1
10 Foreign Trade of India
Introduction :
Before 1947, the pattern of India's foreign
trade was typically colonial. India was a
supplier of raw materials to the industrialized
nations, particularly England and importer of
manufactured goods. This dependence on foreign
trade did not permit industrialization at home.
As a result the indigenous handicrafts suffered
a severe blow. However, many underdeveloped
countries that won independence in the post
World War II period, viewed foreign trade as an
investment.
Meaning of Internal Trade :
Buying and selling of goods and services
within the boundaries of a nation are referred
to as ‘Internal Trade’ or ‘Domestic Trade’ or
‘Home Trade’. For example, if goods produced
in Maharashtra are sold to states like West
Bengal, Uttar Pradesh, Tamil Nadu etc, then it
is known as internal trade.
Fig. 10.1
Meaning of Foreign Trade :
Foreign Trade is trade between the different
countries of the world. It is called as International
Trade or External Trade.
Definition :
According to Wasserman and Hultman,
“International Trade consists of transaction
between residents of different countries”.
93
Types of foreign trade :
Foreign trade is divided into the following
three types.
1) Import Trade, 2) Export Trade, 3) Entrepot Trade
1) Import Trade : Import trade refers to
purchase of goods and services by one
country from another country or inflow of
goods and services from foreign country
to home country. For example, India
imports petroleum from Iraq, Kuwait, Saudi
Arabia, etc.
2) Export Trade : Export trade refers to the
sale of goods by one country to another
country or outflow of goods from one
country to foreign country. For example,
India exports tea, rice, jute to China, Hong
Kong, Singapore etc.
3) Entrepot Trade : Entrepot trade refers to
purchase of goods and services from one
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,
because it plays an important role for economic
development. In developed countries it represents
a significant share of Gross Domestic Product.
Role of foreign trade can be justitied on the
basis of the following points :
1) To earn foreign exchange : Foreign trade
provides foreign exchange which can be
used for very productive purposes. Foreign
trade is a remarkable factor in expanding
 2
the market and encouraging the production
of goods.
2) Encourages Investment : Foreign trade
creates an opportunity for the producers
to reach beyond the domestic markets. It
encourages them to produce more goods
for export. This leads to an increase in total
investment in an economy.
3) Division of labour and specialization :
Foreign trade leads to division of labour
and specialization at world level. Some
countries have abundant natural resources,
they should export raw material and import
finished goods from countries which are
advanced in skilled manpower. Thus,
foreign trade gives benefits to all countries
thereby leading to division of labour and
specialization.
4) Optimum allocation and utilization of
resources : Due to specialization, resources
are channelized for the production of only
those goods which would give highest
returns. Thus, there is rational allocation
and specialization of resources at the
international level due to foreign trade.
5) Stability in price level : Foreign trade helps
to keep the demand and supply position
stable which in turn stabilizes the price
level in the economy.
6) Availability of multiple choices : Foreign
trade provides multiple choices of imported
commodities. As foreign trade is highly
competitive it also ensures a good quality
and standard products. This raises the
standard of living of people.
7) Brings reputation and helps earn
goodwill : Exporting country can earn
reputation and goodwill in the international
market. For example, countries like Japan,
Germany, Switzerland etc. have earned a
lot of goodwill and reputation in foreign
market for their qualitative production of
electronic goods.
94
Try this :
Name the goods exported to and imported
from India to China and Japan in recent years
by India.
Composition and Direction of India’s foreign
trade :
Over the last 70 years, India’s foreign trade
has undergone a complete change in terms of
composition and direction. Main feature of
composition of India’s foreign trade are as
follows :
1) Increasing share of Gross National
Income : In 1990-91, share of India’s foreign
trade (import-export) in gross national
income was 17.55%. It increased to 25%
during 2006-07 and to 48.8% during 2016-17
2) Increase in volume and value of trade :
Since 1990-91, the volume and value of
India’s foreign trade has gone up. India
now exports and imports goods which are
several times more in value and volume.
3) Change in the composition of exports :
Since Independence, the composition of
export trade of India has undergone a
change. Prior to Independence, India used
to export primary products like jute, cotton,
tea, oil-seeds, leather, foodgrains, cashew
nuts and mineral products. With the passage
of time, manufactured items like readymade
garments, gems and jewellery, electronic
goods, especially computer hardware and
software occupy a prime place in India’s
exports.
4) Change in the composition of imports :
Prior to independence, India used to import
consumer goods like medicines, cloth,
motor vehicles, electrical goods etc. A
part from petrol and petroleum, India is
now importing mainly capital goods like
high-tech machinery chemicals, fertilizers,
steel etc.
 3
5) Oceanic trade : Most of India’s trade
is by sea. India has trade relations with
its neighbouring countries like Nepal,
Afghanistan, Myanmar, Sri Lanka etc. The
share of India’s oceanic trade is around 68%.
6) Development of new ports : For its foreign
trade, India depended mostly on Mumbai,
Kolkata and Chennai ports. Therefore,
these ports were overburdened. Recently,
India has developed new ports at Kandla,
Cochin, Vishakhapatnam, Nhava Sheva etc.
to reduce the burden on the exsiting ports.
Find out :
Recent share of India’s foreign trade in
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.