# Bilateral Trade: Key Benefits and Challenges Explained

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> **Definition**
>
> Bilateral trade is the exchange of goods and services between two countries, often facilitated by agreements that reduce or eliminate trade barriers like tariffs and quotas.

## What Is Bilateral Trade?

Bilateral trade is the exchange of goods between two nations promoting trade and investment.  In bilateral trade, countries may reduce or eliminate [tariffs](https://www.investopedia.com/terms/t/tariff.asp), quotas, and trade barriers to boost trade and investment.

Countries usually seek bilateral trade agreements because they are easier to negotiate than multilateral agreements. Bilateral trade allows participants to expand their markets, but critics say that the benefits may favor large corporations.

### Key Takeaways

*   Bilateral trade agreements aim to reduce or eliminate trade barriers like tariffs to boost trade and investment between two countries.  
    
*   These agreements are negotiated more easily and quickly than multilateral pacts, leading to faster trade benefits.  
    
*   While they expand markets, bilateral trade agreements can disadvantage smaller businesses when competing with large multinational corporations.  
    
*   The U.S. has entered into several bilateral trade agreements to improve market access and support economic growth, including a notable settlement with Brazil over a cotton dispute.  
    
*   Bilateral trade can increase market reach for businesses, but not all firms, especially smaller ones, equally benefit from these agreements.

## How Bilateral Trade Agreements Expand Markets

Bilateral trade agreements aim to expand access between two countries’ markets and increase their [economic growth](https://www.investopedia.com/terms/e/economicgrowth.asp). Standardized business operations also 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 U.S. has bilateral trade agreements with 20 countries, including Israel, Australia, 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.

## Pros and Cons of Bilateral Trade Agreements

Bilateral trade agreements are easier and faster to negotiate than multilateral ones because only two countries are involved.

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 expands markets for goods. The U.S. pursued free trade deals under the Bush administration in the early 2000s.

Bilateral agreements promote [trade liberalization](https://www.investopedia.com/terms/t/trade-liberalization.asp) and create markets for U.S. goods. However, they may favor large [multinationals](https://www.investopedia.com/terms/m/multinationalcorporation.asp), possibly driving smaller companies out of business.

## Case Studies: Bilateral Trade in Action

In October 2014, the United States and Brazil settled a longstanding cotton dispute in the [World Trade Organization (WTO)](https://www.investopedia.com/terms/w/wto.asp). 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 to 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.

## What Is Bilateral and Multilateral Trade?

Bilateral trade and multilateral trade are very similar concepts. As mentioned above, bilateral trade refers to trade between two specific countries, while multilateral trade is conducted across three or more. Bilateral trade agreements are easier to negotiate, as they only require the approval of two states. Multilateral trade agreements have to strike a more delicate balance across the economic needs and wants of multiple countries.

## What Is an Advantage of Bilateral Trade?

The most immediate advantage of bilateral trade is that it affords both participating countries easier access to expanded markets. Consider the case of an electronics producer that has successfully sold and marketed devices to a significant portion of the population in the region in which it's based. To further drive revenue, it wants to begin engaging in commerce internationally. If confronted with trade barriers such as high import fees or duties, it may not be able to make a profit abroad. A bilateral trade agreement that eliminates or reduces such frictions can provide businesses in both participating countries with significantly increased economic opportunity. It may also give consumers in both regions more choice.

## What Is a Disadvantage of Bilateral Trade?

When a bilateral trade agreement is set, participating countries have access to a greatly expanded market. However, not everyone benefits from this change equally. In particular, larger firms are generally better situated than their smaller counterparts.

Consider a hypothetical multinational food business headquartered in the U.S. and with subsidiaries located across the world. If the U.S. established a new bilateral trade agreement that eliminated barriers with another country, the multinational might be much better poised to take advantage of this new market, as it would likely have the necessary capital to scale up production and transport.

Not only might the multinational's U.S. competitors struggle to do the same, but local businesses in the other country might also find it difficult to compete with the production, marketing, and human resources of the multinational. Ultimately, this could lead to a system in which there are some winners and losers resulting from the new agreement.

## Conclusion: The Impact of Bilateral Trade Agreements

Bilateral trade refers to commerce conducted between two countries. It is typically facilitated by bilateral trade agreements, which are designed to eliminate trade barriers and standardize regulations.

Bilateral trade agreements allow countries to expand their markets, and are much easier to negotiate than multilateral agreements. However, expanded markets may benefit larger firms over smaller players, leading to closures of some businesses.

> **Article Sources**
>
> 1.  Office of the United States Trade Representative. "[Free Trade Agreements](https://ustr.gov/trade-agreements/free-trade-agreements)."
>     
> 2.  Office of the United States Trade Representative. "[CAFTA-DR (Dominican Republic-Central America FTA)](https://ustr.gov/trade-agreements/free-trade-agreements/cafta-dr-dominican-republic-central-america-fta)."
>     
> 3.  Office of the United States Trade Representative (Archive). "[North American Free Trade Agreement (NAFTA)](https://ustr.gov/about-us/policy-offices/press-office/ustr-archives/north-american-free-trade-agreement-nafta)."
>     
> 4.  Office of the United States Trade Representative. "[United States-Mexico-Canada Agreement](https://ustr.gov/trade-agreements/free-trade-agreements/united-states-mexico-canada-agreement)."
>     
> 5.  The White House: Bush Administration. "[President Bush Expanded and Enforced Trade Agreements to Open New Markets for American Products](https://georgewbush-whitehouse.archives.gov/infocus/bushrecord/factsheets/tradeagreements.html)."
>     
> 6.  Office of the United States Trade Representative (Archive). "[United States and Brazil Reach Agreement to End WTO Cotton Dispute](https://ustr.gov/about-us/policy-offices/press-office/press-releases/2014/October/United-States-and-Brazil-Reach-Agreement-to-End-WTO-Cotton-Dispute)."
>     
> 7.  Office of the United States Trade Representative (Archive). "[United States Secures Full Access for U.S. Beef and Beef Products to Peru](https://ustr.gov/about-us/policy-offices/press-office/press-releases/2016/march/united-states-secures-full-access-us)."