What Is Trade Policy?

Ann Logue is the author of "Day Trading for Dummies," "Hedge Funds for Dummies," and "Socially Responsible Investing for Dummies." She has over two decades of experience covering investing, business, and economics for a range of outlets, including Nordea Markets, Gerstein Fisher Asset Management, and The Balance.

Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest.

Trade policy is the set of agreements, regulations, and practices by a government that affect trade with foreign countries.

Key Takeaways

• Trade policy is a government’s stance on international trade, or a combination of laws and practices that affects imports and exports.
• Trade policies can include regulations, tariffs, and quotas.
• Some nations want to encourage more trade and pursue open trade policies with certain other nations, while others want to restrict trade and set policies that protect local industries from competition.
• Trade policies can have a number of benefits, including economic growth or lower costs of goods.

Definition and Example of Trade Policy

Trade policy refers to a nation’s formal set of practices, laws, regulations, and agreements that govern international trade practices, or imports and exports to foreign countries. Trade policies aim to strengthen the domestic economy. For example, U.S. trade policy aims to strengthen the competitiveness of U.S. industries.

• Alternate names: commercial policy, international trade policy

Note

Some trade policies are codified into law; others are part of the practices that a nation’s bureaucrats and diplomats follow. They are intended to reflect a national philosophy about international trade.

Trade policies can be aimed at a number of issues related to importing and exporting, such as foreign retaliation, jobs, or tariffs; or they may focus on protecting intellectual property, setting standards that promote collaboration and reduce trade barriers, or establishing trade agreements and trade laws.

For example, in the U.S., the Export Trading Company Act (ETCA) enables U.S. firms to work together to reduce export costs, increase exporting efficiency, and better compete in the global market, among other initiatives. It provides antitrust protection and other benefits to U.S. firms that collaborate on exporting activities. As a result, these firms get the advantage of, for example, reduced shipping costs, better negotiating power, and the ability to fill larger export orders.

Note

Other trade policies may emphasize finding export markets for goods produced in the country, encouraging travel and tourism from other countries, or limiting and heavily taxing imports to protect local producers.

How a Trade Policy Works

Trade policy is established when a government sets standards and laws regarding international trade.

In some cases, a nation will pursue a more aggressive protectionist policy designed to favor its domestic industries over international competitors. Protectionism policies can include setting quotas on the number of imported goods allowed in a country, imposing tariffs on imported goods, and offering subsidies for domestic producers.

On the other hand, a nation may want to increase international investment and pursue a free trade policy (sometimes called an “open trade policy”) that reduces the barriers to doing business. Many countries establish trade policies between the two extremes, adjusting them as the global economy and domestic political pressures change.

Note

The U.S. government’s International Trade Administration (ITA) provides information on the trade policies of nations around the world, including specific information for different industries.

Examples of Trade Agreements

A trade agreement occurs when two or more countries agree to the terms of trade, which can include the amount of tariffs and quotas, among other terms. Here are some examples of foreign trade agreements:

• The U.S.-Mexico-Canada Agreement (USMCA): The USMCA, which replaced the North American Free Trade Agreement (NAFTA) in 2020, aims to eliminate trade barriers between the U.S., Mexico, and Canada while including some restrictions on importing and exporting.
• The Dominican Republic-Central America Free Trade Agreement (CAFTA-DR): The CAFTA-DR is a trade agreement between the U.S. and Central America countries El Salvador, Costa Rica, Honduras, and Guatemala, as well as the Dominican Republic. It aims to promote stronger investment ties and stability.

Benefits of Trade

Trade expansion can provide a number of economic benefits for a nation. It can fuel economic growth, improve the job market, lower the costs of goods, and raise living standards. Trade expansion results in a wider variety of product options available for consumers and businesses.

Trade policies that reduce tariffs, quotas, and other barriers on imports generally lead to lower prices and more options for consumers. However, manufacturers that sell goods to domestic customers often prefer a more import restrictive policy.