Commercial Policy

The orthodox theory of international trade has not provided a very fertile ground for the examination of the effects of commercial policy measures upon the composition of international trade flows.1 The theory’s emphasis on two-good models meant that variation in tariff structure could not be effectively analysed and the complete reliance upon generic factors of production excluded the concept of tariffs generating potentially permanent or short-run quasi-rents to industry-specific factors of production. Orthodoxy has sought to combine tariffs with its own artificial assumptions rather than to evolve to provide a frame of reference in which questions of commercial-policy effects can be fruitfully analysed. Orthodox theory has two main tenets for the implications of tariffs and non-tariff barriers (NTBs). A commercial policy measure will lead to the substitution of domestically produced goods for competing imports (if foreign supply is perfectly price-inelastic, a quota must be used) and, through this substitution, will bring about an ‘inward’ shift in the offer curve of the nation imposing the commercial policy measure. In this way, the country’s net barter terms of trade will be improved as long as the trading partner’s offer curve is not perfectly elastic.