Terms of trade measures the ratio of a country's export prices to its import prices, and it captures something genuinely different from the raw dollar value of exports or imports alone: whether a given quantity of that country's exports can now buy more or fewer imports than before. A rise in terms of trade means export prices have grown faster than import prices, so the same quantity of exports now purchases more imports than it used to. Trade policy is the deliberate set of tools, tariffs, quotas, negotiated agreements, governments actually use to try to shift that ratio, and the broader terms of exchange, in their own favour.
A country's terms of trade can shift even if the volume it trades stays exactly the same
Because terms of trade tracks a price ratio rather than trade volume, a country's terms of trade can genuinely improve or worsen even while it exports and imports exactly the same physical quantities of goods as before, purely because relative prices shifted. A country that mainly exports one commodity, oil, say, sees its terms of trade swing directly with that commodity's global price, gaining real purchasing power over imports when the price rises and losing it when the price falls, entirely independent of how much oil it actually produces and sells.
Trade policy tools are deliberate attempts to move that price relationship in a country's favour
A tariff raises the price of imported goods inside the country imposing it, and a quota limits the physical quantity of imports allowed in, and both tools are sometimes used, alongside negotiated trade agreements, specifically to try to shift a country's effective terms of trade or protect specific domestic industries from cheaper foreign competition. Because these tools directly affect prices and available quantities, they inevitably create winners and losers within the country using them, protected domestic producers typically gain, while domestic consumers facing higher prices typically lose, which is exactly why trade policy remains such a genuinely contested area of economic policymaking rather than a straightforward, universally beneficial lever to pull.
What we're still unsure about
That terms of trade correctly captures a country's real purchasing power from a given volume of exports, and that trade policy tools can shift that ratio, are well established, extensively confirmed principles of international economics. What's more genuinely a matter of ongoing policy debate is exactly how much net benefit a specific trade policy intervention actually delivers to a country as a whole once its full costs, higher prices for domestic consumers, potential retaliation from trading partners, are weighed against its benefits to protected industries, and economists continue to reach genuinely different conclusions about specific real-world tariffs and trade agreements, rather than there being one settled formula for when trade policy intervention pays off.
This sits inside Terms of Trade & Trade Policy, one of seven topics in Trade, one of five domains in Economics, one of seventeen subjects the app can quiz you on.