Bilateral Trade Definition and Pros & Cons of Agreements

What Is Bilateral Trade?

Bilateral trade is the exchange of goods between two nations promoting trade and investment. The two countries will reduce or eliminate tariffs, import quotas, export restraints, and other trade barriers to encourage trade and investment.

In the United States, the Office of Bilateral Trade Affairs minimizes trade deficits through negotiating free trade agreements with new countries, supporting and improving existing trade agreements, promoting economic development abroad, and other actions. 

Understanding Bilateral Trade

The goals of bilateral trade agreements are to expand access between two countries’ markets and increase their economic growth. Standardized business operations in five general areas prevent one country from stealing another’s innovative products, dumping goods at a small cost, or using unfair subsidies. Bilateral trade agreements standardize regulations, labor standards, and environmental protections. 

The United States has signed bilateral trade agreements with 20 countries, some of which include Israel, Jordan, Australia, Chile, Singapore, Bahrain, Morocco, Oman, Peru, Panama, and Colombia.

The Dominican Republic-Central America FTR (CAFTA-DR) is a free trade agreement signed between the United States and smaller economies of Central America, as well as the Dominican Republic. The Central American countries are El Salvador, Guatemala, Costa Rica, Nicaragua, and Honduras. NAFTA replaced the bilateral agreements with Canada and Mexico in 1994. The U.S. renegotiated NAFTA under the United States-Mexico-Canada Agreement, which went into effect in 2020.

Advantages and Disadvantages of Bilateral Trade

Compared to multilateral trade agreements, bilateral trade agreements are negotiated more easily, because only two nations are party to the agreement. Bilateral trade agreements initiate and reap trade benefits faster than multilateral agreements.

When negotiations for a multilateral trade agreement are unsuccessful, many nations will negotiate bilateral treaties instead. However, new agreements often result in competing agreements between other countries, eliminating the advantages the Free Trade Agreement (FTA) confers between the original two nations.

Bilateral trade agreements also expand the market for a country's goods. The United States vigorously pursued free trade agreements with a number of countries under the Bush administration during the early 2000s.

In addition to creating a market for U.S. goods, the expansion helped spread the mantra of trade liberalization and encouraged open borders for trade. However, bilateral trade agreements can skew a country's markets when large multinational corporations, which have significant capital and resources to operate at scale, enter a market dominated by smaller players. As a result, the latter might need to close shop when they are competed out of existence.

Examples of Bilateral Trade

In October 2014, the United States and Brazil settled a longstanding cotton dispute in the World Trade Organization (WTO). Brazil terminated the case, relinquishing its rights to countermeasures against U.S. trade or further proceedings in the dispute.

Brazil also agreed to not bring new WTO actions against U.S. cotton support programs while the current U.S. Farm Bill was in force, or against agricultural export credit guarantees under the GSM-102 program. Because of the agreement, American businesses were no longer subject to countermeasures such as increased tariffs totaling hundreds of millions of dollars annually.

In March 2016, the U.S. government and the government of Peru reached an agreement removing barriers for U.S. beef exports to Peru that had been in effect since 2003.

The agreement opened one of the fastest-growing markets in Latin America. In 2015, the United States exported $25.4 million in beef and beef products to Peru. Removal of Peru’s certification requirements, known as the export verification program, assured American ranchers expanded market access.

The agreement reflected the U.S. negligible risk classification for bovine spongiform encephalopathy (BSE) by the World Organization for Animal Health (OIE).

The United States and Peru agreed to amendments in certification statements making beef and beef products from federally inspected U.S. establishments eligible for export to Peru, rather than just beef and beef products from establishments participating in the USDA Agricultural Marketing Service (AMS) Export Verification (EV) programs under previous certification requirements.