Bilateral trade agreement, also known as a preferential trade agreement, is a commercial arrangement between two countries that aims to lower or eliminate tariffs and other trade barriers on goods and services traded between them. These agreements prioritize trade between the two countries, often to the detriment of other trading partners.
Bilateral trade agreements are often negotiated between developed and developing economies, where the former is seeking access to the latter`s markets and resources. For example, the United States-Mexico-Canada Agreement (USMCA) is a recent bilateral trade agreement that replaced the North American Free Trade Agreement (NAFTA). It governs trade between the United States, Mexico, and Canada and provides a framework for economic integration in the region.
Bilateral trade agreements have both advantages and disadvantages. On the one hand, they can increase trade and investment flows, create jobs, and promote economic growth in the participating countries. They also provide a more stable and predictable trade environment by reducing the risk of sudden policy changes between the two countries.
On the other hand, bilateral trade agreements can lead to trade diversion, whereby trade is diverted away from other countries that do not have preferential access to the partner country`s market. This can be harmful to third-party countries that may lose market share and income. Additionally, bilateral trade agreements can be complex and difficult to negotiate, and they may exclude certain industries or groups that are not adequately represented in the negotiations.
In conclusion, bilateral trade agreements are beneficial for trade and investment between two countries, but require careful consideration of their impact on third-party countries and the industries excluded from the negotiations. As international trade continues to grow in importance, understanding the complexities of bilateral trade agreements will be essential for businesses, policymakers, and economists.