Each agreement covers five areas. First, it eliminates tariffs and other trade taxes. This gives companies within both countries a price advantage. It works best when each country specializes in different industries. Second, countries agree not to dump products at a cheap cost. Their companies might do that to gain unfair market share. They drop prices below what something would sell for at home or even its cost to produce. They raise prices once they’ve destroyed competitors. Third, the governments refrain from using unfair subsidies. Many countries subsidize strategic industries, such as energy and agriculture. This lowers the costs for those producers. It gives them an unfair advantage when exporting to another nation. Fourth, the agreement standardizes regulations, labor standards, and environmental protections. Fewer regulations act like a subsidy. It gives the country’s exporters a competitive advantage over its foreign competitors. Fifth, they agree to not steal the other’s innovative products.
Advantages
Bilateral agreements increase trade between the two countries. They open markets to successful industries. As companies benefit, they add jobs. The country’s consumers also benefit from lower costs. They can get exotic fruits and vegetables that can become too expensive without the agreement. They are easier to negotiate than multilateral trade agreements, since they only involve two countries. This means they can go into effect faster, reaping trade benefits more quickly. If negotiations for a multilateral trade agreement fail, many of the nations will negotiate a series of bilateral agreements instead.
Disadvantages
Any trade agreement will cause less-successful companies to go out of business. They can’t compete with a more powerful industry in the foreign country. When protective tariffs are removed, they lose their price advantage. As they go out of business, workers lose jobs. Bilateral agreements can often trigger competing bilateral agreements among other countries. This can whittle away the advantages that the free trade agreement confers between the original two nations.
Examples
On July 17, 2018, the EU and Japan signed the world’s largest bilateral agreement. It reduces or ends tariffs on most of the $152 billion in goods traded. It came into force in 2019 after ratification. The United States has bilateral trade agreements in force with 12 other countries. Here’s the list, the year it went into effect, and its impact:
