Bilateral Agreement

What is a Bilateral Agreement?

A bilateral agreement, also called a clearing trade or side deal, refers to an agreement between parties or states that aims to keep trade deficits to a minimum. It varies depending on the type of agreement, scope, and the countries that are involved in the agreement.

Bilateral agreements can take some time to finalize. For instance, it took three years for the customer cooperation agreement between the European Union and New Zealand to take effect. With several factors that can affect a bilateral agreement, there’s no standard time as to how long before an agreement will be put in place.

Bilateral Agreements vs. Trade Deals

Bilateral agreements are not the same as trade deals. The latter involves decreasing or eliminating import quotas, export restrictions, tariffs, and other trade-related barriers among states. Also, the rules governing trade deals are established by the World Trade Organization (WTO).

On the other hand, bilateral agreements are not bound by the rules set by the WTO and do not solely focus on trade-related issues. Instead, the agreement usually targets individual policy areas, aiming to increase cooperation and facilitate trade between countries in certain areas.

Scope of Bilateral Agreements

In a bilateral trade agreement, the countries involved provide each other access to their markets, which leads to trade and economic growth. The agreement also creates an environment that promotes fairness since a set of rules in business operations is observed. Here are the five areas covered by bilateral agreements:

1. With the elimination of tariffs and trade-related taxes, companies located in countries with a bilateral agreement enjoy a price advantage, especially for nations that flourish in different industries.
2. Countries involved in the agreement will not offer products at a low cost only to gain a bigger share in the market. They will not offer goods at prices that are even lower than production costs, then increase prices when they’ve overcome the competition.
3. The countries will not use unfair subsidies. For instance, when countries subsidize energy or agriculture, producers will see lower costs, giving them an unfair advantage when they export the goods.
4. Because of standardized business operations such as labor standards and environmental protection, exporters operate in a level playing field.
5. The agreement involves not stealing the innovative goods of other exporters. Countries adhere to existing copyright and intellectual property laws.

Advantages of Bilateral Agreements

1. Since it involves only two countries, entering into a bilateral agreement is much easier as compared to multilateral trade agreements.
2. It gives companies access to new markets.
3. When the parties involved see demand, they will open more job opportunities.
4. Bilateral agreements also enable consumers to buy goods at lower prices. For instance, some types of products may be more expensive without an agreement.

Disadvantages

1. Just like in any other trade-related agreement, less successful companies will likely find it hard to keep their business going as they will not be able to compete with more successful industries in another country.
2. The elimination of trade taxes means companies lose their price advantage.
3. A bilateral agreement can result in competing agreements between other countries.

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:

• Customs Union
• OECD
• Purchasing Power Parity
• Trade Barriers
• See all economics resources