economic Meaning of Foreign Trade : development. In developed countries it represents Foreign Trade is trade between the different a significant share of Gross Domestic Product. countries of the world. It is called as International Role of foreign trade can be justitied on the Trade or External Trade. basis of the following points : Definition : 1) To earn foreign exchange : Foreign trade According to Wasserman and Hultman, provides foreign exchange which can be “International Trade consists of transaction used for very productive purposes. Foreign between residents of different countries”. trade is a remarkable factor in expanding 93  2 the market and encouraging the production Try this : of goods. Name the goods exported to and imported 2) Encourages Investment : Foreign trade from India to China and Japan in recent years creates an opportunity for the producers by India. to reach beyond the domestic markets. It encourages them to produce more goods Composition and Direction of India’s foreign for export. This leads to an increase in total trade : investment in an economy. Over the last 70 years, India’s foreign trade 3) Division of labour and specialization : has undergone a complete change in terms of Foreign trade leads to division of labour composition and direction. Main feature of and specialization at world level. Some composition of India’s foreign trade are as countries have abundant natural resources, follows : they should export raw material and import 1) Increasing share of Gross National finished goods from countries which are Income : In 1990-91, share of India’s foreign advanced in skilled manpower. Thus, trade (import-export) in gross national foreign trade gives benefits to all countries income was 17.55%. It increased to 25% thereby leading to division of labour and during 2006-07 and to 48.8% during 2016-17 specialization. 2) Increase in volume and value of trade : 4) Optimum allocation and utilization of Since 1990-91, the volume and value of resources : Due to specialization, resources India’s foreign trade has gone up. India are channelized for the production of only now exports and imports goods which are those goods which would give highest several times more in value and volume. returns. Thus, there is rational allocation and specialization of resources at the 3) Change in the composition of exports : international level due to foreign trade. Since Independence, the composition of export trade of India has undergone a 5) Stability in price level : Foreign trade helps to keep the demand and supply position change. Prior to Independence, India used stable which in turn stabilizes the price to export primary products like jute, cotton, level in the economy. tea, oil-seeds, leather, foodgrains, cashew nuts and mineral products. With the passage 6) Availability of multiple choices : Foreign of time, manufactured items like readymade trade provides multiple choices of imported garments, gems and jewellery, electronic commodities. As foreign trade is highly goods, especially computer hardware and competitive it also ensures a good quality and standard products. This raises the software occupy a prime place in India’s standard of living of people. exports. 7) Brings reputation and helps earn 4) Change in the composition of imports : goodwill : Exporting country can earn Prior to independence, India used to import reputation and goodwill in the international consumer goods like medicines, cloth, market. For example, countries like Japan, motor vehicles, electrical goods etc. A Germany, Switzerland etc. have earned a part from petrol and petroleum, India is lot of goodwill and reputation in foreign now importing mainly capital goods like market for their qualitative production of high-tech machinery chemicals, fertilizers, electronic goods. steel etc. 94  3 5) Oceanic trade : Most of India’s trade these ports were overburdened. Recently, is by sea. India has trade relations with India has developed new ports at Kandla, its neighbouring countries like Nepal, Cochin, Vishakhapatnam, Nhava Sheva etc. Afghanistan, Myanmar, Sri Lanka etc. The to reduce the burden on the exsiting ports. share of India’s oceanic trade is around 68%. 6) Development of new ports : For its foreign Find out : trade, India depended mostly on Mumbai, Recent share of India’s foreign trade in Kolkata and Chennai ports. Therefore, Gross National Income. Do you know? Composition of India’s Imports Years Commodities 2015-16 2016-17 Sr. Expenditure Percentage Expenditure Percentage No. (in million $) (in million $) Petroleum, oil and 1 82,944 21.8 86,896 22.6 lubricants 2 Electronic goods 40,032 10.5 41,941 10.9 Pearls and precious 3 20,070 5.3 23,809 6.2 stones 4 Edible oils 10,492 2.8 10,893 2.8 5 Fertilizers 8,072 2.1 5,024 1.3 6 Foodgrains 276 0.1 1,429 0.4 Composition of India’s Exports Years Commodities 2015-16 2016-17 Sr. Expenditure Expenditure Percentage (in million $) Percentage (in million $) No. Readymade 1 16,964 6.9 17,368 6.3 Garments 2 Iron ore 191 0.0 1,534 0.5 3 Cotton yarn 8,874 3.4 8,550 3.1 4 Petroleum products 31,209 11.9 32,416 11.7 Leather 5 5,554 2.1 5,308 1.9 manufactures 6 Engineering goods 7,220 23.0 65,267 23.7 Source : 1) Reserve Bank of India, Handbook of Statistics on Indian Economy 2016-17, 2) Government of India, Economic Survey 2017-18. 95  4 Direction of India’s foreign trade : Direction of foreign trade means the countries to which India exports its goods and services and the countries from which it imports the goods and services. Thus, direction consists of destination of exports and sources of our imports. Prior to Independence, much of India’s trade was done with Britain. Therefore Britain used to hold the first position in India’s foreign trade. However, after Independence, Fig. 10.2 new trade relations with many other countries Recent Trends in Exports : were established. Now USA has emerged as the leading trading partner followed by Germany, 1) Engineering goods : According to Japan and United Kingdom. Engineering Goods Export Promotion Council (EGEPC) Report, the share of Do you know? engineering goods was 25% in India’s total Direction of India's Imports exports in 2017-18. Within this category Year some of the prominent exported items are Countries/Organisation 2016-17 transport equipment including automobiles Sr. no. (Percentage) and auto components, machinery and 1 OECD 28.1 instruments. During the period 2010-11 to 2 OPEC 24.1 2014-15, exports of transport equipment 3 Eastern Europe 2.4 have grown from 16 billion dollars to to 4 Developing Nations 43.2 24.8 billion dollars. 5 Others 2.2 2) Petroleum products : India’s petroleum capacity increased significantly since Direction of India's Exports 2001-02, due to which India turned as a Year net exporter of petroleum refinery products. Countries/Organisation 2016-17 Petroleum product had a share of 4.3% in Sr. no. (Percentage) India’s total exports in 2000-01, which rose 1 OECD 37.9 steadily to 20.1% in 2013-14. 2 OPEC 16.4 3) Chemicals and chemical products : An 3 Eastern Europe 1.0 important export item that has performed 4 Developing Nations 43.5 reasonably well over the last few years 5 Others 1.2 is chemicals and chemical products. The Source : Reserve Bank of India, Handbook of share of this item was 10.4% in 2014-15. Statistics on Indian Economy. 4) Gems and Jewellery : Gems and jewellery Trends in India’s foreign trade since 2001 : is one of the major contributors to export Since liberalisation, India’s foreign trade earnings in India, having a share of 13.3% has expanded manifold and has shown a in India’s merchandise export in 2014-15. significant structured shift in imported and 5) Textiles and readymade garments : exported products, and also in its geographical Textiles and garment exports together composition. accounted for 11.3% of India’s exports 96  5 in 2014-15. In fact, India is one of the etc. is included in balance of payments. leading exporting countries of textiles and readymade garments in the world. Trends in Imports : 1) Petroleum : Petroleum has always remained the most important item of imports in India’s trade in the pre as well as post reform period. It had a share of 27% in total imports in 1990-92 which currently Fig. 10.3 stands at around 31%. Balance of Trade : 2) Gold : After petroleum, the second most Balance of trade is the difference between imported item is gold. It has been observed the value of a country’s exports and imports for that there is a significant drop in gold a given period. Balance of trade is also referred imports during 2013-14. The gold imports to as the international trade balance. declined from 53.3 billion dollars in 2011-12 According to Bentham, “Balance of trade to 27.5 billion dollars in 2013-14. This was of a country is the relation over a period between primarily due to fall in international gold the values of her exports and imports of physical prices and various policy measures taken by goods.” the government to curb gold imports. According to Samuelson, “if export value is 3) Fertilizers : The share of fertilizers in greater than the import value it is called as trade import expenditure declined from 4.1% in surplus and if import value is greater than export 1990-91 to only 1.3% in 2016-17. value, then it is called as trade deficit.” It is clear from the above definitions that 4) Iron and Steel : The share of iron and steel balance of trade includes the value of imports in import expenditure declined from 4.9% and exports of visible goods and invisible goods. to 2.1% in 2016-17. Concept of Balance of payments : The Balance of payments of a country is a systematic record of all international economic transactions of that country during a given period, usually a year. According to Ellsworth, “Balance of payments is a summary statement of all the transactions between the residents of one country and the rest of the world. According to Walter Krause, “The balance of payments of a country is a systematic record of all economic transactions completed between its residents and the rest of the world during a Fig. 10.4 given period of time usually a concept of year. From the above definitions, it is clear that the Find out : value of exchange of goods and services among List of countries coming under OPEC the citizens, businessmen, firms, government and OECD. 97  6 Balance of Payments Balance of Payments – Meaning & Definition According to Kindleberger, “The Balance of Payments of a country is a systematic record of all the economic transactions between its residents and residents of foreign countries.” - Balance of Payments (BoP) is the recording of all the economic transactions of a particular country with the rest of the countries in the world. - As part of the Foreign Trade and international trade norms, each country enters into economic contracts with the other countries in the world. - As a result of such agreements and transactions, the particular country receives Payments from the other countries. - Balance of Payments is a statement of accounts of these receipts and payments. Generally, a country deals with the other countries in the following items: - Visible items (imported and exported physical goods) - Invisible items (imported and exported services) - Capital Transfers (capital receipts and Payments like investment in India by foreign parties) Features - Systematic recording of Receipts and Payments of one country with the other countries. - Statement of account pertaining to a specific period of time, usually one year. - Includes all the three items, that is, visible, non-visible, and capital transfers. - Receipts and Payments are recorded as per the double-entry system. - Includes all government and non-government items.  7 Structure of BoP The components of Balance of Payments is categorized as: Capital Account Current Account Overall balance of Payments Capital Account - It involves the capital transactions, that is, those which create assets and/ or liabilities. - Capital account reflects the net changes in the ownership of the national assets - Components of capital accounts include Foreign Direct Investment, Foreign Portfolio Investment, External Borrowings, and Reserve Account with the Central Bank. Current Account - It deals with the current, short-term, and ongoing transactions such as trading in goods and services, current unilateral transfers, and investment incomes, etc. - It reflects the nation’s net income. Overall BoP - It is the total of a country’s balance of payments on capital and current account. Hence, the formula: Balance of Payments (BoP) = Current Account + Capital Account = 0 Disequilibrium in Balance of Payments Several reasons such as differences in the value of exports and imports cause disequilibrium in the balance of payments. The disequilibrium may be either in minus, deficit, unfavorable side or plus, surplus, favorable side.  8 Unfavourable/ Favourable BoP Balance of Payments is unfavorable when the Payments (debit) of the country is more than its receipts (credit). Meanwhile, when the receipts (credit) are more than the Payments (debit), the BoP is said to be favorable. Disequilibrium in Balance of Payments can be understood as: 1. Favourable BoP 2. Unfavourable BoP 1. Favourable BoP When the receipts are more than the Payments, then there is a favourable balance of Payments. Such a situation increases foreign exchange reserves. The export of goods, services, and capital receipts is more than that of the imports. It is also known as surplus BoP Bf = R – P > 0 Bf = Balance of Payments R – P > 0 = Receipts are greater than Payments or their difference is positive 2. Unfavourable BoP There is an unfavourable BoP when the Payments are more than the receipts. Such a situation reduces foreign exchange reserves. As well, the exports of goods, capital receipts, and services are less than that of the imports. It is also termed as a deficient balance of Payments. Bu = R – P < 0 Bu = Unfavourable BoP R – P < 0 = Receipts are less than the Payments or their difference is negative  9 Equilibrium in BoP When the capital receipts and exports (both visible and invisible) of a country are equal to its capital imports and Payments (visible and invisible), then it is called equilibrium in the Balance of Payments. B=R–P=0 B = Balanced BoP R = Receipts P = Payments Causes of Disequilibrium in BoP The main causes of unfavourable BoP in India are discussed as below: - Import of machinery - Import of war equipment - Increasing demand of consumption goods - Price Disequilibrium - Expenditure on Embassies - Competition from international countries - Increasing prices of crude oil - Payments of interest on foreign debts - War among the gulf countries Measures to Correct the Disequilibrium in BoP The main reason for the disequilibrium in BoP is the excess of imports over exports. Measures to correct the disequilibrium in the Bop include: - Promotion of exports - Scaling up production - Favourable trade agreements - Encouragement of foreign investment - Boosting foreign tourism - Decreasing the level of economic inflation - Devaluation of the Indian currency - Restricting imports, specifically of luxury goods - Exercising import substitution  10 SAARC Introduction: - SAARC stands for South Asian Association for Regional Cooperation. It is a regional organization that promotes cooperation among South Asian countries. - SAARC was established on December 8, 1985, when the eight countries signed the charter in Dhaka. - The headquarters of SAARC are located in Kathmandu, Nepal. Members: There are 8 member states of SAARC. They are: - Afghanistan - Bangladesh - Bhutan - India - Maldives - Nepal - Pakistan - Sri Lanka Aim: - The aim of SAARC (South Asian Association for Regional Cooperation) is to promote regional cooperation and development among South Asian countries. Objectives: The South Asian Association for Regional Cooperation (SAARC) has three main objectives: - Promote self-reliance - Improve mutual trust - Promote cooperation  11 SAARC's objectives also include: - Promoting the welfare of South Asians - Improving quality of life - Accelerating economic growth - Social progress - Cultural development - Providing opportunities for people to live in dignity - Realizing people's full potential - Improving relationships with other developing nations - Improving relationships with international and regional groups Logo: - The SAARC logo depicts two hands joining together with seven doves in between. - The hands symbolize friendship and goodwill, while the doves represent the seven founding member nations seeking peace. Later Afghanistan joined as the 8th member of SAARC in 2007. Functions: 1. Policy Direction: Set the organization's strategic direction. 2. Decision-Making: Make key regional decisions. 3. Regional Issue Addressing: Collaborate on common challenges. 4. Bilateral and Multilateral Engagement: Engage with member nations and regional forums. 5. Cooperation Promotion: Promote regional cooperation and development. Apex and Recognized Bodies: SAARC has six Apex Bodies, they are: 1. SAARC Chamber of Commerce & Industry (SCCI), 2. South Asian Association for Regional Cooperation in Law (SAARCLAW), 3. South Asian Federation of Accountants (SAFA), 4. South Asia Foundation (SAF), 5. South Asia Initiative to End Violence Against Children (SAIEVAC), 6. Foundation of SAARC Writers and Literature (FOSWAL)  12 Problems: - Political Tensions: Ongoing political disputes between member nations. - Limited Economic Integration: Hindered trade and economic integration. - Security Concerns: Regional security challenges and terrorism. - Infrastructure Gaps: Inadequate regional connectivity and infrastructure. - Socio-Economic Disparities: Economic and social inequalities among member states.  13 BRICS Meaning BRICS is an acronym for Brazil, Russia, India, China, and South Africa. In 2001, Jim O’Neill, an economist at Goldman Sachs, came up with the term “BRIC” (without South Africa). He said that by 2050, the four BRIC economies would rule the world economy. In 2010, South Africa joined the list. Objectives of BRICS BRICS aims to increase economic and political stability. It is believed that by the end of 2050, these countries will be the main places where products, services, and raw materials come from. Cooperation, development, and influence in world affairs are at the heart of the BRICS goals. The main objectives of BRICS are as under- - Economic cooperation: encouraging trade, cooperation and growth among members, as well as improving BRICS economies’ access to markets. - Development financing: Creating institutions such as the CRA (Contingent Reserve Arrangement) and the NDB (The New Development Bank) to finance infrastructure and development projects in member nations. - Political coordination: Strengthening political discourse and coordination on international issues, such as modifying institutions of global governance to take into account the shifting global economic landscape and to provide rising economies with a stronger voice and representation. - Social and cultural exchanges: Promoting interpersonal relationships and mutual respect for one another’s cultures while also boosting social and cultural exchanges between member nations. - Technology and innovation: Strengthening international collaboration in the fields of science, technology and innovation to promote knowledge exchange, capacity building and technological advancements among member nations. - Sustainable development: Promoting environmentally friendly and sustainable development methods while working together to achieve sustainable development goals.  14 - Peace and security: Promoting peace, stability and security locally and internationally while addressing shared security issues and risks, such as terrorism. - South–South cooperation: Strengthening cooperation and collaboration among developing countries, sharing best practices, and supporting initiatives that contribute to the overall development of the Global South. - Promote growth: to increase, deepen, and broaden cooperation among its member countries in order to promote growth that is sustainable, fair, and good for everyone. All of the members’ growth and progress are taken into account. - Build relations: to ensure that the economic strengths of each country are used to build relations and eliminate competition where possible. BRICS is becoming a new and promising diplomatic and political group with goals that go far beyond the original goal. Initially, it was only expected to solve global financial problems and change the way institutions worked. Key aspects of BRICS The key aspects of BRICS encompass various dimensions that characterize the cooperation and influence of the group. 1. Economic powerhouses The BRICS countries account for a considerable share of the global population, landmass and gross domestic product. They are significant rising economies with enormous potential for economic expansion. 2. Cooperation and dialogue The BRICS group provides a forum for ongoing communication and collaboration among its members. It offers a platform for decision-makers to have conversations, share ideas and collaborate on projects. 3. Economic cooperation The BRICS initiative seeks to increase trade and economic cooperation among its member nations. Initiatives, such as the BRICS Business Council, are used to attract investment, lower trade barriers and develop economic ties.  15 4. Development finance The BRICS have formed financial institutions, including the CRA (Contingent Reserve Arrangement) and the NDB (The New Development Bank). These organizations fund infrastructure projects, finance international development and maintain the financial systems of their member nations. 5. Political influence The BRICS countries aim to have a political impact on the world arena. Member nations work together on global concerns, push for reform in institutions of global governance, and work to ensure that rising economies are more represented. 6. Global governance reform The BRICS countries support a system of global governance that is more inclusive and egalitarian. It aims to improve global financial institutions and advance a multipolar world order that more accurately represents the objectives and ambitions of developing nations. 7. Closure of Goldman Sachs’ BRICS investment fund The Goldman Sachs BRICS Fund was an investment fund launched by Goldman Sachs in 2006. It was designed to provide investors with exposure to the economies of the BRICS countries by investing in companies listed in these markets. The fund aimed to capitalize on the rapid economic growth and development potential of the BRICS nations, which were identified as emerging economic powerhouses. It allowed investors to diversify their portfolios and participate in the growth of these economies. However, in 2015, Goldman Sachs decided to discontinue its BRIC fund due to an assessment that it would not experience significant asset growth in the foreseeable future. The economic challenges faced by the BRICS countries after the global financial crisis, such as Brazil’s economic slump, Russia’s struggles with low oil prices and sanctions, and China’s slowing growth, have led to a reassessment of the investment prospects in these markets. Despite the fading allure of the BRICS era, Goldman Sachs emphasizes that it remains committed to exploring opportunities in these emerging markets.  16 WTO INTRODUCTION: - The General Agreement on Tariffs and Trade (GATT) was regulating world trade since 1947. - It then was transformed into World Trade Organisation (WTO), on 1st January 1995, in its Uruguay Round (GATT 8th Round), talks which lasted for eight years. - GATT was mainly concentrating on trade in manufactures whereas WTO deals with all major aspects of international trade. OBJECTIVES: - The overall objective of the WTO is to help its members use trade as a means to raise living standards, create jobs and improve people’s lives. - The WTO operates the global system of trade rules and helps developing countries build their trade capacity. - It also provides a forum for its members to negotiate trade agreements and to resolve the trade problems they face with each other. The important objectives of the WTO include: 1. Improving people’s lives - The fundamental goal of the WTO is to improve the welfare of people around the world. - The WTO’s founding Marrakesh agreement recognizes that trade should be conducted with a view to raising standards of living, ensuring full employment, increasing real income and expanding global trade in goods and services while allowing for the optimal use of the world’s resources. 2. Negotiating trade rules - The WTO was born out of five decades of negotiations aimed at progressively reducing obstacles to trade. - Where countries have faced trade barriers and wanted them lowered, the negotiations have helped to open markets for trade. - Conversely, in some circumstances, WTO rules support maintaining trade barriers – for example, to protect consumers or the environment.  17 3. Overseeing WTO agreements - At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations. - Essentially contracts, these documents provide the rules for international commerce and bind governments to keep their trade policies within agreed limits. - Their goal is to help producers of goods and services, exporters and importers conduct their business, with a view to raising standards of living, while allowing governments to meet social and environmental objectives. 4. Maintaining open trade - The system’s overriding purpose is to help trade flow as freely as possible, provided there are no undesirable side effects, because this stimulates economic growth and employment and supports the integration of developing countries into the international trading system. - Its rules have to be transparent and predictable, to ensure that individuals, companies and governments know what the trade rules are around the world, and to assure them that there will be no sudden changes of policy. 5. Settling disputes - Trade relations often involve conflicting interests. - Agreements, including those painstakingly negotiated in the WTO, often need interpreting. - The most harmonious way to settle these differences is through a neutral procedure based on an agreed legal foundation. - That is the purpose behind the dispute settlement process written into the WTO agreements. AIMS OF WTO: 1. Non-discrimination A country should not discriminate between its trading partners, and it should not discriminate between its own and foreign products, services or nationals. 2. Opening trade Lowering trade barriers is an obvious way to encourage trade; these barriers include customs duties (or tariffs) and measures such as import bans or quotas, that restrict quantities selectively.  18 3. Predictability and transparency Foreign companies, investors and governments should be confident that trade barriers will not be raised arbitrarily. With stability and predictability, investment is encouraged, jobs are created and consumers can fully enjoy the benefits of competition – such as increased choice and lower prices. 4. Fair competition Discouraging “unfair” practices, such as export subsidies and dumping products at below normal value to gain market share; the issues are complex, and the rules try to establish what is fair or unfair, and how governments can respond, in particular by charging additional import duties calculated to compensate for damage caused by unfair trade. 5. Support for less developed countries Over three-quarters of WTO members are developing economies or in transition to market economies. The WTO agreements give them transition periods to adjust to WTO provisions and, in the case of the Trade Facilitation Agreement, provide for practical support for implementation of the Agreement. 6. Protection of the environment The WTO agreements permit members to take measures to protect not only public, animal and plant health but also the environment. However, these measures must be applied in the same way to both national and foreign businesses: members must not use environmental protection measures as a means of introducing discriminatory trade barriers. 7. Inclusion The WTO seeks to build a more inclusive trading system that will allow more women and small businesses to participate in trade and to reap the economic benefits of global trading.  19 Commercial Trade Policy A commercial policy or trade policy is a governmental policy governing trade with other countries. This covers tariffs, trade subsidies, import quotas, voluntary export restraints, and restrictions on the establishment of foreign-owned businesses, regulation of trade in service, and other barriers to international trade. Countries that are part of an economic union often have a single commercial policy that determines how member countries can interact with non-member countries. For example, member countries of the European Union have a common commercial policy. In modern times, the commercial policy of every country is generally based on the encouragement of exports and the discouragement of imports. The exports are encouraged by giving preferential freight rates on exports, subsidies, etc. Imports are hindered by erecting the tariffs walls, exchange controls, quota system, buy at the home campaign, etc. Features/ Objectives of Commercial Policies 1. To improve & extend international aid/co-operation through the exchange of goods & making a contract with different countries. 2. To create an international market for our local products to increase export. 3. To participate in the international trade fair to introduce our local products through govt or private initiatives. 4. To take proper steps for promoting the export of non-traditional items. 5. To launch publicity campaigns for creating a new market for traditional products. 6. To create a favorable environment for foreign trade/exchange. 7. To provide export facilities to exporters. 8. To reduce the import of luxurious goods. 9. To import raw materials, machinery, parts & accessories 10. To promote the establishment of export-oriented industries.  20 11. To meet the need for essential goods. 12. To encourage govt. & private sector industry for foreign trade. 13. To stabilize the foreign exchange rate. 14. To promote the export of man-power, to increase the earning of foreign currencies. 15. Encourage domestic and foreign investment in overall industrial development. 16. Encourage especially the development of small & cottage industries. 17. Encourage the development of agro-based and agro-supportive industries. 18. Stimulate the development of industries based on indigenous raw materials and indigenous technology 19. Motivate investment in the intermediate and basic industries 20. Create possible opportunities for revitalizing and rehabilitating controlling the quality of products; 21. Take appropriate measures for preventing environmental pollution and maintaining the ecological balance. 22. Control the internal/external trade and other commercial activities of the economy 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.  21 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. 3. 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. 4. Export Subsidies - An export subsidy is a payment to a firm or individual that ships a good abroad. 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.  22 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 those 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.