What Are Bilateral Trade Agreements?

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.

A bilateral trade agreement confers favored trading status between two nations. By giving them access to each other's markets, it increases trade and economic growth. The terms of the agreement standardize business operations and level the playing field.

Each agreement covers five areas. First, it eliminates tariffs and other trade taxes. This gives companies within both countries a price advantage. It works best when each country specializes in different industries.

Second, countries agree not to dump products at a cheap cost. Their companies might do that to gain unfair market share. They drop prices below what something would sell for at home or even its cost to produce. They raise prices once they've destroyed competitors.

Third, the governments refrain from using unfair subsidies. Many countries subsidize strategic industries, such as energy and agriculture. This lowers the costs for those producers. It gives them an unfair advantage when exporting to another nation.

Fourth, the agreement standardizes regulations, labor standards, and environmental protections. Fewer regulations act like a subsidy. It gives the country's exporters a competitive advantage over its foreign competitors.

Fifth, they agree to not steal the other's innovative products.

Advantages

Bilateral agreements increase trade between the two countries. They open markets to successful industries. As companies benefit, they add jobs.

The country's consumers also benefit from lower costs. They can get exotic fruits and vegetables that can become too expensive without the agreement.

They are easier to negotiate than multilateral trade agreements, since they only involve two countries. This means they can go into effect faster, reaping trade benefits more quickly. If negotiations for a multilateral trade agreement fail, many of the nations will negotiate a series of bilateral agreements instead.

Disadvantages

Any trade agreement will cause less-successful companies to go out of business. They can't compete with a more powerful industry in the foreign country. When protective tariffs are removed, they lose their price advantage. As they go out of business, workers lose jobs.

Bilateral agreements can often trigger competing bilateral agreements among other countries. This can whittle away the advantages that the free trade agreement confers between the original two nations.

Examples

On July 17, 2018, the EU and Japan signed the world's largest bilateral agreement. It reduces or ends tariffs on most of the $152 billion in goods traded. It came into force in 2019 after ratification.

The United States has bilateral trade agreements in force with 12 other countries. Here's the list, the year it went into effect, and its impact:

1. Australia (January 1, 2005): This agreement helped boost U.S. goods exports by 80%.
2. Bahrain (January 11, 2006): All tariffs were removed. The United States increased exports in agriculture, financial services, telecommunications, and other services.
3. Chile (January 1, 2004): It eliminated tariffs, provided protection for intellectual property, and required effective labor and environmental enforcement, among other things.
4. Colombia (October 21, 2011): Tariff reductions expanded exports of U.S. goods by at least $1.1 billion. These increased U.S. GDP by $2.5 billion.
5. Israel (1985): Reduced trade barriers and promoted regulatory transparency.
6. Jordan (December 17, 2001): In addition to reducing trade barriers, the agreement specifically removed barriers to U.S. meat and poultry exports. It also allowed increased imports of agricultural products from Jordan.
7. Korea (March 15, 2012): Almost 80% of tariffs have been removed, boosting exports by $10 billion. On March 26, 2018, the Trump administration exempted South Korea from a 25% steel tariff. The U.S. ally is the third-largest foreign supplier of steel. In return, South Korea amended the 2012 agreement. The United States will keep its 25% tariff on pickup trucks for an additional 20 years. Under the original agreement, the tariffs would have expired in 2021. South Korea agreed to double its import quota for U.S. cars.
8. Morocco (January 5, 2006): The goods trade surplus rose up to $1.8 billion in 2011, up from just $79 million in 2005.
9. Oman (January 1, 2009): Part of the George W. Bush administration's effort to open up a larger free-trade area in the Middle East.
10. Panama (October 21, 2011): Trade representatives are negotiating labor and tax policies. The agreement will remove a 7% average tariff, with some tariffs as high as 81% and others as high as 260%. The Panama Canal’s impact on the U.S. economy is tremendous. This strategic waterway keeps the costs of imports down. It also provides better access to markets in China and other Asian countries.
11. Peru (February 1, 2009): The FTA eliminated all tariffs and provided legal protections for investors and intellectual property. It was the first to add protection for labor and the environment.
12. Singapore (January 1, 2004): This deal was signed in 2003 and took effect in 2004.

Frequently Asked Questions (FAQs)

What is the difference between a bilateral and a multilateral trade agreement?

This difference comes down to the number of countries involved. Bilateral agreements involve two countries, while multilateral agreements involve three or more.

What is a bilateral trade deficit?

A bilateral trade deficit occurs when the value of one country's imports from another country exceeds the value of its exports to that same country. There is significant debate among economists about whether a trade deficit is a cause for concern.