Bilateral Trade Agreements and Their Importance in the World Economy

Dec 10, 2023 By Triston Martin

Bilateral trade agreements aim to increase the two countries' market access and economic growth. They achieve this by standardizing operations across five key areas, ensuring fair practices, and preventing issues such as intellectual property theft, low-cost dumping of goods, and unjust subsidies. These agreements also set uniform regulations labor and environmental protection standards.

The United States has established bilateral trade agreements with 20 countries, including Israel, Australia, Singapore, Morocco, Peru, and Colombia. These agreements are essential for fostering beneficial economic relationships and promoting mutual growth.

Another essential trade agreement is CAFTA-DR. Central American countries include the Dominican Republic, El Salvador, Guatemala, Costa Rica, Nicaragua, and Honduras. This deal shows how bilateral trade agreements can connect big and small economies and increase business opportunities.

The US bilateral trade agreements with Mexico and Canada were replaced by NAFTA in 1994. The US-Mexico-Canada Agreement, renegotiated from NAFTA, will take effect in 2020. This evolution of trade agreements shows the dynamic nature of international trade relations and the ongoing commitment to refining and improving these economic partnerships.

Bilateral Agreement Extent and Scope

1. Market Access and Price

Bilateral trade agreements create opportunities for countries to access each other's markets. This process encourages trade and economic development. Under these agreements, removing tariffs and trade taxes offers a competitive pricing edge for businesses. This advantage is particularly significant for countries excelling in distinct industries. These agreements ensure companies benefit from reduced costs, enhancing their market position.

2. Fair Pricing in Trade

An essential feature of bilateral trade agreements is the commitment to fair pricing. Countries in these agreements agree not to sell products at unsustainably low prices to dominate the market. They avoid practices like selling below production costs to eliminate competitors and then raising prices. This approach ensures a balanced and competitive market, where no single player can unfairly dominate due to pricing strategies.

3. Subsidy Regulations

Bilateral agreements also address the issue of subsidies, especially in sectors like energy and agriculture. Countries agree not to use subsidies that would give their producers an unfair advantage in international trade. By regulating subsidies, these agreements help maintain a level playing field for all producers, preventing any country from gaining an undue advantage in export markets through subsidized production costs.

4. Standardization in Business Operations

These agreements promote standardized business practices, including labor standards and environmental protection. This standardization ensures that businesses operate pretty and responsibly. Exporters are thus encouraged to compete based on the quality and innovation of their products rather than on unfair business practices.

5. Intellectual Property Rights

Respecting intellectual property rights is a crucial component of bilateral trade agreements. Countries commit to protecting and not infringing upon the innovative products and ideas of others. They foster a respectful and collaborative international business environment by adhering to copyright and intellectual property laws.

Benefits of Bilateral Trade Agreements

Negotiating a trade agreement with two countries is more straightforward than with several. The benefits of these agreements are great. New customers are a significant benefit for businesses.

This expansion allows companies to grow and creates jobs when demand rises. Lower product prices are a substantial benefit of bilateral trade agreements for buyers—these agreements, which lower prices on certain products, appeal to consumers.

Drawbacks of Bilateral Trade Agreements

However, bilateral trade agreements are not without their disadvantages. One significant challenge is the impact on less successful companies. These businesses often struggle to compete with more powerful industries from another country, leading to potential closures and loss of local jobs.

Another drawback is the loss of price advantage for companies due to eliminating trade taxes. This can lead to an imbalance in the competitive landscape. Furthermore, bilateral contracts can inadvertently spark the creation of competing agreements among other nations, potentially neutralizing the benefits of bilateral trade agreements initially gained from the agreement.


On July 17, 2018, the EU and Japan established the world's most significant bilateral trade agreement, impacting the trade of goods worth $152 billion. This important bilateral contract, effective in 2019, has been instrumental in reducing or eliminating tariffs on numerous goods.

The United States also has its share of effective bilateral trade agreements with 12 countries, each with unique impact and benefits. The agreement with Australia, effective on January 1, 2005, is a notable example of the benefits of bilateral trade agreements, enhancing U.S. goods exports by 80%. Similarly, the bilateral contract with Bahrain, in force since January 11, 2006, abolished all tariffs, leading to a surge in U.S. exports in various sectors.

Chile’s agreement, effective January 1, 2004, is comprehensive. It eliminated taxes, protected intellectual properties, and enforced international worker’s rights and environmental standards. Another example of the gains to accrue from bilateral trade agreements is the U.S.-Columbia agreement, which was effected on October 21, 2011, which expanded US exports by $1.1 billion and added $2.5 billion in the U.S.

Differences Between Bilateral Contracts and Trade Deals

While international relations frequently refer to bilateral contracts and trade agreements, these terms denote different concepts. Such trade agreements aim to lower or eliminate trade barriers such as import quotas, export bans, and tariffs among nations. These contracts follow the WTO guidelines on international trade, thus maintaining uniformity.

However, bilateral contracts or bilateral trade agreements take place beyond the jurisdiction of the WTO. Trade affairs, however, is not their only limit. Instead, these agreements usually focus on policy issues to enhance cooperation and trade in respective fields. Bilateral trade agreements are flexible as they allow for specialization depending on the unique circumstances of the countries entering these agreements. Such a tailored approach can facilitate better collaborations on technology, environmental concerns, cultural activities, and trade, among other matters.

Recognizing the distinct roles and advantages of these two types of agreements in international relations is crucial. While trade deals under the WTO umbrella provide a broad framework for global commerce, bilateral contracts offer a more specialized and direct route for countries to address and advance their mutual interests.

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