What Is Bilateral Trade?

What Is Bilateral Trade?

Let me explain bilateral trade directly to you: it's the exchange of goods and services between two countries, often supported by agreements that cut down or remove trade barriers such as tariffs and quotas.

When countries engage in this, they might agree to lower tariffs, reduce import quotas, limit export restraints, and eliminate other obstacles to boost trade and investment.

In the United States, the Office of Bilateral Trade Affairs works to reduce trade deficits by negotiating free trade agreements with new partners, strengthening existing ones, promoting overseas economic development, and taking similar steps.

Understanding Bilateral Trade

I want you to understand that bilateral trade agreements are designed to open up markets between two countries and drive their economic growth. They standardize business practices to stop issues like one country stealing innovative products from another, dumping goods cheaply, or using unfair subsidies.

These agreements also set consistent regulations, labor standards, and environmental protections. The United States has bilateral trade agreements with 20 countries, including Israel, Jordan, Australia, Chile, Singapore, Bahrain, Morocco, Oman, Peru, Panama, and Colombia.

There's also the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR), which involves the US and smaller Central American economies like El Salvador, Guatemala, Costa Rica, Nicaragua, Honduras, plus the Dominican Republic. NAFTA, which replaced earlier bilateral deals with Canada and Mexico in 1994, was renegotiated into the United States-Mexico-Canada Agreement that took effect in 2020.

Advantages and Disadvantages of Bilateral Trade

Compared to multilateral agreements, bilateral ones are easier to negotiate since only two countries are involved, allowing them to start and benefit from trade gains more quickly.

If multilateral talks fail, countries often turn to bilateral treaties instead. However, new agreements can create competing pacts elsewhere, which might erode the benefits of the original free trade agreement between the initial two nations.

Bilateral agreements expand the market for a country's goods, and the US pursued many under the Bush administration in the early 2000s. Beyond market creation for US products, this spread trade liberalization and open borders.

That said, these agreements can distort markets when big multinational corporations with vast resources enter areas dominated by smaller firms, potentially forcing those smaller players to shut down due to competition.

Examples of Bilateral Trade

Consider this example: in October 2014, the US and Brazil resolved a long-standing cotton dispute through the World Trade Organization. Brazil dropped the case, giving up countermeasures against US trade and further disputes.

Brazil also agreed not to initiate new WTO actions against US cotton support programs under the current Farm Bill or against agricultural export credit guarantees via the GSM-102 program. This meant American businesses avoided countermeasures like higher tariffs worth hundreds of millions annually.

Another case is from March 2016, when the US and Peru agreed to lift barriers on US beef exports that had been in place since 2003. This opened Peru, one of Latin America's fastest-growing markets, where the US exported $25.4 million in beef and products in 2015.

By removing Peru's certification requirements under the export verification program, American ranchers gained better market access. The deal aligned with the US's negligible risk status for bovine spongiform encephalopathy from the World Organization for Animal Health.

Amendments to certification allowed beef from federally inspected US establishments to be exported to Peru, not just from those in the USDA Agricultural Marketing Service Export Verification programs as before.

What Is Bilateral and Multilateral Trade?

You should know that bilateral and multilateral trade are similar, but bilateral involves just two countries, while multilateral includes three or more. Bilateral agreements are simpler to negotiate with only two parties needing approval, whereas multilateral ones must balance the needs of multiple nations.

What Is an Advantage of Bilateral Trade?

A key advantage is that it gives both countries easier access to larger markets. Think of an electronics company that's saturated its home market and wants to expand abroad; without barriers like high import duties, it might not profit, but a bilateral agreement reduces those frictions, boosting opportunities and consumer choices in both places.

What Is a Disadvantage of Bilateral Trade?

On the downside, while markets expand, not everyone wins equally—larger companies are often better positioned to capitalize. For instance, a US-based multinational food giant could scale up quickly in a new market under such an agreement, outcompeting local or smaller US firms that lack the resources, potentially leading to business closures and uneven benefits.

The Bottom Line

To wrap this up, bilateral trade is commerce between two countries, usually aided by agreements that remove barriers like tariffs and quotas. These pacts standardize regulations and bolster economic strength, but they can favor big firms over smaller ones, sometimes causing business failures.