BILATERALISM

An approach to trade policy in which each state negotiates particular agreements with each of its partners on an individual basis.

"However, bilateralism appears to have grown during the 1980s with the negotiation of formal bilateral agreements by the United States as well as the maintenance of so-called voluntary export restraints and the use of bilateral agreements to resolve issues on which major countries such as the United States have taken aggressive unilateral action."
(Keohane, R. O.,"Sovereignty in International Society", in Held, D. and A. McGrew, The Global Transformation Reader: An Introduction to the Globalization Debate, 2nd Edition, Cambridge (UK): Polity Press, 2003, p. 155)

"In bilateral trade negotiations between states involving a strong and weak state, generally speaking the strong state comes along with a prepared draft text which acts as a starting point for the negotiations. Bilateral negotiations are complex and lengthy affairs, features which make them costly even for strong states. In order to lower the transaction costs of bilateralism the US has developed models or prototypes of the kind of bilateral treaties it wishes to have with other countries. Once a model treaty is ratified by the Senate, US trade negotiators know that if they stick to its terms in other negotiations there is a good chance the treaties flowing from these negotiations will also be approved. For the US there are very strong incentives for a standardization of bilateral treaty standards."
(Drahos, P., Bilateralism in Intellectual Property, Oxfam, visited 2009-05-04)

"NAFTA was a species of bilateralism: a deal first negotiated between the U.S. and Canada and then extended southward. To be more specific, NAFTA was an instance of regional mercantilism. The U.S. would be master of the North American continent, granting preferential trade status (‘regional content' laws) to any goods produced in the signing countries, while penalizing goods from outside. The treaty was as much about protection as trade."
(Tucker, J., The Free Market, The Mises Institute monthly, vol. 14, n. 10, visited 2009-05-04)

Why Choose Bilateralism?

"Bilateralism assumes that results are more easily obtained if only two parties are involved, partly because available economic or political pressure would be less diluted. In principle, fewer diverting factors are involved. This is true in cases where it is possible to isolate the purely bilateral dimension. Often this cannot be done since at least one of the parties may have obligations in the same matter towards third parties. Some advocates of bilateral negotiations see them as the only valid way for achieving results."
(Goode, W., Dictionary of Trade Policy Terms, Fourth Edition, Cambridge (UK): Cambridge University Press, 2003, p. 43)

How It Is Used

"The history of bilateral negotiations since the mid-1980s casts doubt on the general validity of this proposition, but bilateralism has been used with success for the resolution of some selected issues. The effectiveness of bilateral approaches depends on the amount of negotiating coin a country has to influence the behaviour of the other. It is largely an approach which works more in favour of the strong and against the interests of small and medium-sized countries. Bilateralism can also introduce additional tensions into the multilateral system. One form of bilateralism is used in the multilateral trade negotiations. WTO members often negotiate tariff concessions bilaterally, but they apply the results multilaterally in accordance with the most-favoured-nation obligation."
(Goode, W., Dictionary of Trade Policy Terms, Fourth Edition, Cambridge (UK): Cambridge University Press, 2003, p. 43)

Countries sign bilateral trade agreements which lower import tariffs and thereby facilitate trade. A country may sign any number of bilateral trade agreements, which will then define that country's trading regime.

Bilateral trade agreements played a key role in the early rounds of GATT in forging a multilateral trade agreement. The process of bilateral agreements can generate a free trade regime. It is argued that a multiplicity of countries involved in a multilateral trade agreement may find it harder to reach consensus on trade issues.
(adapted from Goyal, S., and S., Joshi, Bilateralism and Free Trade, Erasmus Universiteit Rotterdam, 1999, visited 2009-04-05)

Effects

"There are three direct effects at work when a pair of countries sign a trade agreement which lowers import tariffs: one, the domestic firm is faced with greater competition from a foreign firm; two, the domestic firm gets greater access to the foreign market; and three, domestic consumers benefit from greater competition, in terms of lower prices.

In addition, there is an interesting indirect effect of such bilateral agreements: they make the markets of the countries signing the agreement less valuable to other active firms on the market."
(Goyal, S., and S., Joshi, Bilateralism and Free Trade, Erasmus Universiteit Rotterdam, 1999,visited 2009-04-05)