Regulations and agreements governing international trade and commerce.
Trade policy encompasses the rules, regulations, and agreements that govern international trade and commerce. It includes measures such as tariffs, quotas, subsidies, and trade agreements that countries use to regulate their international economic interactions.
Important elements of trade policy include tariffs and non-tariff barriers, free trade agreements and customs unions, export promotion and import substitution strategies, trade remedies (e.g., anti-dumping measures), and intellectual property rights in international trade.
Trade policy aims to balance various goals, including promoting economic growth and efficiency through specialization and comparative advantage, protecting domestic industries and jobs, ensuring fair competition in international markets, and advancing geopolitical and diplomatic interests.
The effects of trade policy can be far-reaching, impacting not only economic outcomes but also social and environmental conditions both domestically and internationally.
Governments use various instruments to implement trade policy, including tariffs, quotas, subsidies, regulations, and bilateral or multilateral trade agreements.
Based on theories of comparative advantage, international economics, and strategic trade policy. It draws on works by classical economists like David Ricardo and modern trade theorists such as Paul Krugman.
If trade barriers are reduced gradually and accompanied by robust trade adjustment assistance programs, then domestic industries and workers have time to adapt, minimizing short-term economic disruptions. For example, the U.S. Trade Adjustment Assistance (TAA) program, which provides job training and relocation allowances to workers displaced by trade, has helped over 2 million workers since 1974, with 76% of participants finding employment within six months of completing the program.
If a country invests in human capital alongside trade liberalization, then it can better capitalize on new economic opportunities and mitigate negative impacts on displaced workers. South Korea's heavy investment in education and skills development, alongside its export-oriented growth strategy, enabled it to rapidly move up the value chain in manufacturing and technology sectors, with its tertiary education enrollment rate increasing from 16% in 1990 to 94% in 2019.
If a country diversifies its trade relationships and export markets, then it reduces dependency on any single market and increases economic resilience. Vietnam's strategy of diversifying its trade partners, including signing free trade agreements with the EU, UK, and CPTPP countries, helped it maintain export growth even amidst U.S.-China trade tensions and the COVID-19 pandemic, with exports growing by 7% in 2020 while global trade contracted.
If a country specializes in industries where it has a comparative advantage while strategically supporting emerging high-potential sectors, then it can maximize the benefits of international trade while fostering future competitiveness. Germany's long-term support for its manufacturing sector through initiatives like the Fraunhofer Institutes, which bridge basic research and industry needs, has helped maintain its global competitiveness in high-value manufacturing exports.
If a country implements robust intellectual property protection while also facilitating technology transfer and local innovation, then it can attract foreign investment and technology while building domestic capabilities. Israel's combination of strong IP laws and government support for R&D and technology transfer (e.g., through the Yozma program) has helped it become a global innovation hub, with the highest number of startups per capita globally.