Bilateral and Multilateral Trade Agreements

Trade Agreements

In the field of international business, bilateral and multilateral trade agreements play an important role in fostering economic cooperation and facilitating global commerce. These agreements involve two or more countries and aim to establish mutually beneficial terms and conditions for the exchange of goods, services, and investments among each other. 

The traditional approach to trade regulation involved bilateral treaties between two nations. For centuries nations adhered to the principles of mercantilism, which entailed the implementation of high tariffs and many restrictions on international trade. In the 19 century especially in the United Kingdom,  the belief in free trade emerged as a paramount principle. Since then, this belief become the prevailing ideology among Western nations. In the years since the Second World War, controversial multilateral treaties like the General Agreement on Tariffs and Trade (GATT) and the World Trade Organisation have attempted to create a globally regulated trade structure. These trade agreements have often resulted in protests and discontent with claims of unfair trade that are not mutually beneficial.

Free trade

The economically dominant nations typically offer the strongest support for free trade, yet they frequently practice selective protectionism for strategically significant industries. For example, the United States and Europe impose protective tariffs on agriculture. Both the Netherlands and the United Kingdom were strong advocates of free trade during their periods of economic dominance. Today the United States, Australia, United Kingdom, and Japan are their greatest proponents. However, numerous countries, including China, India, and Russia, are progressively becoming advocates of free trade as they become more economically powerful themselves. With the decline in tariff levels, there is an increasing willingness to negotiate non-tariff measures such as foreign direct investment, procurement and trade facilitation. The latter examines the transaction cost associated with meeting trade and customs procedures.

The World Trade Organization manages the regulation of international trade on a global scale. Additionally, various other regional arrangements, such as MERCOSUR in South America, the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico, and the European Union among 27 independent states, also facilitate this process.

Trade Agreements

Bilateral Trade Agreement

Two nations establish bilateral trade agreements between each other. They are fairly easy to negotiate, and give those two nations favoured trading status between each other.

A bilateral trade law/ regulation usually includes a broad range of provisions regulating the conditions of trade between the contracting parties. These include stipulations governing customs duties and other levies on commercial and fiscal regulations, imports and exports, transit arrangements for merchandise, customs valuation bases, quotas, administrative formalities and various legal provisions. Most bilateral trade laws, either explicitly or implicitly, provide for reciprocity, most-favoured-nation treatment, and national treatment of non-tariff restrictions on trade.

The definition of a bilateral trade agreement involves an economic contract between two nation-states. Bilateral agreements play a role in addressing and improving economic trade imbalances between nations. To restore economic stability between the two parties, specific goods or services often see reductions, lifts, or restrictions on tariffs, taxes, and quotas.

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Some of the world’s widely known multinational companies and agreements started as bilateral trade agreements. The North American Free Trade Agreement was first established as a pact between Canada and the US in 1988. Subsequently, Mexico became part of the agreement in 1992, evolving it from a bilateral accord between the US and Mexico. NAFTA mainly affects agricultural trade between the countries. According to the United States Department of Agriculture, NAFTA has other provisions, such as implementing standardised phytosanitary and sanitary measures and export subsidies.

Bilateral agreements often serve as the basis for trade between countries that impose restrictive conditions, including:

  1. Centrally Controlled Economies
  2. Lack of Hard Currency
  3. Non-Convertible Currencies

1) Centrally Controlled Economies

In economies with no or very few official free market exchanges, a central planning bureaucracy determines and controls all official flows of goods and capital. This is evident in countries such as the Democratic Republic of Korea and Cuba.

2) Lack of Hard Currency

A national currency that is not accepted as a unit of payment by international suppliers (as in most developing countries of Africa, Asia, and Latin America but also many countries of the former Soviet Union). For example, a bilateral barter clearing agreement has been signed between the governments of Ukraine and Iran in which Iranian oil and gas have been exchanged for weapons, metal scrap, refined products, chemicals, and machinery.

3) Non-Convertible Currencies

Currencies that cannot be freely exchanged against each other [as in the Commonwealth of Independent States (CIS) a group of countries including Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgistan, Moldova, Ukraine, Russia, Turkmenistan, Tajikistan, and Uzbekistan- formed in 1991 after the dissolution of the Soviet Union.

There is a tendency for industrialised nations to sign bilateral agreements among themselves. One such agreement is the Free Trade Area Treaty between Israel and the U.S., which was signed in April 1985, providing for the eventual elimination of virtually all barriers to trade between the two countries. It has also been the first trade agreement ever to cover explicitly a full range of services, including transportation, hospitality services, travel, tourism services, communication, banking, insurance, construction, accounting, education, law, management consulting, computer services, and advertisement. Since the failure of the World Trade Conference – WTO in Cancun, Mexico, in 2003, the U.S. Government has signed several bilateral agreements with countries such as Singapore and Chile to improve trade conditions.

Multilateral Trade Agreement

A multilateral trade agreement involves three or more countries that seek to regulate trade between nations without any form of discrimination. They usually have the purpose of minimizing trade barriers among the countries taking part, which leads to enhanced economic integration among the parties concerned. The most effective approach to liberalize trade in a globally interdependent economy is through multilateral trade agreements.

Multilateral Trade Negotiations are the negotiations between General Agreement on Tariffs and Trade (GATT) member nations that are conducted under the auspices of the GATT and that are aimed at reducing tariff and non-tariff trade barriers. The World Trade Organisation has now replaced the GATT as the administrative body.

Before the Uruguay Round

Before the Uruguay Round of multilateral trade negotiations, which were concluded in December 1993, multilateral trade negotiations were seen as a preserve of the developed countries and the developing countries had only a marginal role to play in the negotiation process; they were primarily the recipients of preferential market access and other special differential treatment. Since the Uruguay Round, although the developing countries have actively participated in the international negotiation process. However, they face serious challenges in keeping pace with the growing area of international trade law.

Alongside GATT multilateral trade negotiations, RTAs emerged in the 1950s, and their numbers have been rising continuously since then. The most remarkable one was the common European market, which became later the EU. It currently has a huge impact on international agricultural markets.

With the increased influence of globalization, the actions of one nation bear on other nations more than ever. Multilateral agreements have become an increasingly important means for nations to resolve important issues in a way that establishes common ground and resolves actual and potential points of difference. Multilateral agreements frequently require complex negotiations necessary to resolve the differences between the various parties and bring them into agreement.

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