Trade Policy

Foreign Trade Policy

Foreign trade policy as it relates to the international market should follow any agreed-upon principles decided by multiple nations that are part of international organizations like the World Trade Organization (WTO) and the International Monetary Fund (IMF). These organizations were created to support international trade in a fair and sustainable way that benefits all nations involved.

While trade policy is usually set by a nation's government, if the policy is too drastic or is devastating to another nation's economy, the WTO will step in as a mediator to keep the peace and come up with a solution. An example of this type of situation is when the Trump Administration placed around $200 billion worth of tariffs on Chinese imports during the presidency.¹ The WTO stated that the tariffs were in violation of global trade body rules because they were only against China and it could not be proven that the domestic industry benefited from the tariffs.¹

Foreign trade policies are meant to reduce barriers between trading nations, produce non-discriminatory trading practices, and make the trading process more transparent through the use of international organizations like the WTO.

Types of Trade Policy

In the US, we see several types of trade policies. There are trade policies that affect which goods and services can be imported and how much. There are others that affect exports, currency exchange rates, or tourism. The job of trade policies though is to regulate imports and exports to the benefit of the domestic economy.

Trade Policy: Imports

There are several reasons why a government would want to establish trade policies for importing goods and services. First, under free trade, imports are seen to benefit the economy because they increase the selection of goods available to the consumers, lower prices, improve economic efficiency, and create global price stability.

A trade policy that supports imports could be a free trade agreement between two or more nations that allows for goods from one country to be imported into the other without restrictions like tariffs or quotas. This would keep domestic prices low and stable by increasing the supply available. A trade policy might also restrict imports. For example, if the US steel industry were to suffer from low prices due to foreign steel being more affordable, the government might step in to help them out. It could set a quota limiting the total amount of steel that can be imported or impose a tariff that charges the importer a percentage of the value of the steel.

Trade Policy: Exports

Exports benefit the domestic economy first and foremost because they bring money and foreign currency into the country. Exporting also expands the consumer base that is available to producers, which is important for increasing profits. A trade policy that benefits exports could be a deal between two countries where Country A will only sell its wheat to Country B as long as Country B agrees to offer border and transport protection from neighboring enemy countries.

A situation where the government may employ a more protectionist trade policy on exports is if there is a natural resource that is being depleted or the domestic population is not able to consume the good because it is all being exported. When foreign prices for a good, let's say corn, are more profitable than what domestic consumers are able to pay, producers will want to export their corn to raise their profit margins. This causes a shortage in the domestic market for corn. The government can restrict the amount of corn that is exported to benefit the domestic consumer.

Instruments of Trade Policy

Most of the instruments of trade policy will sound familiar. They are tools that the government uses to implement the trade policy it has decided to use based on its economy's needs. Let's take a look at the major instrument of trade policy.

Table 1 goes over the various types of trade instruments that governments use to exact their trade policies. One instrument is favored due to its relative simplicity, the benefits it provides the government in the form of revenue, and that it is a tried and true method of trade. The oldest instrument of trade is a tariff. They have also been used as a form of discipline for nations that the domestic country feels have wronged them through unfair trading practices, political slights, human rights abuses, etc. However, tariffs do cause local prices to increase and may also cause retaliation from exporting countries that rely on the trading relationship with the importing country that set the tariff.

Importance of Trade Policy

So, what is the importance of trade policy? Well, trade in general is vital to the economic well-being of a nation. It provides the citizens of a nation with a greater selection of goods, opens the country up to a larger consumer base where they can sell their goods, keeps prices more stable and insulates the country from a disaster such as a failed crop, and brings in revenue that the country would not be able to generate without trade. Solid trade policies are what keep all of this trade running smoothly and efficiently. Trade policies also support the domestic markets by influencing prices through the regulation of imports and exports. Trade policies that lean towards free trade are the preferred route taken by economists because they theorize that the economy will always strive toward equilibrium and efficiency. Protectionist policies are frowned upon since they disrupt what free trade is trying to achieve because they interfere with the natural flow of the global economy.