How are bilateral trade agreements different from multilateral trade agreements?

Who facilitates these

agreements?

Bilateral trade agreements refer to trade agreements of one country with the other. Or, these are
trade agreements between any two countries of the world. Multilateral trade refers to trade agreements of
one country with many countries of the world. That is, these are trade agreements among many countries
of the world. WTO facilitates bilateral as well as multilateral trade agreements. It is focusing on the
competition in the international market and free access to markets across different countries of the world.

Examples of Bilateral trade agreements

 ASEAN – China Free Trade Area (ACFTA), in effect as of 1 January 2010

 EU – Japan Economic Partnership Agreement (2018)
 US – EU United States (TTIP – Transatlantic Trade and Investment Partnership) – in negotiation.

Different types of trading blocks

Trading blocks have become increasingly influential for world trade

 They have advantages in enabling free trade between geographically close countries. This can lead to
lower prices, increased export potential, higher growth, economies of scale and greater competition.
 However, it can lead to compromise as countries pool economic sovereignty. Also, the move to free
trade tends to create winners and losers – with some domestic industries losing out to lower-cost
imports.

Examples of global trading blocks

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  European Union – The most integrated trading block. The EU27 have free trade and common
regulations and are part of a customs union.
 NAFTA – North Atlantic Free Trade Association.  A free trade area between Canada, US and
Mexico
 ASEAN Free Trade Area Free trade area in South East Asia founded 1992. Includes: Brunei,
Indonesia, Malaysia, Philippines, Singapore and Thailand, Vietnam, Laos, Myanmar and Cambodia.
 SAFTA South Asia free trade area based around the Indian sub-continent. Includes Afghanistan,
Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.
 Mercosur – a southern American trading block formed in 1991. Includes full members of Argentina,
Brazil, Paraguay and Uruguay. With associate members including Bolivia, Chile, Colombia,
Ecuador. Developed from free trade area to become customs union.
 African Union 55 countries of the continent of Africa. Created to forge closer political and
economic ties. It has aspirations to become a free trade area.

Difference between free trade area and customs union

A customs union has a common external tariff on imports. This means that it doesn’t matter which country
the imports enter – because all countries have the same import tariff. This means there doesn’t need to be
internal checking on ‘Rules of origin‘. For example, if imports from Africa enter Spain then if goods travel
across the border from Spain to France, there is no need to check whether goods are paying the correct
import tariff – because the import tariffs are all the same.

A disadvantage of joining a customs union is that a country is not able to pursue its own independent trade
deals. However, since trade deals are complicated and take several years, there is an advantage to
negotiating trade deals as part of a regional trade block – rather than separate individual countries.

Advantages of trading blocks

 Tariff removal leads to trade creation – lower prices for consumers and greater opportunity for exporters.
 Increased trade enables increased specialisation – which gives benefits of economies of scale (lower average
costs from increased output)

 Catch-up effects. Countries joining a rich trading block can benefit from inward investment and increased
trade opportunities. Countries in Eastern Europe have made considerable progress in catching up with
average income levels in Western Europe.
 Gravity theory of trade suggests that trade with countries in close proximity is the most important due to
lower transport and similar cultural and economic ties.
 Gives small countries a greater say in global trade agreements
 Increased competition. The removal of tariffs creates greater choice for consumers. Therefore domestic firms
have a greater incentive to cut costs to remain competitive.

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  Catch-up effects. Countries joining a rich trading block can benefit from inward investment and increased
trade opportunities. Countries in Eastern Europe have made considerable progress in catching up with
average income levels in Western Europe.
 Gravity theory of trade suggests that trade with countries in close proximity is the most important due to
lower transport and similar cultural and economic ties.
 Gives small countries a greater say in global trade agreements
 Increased competition. The removal of tariffs creates greater choice for consumers. Therefore domestic firms
have a greater incentive to cut costs to remain competitive.

Disadvantages of trading blocks

 Joining a customs union may lead to increased import tariffs – which leads to trade diversion. For
example, when the UK joined the EEC customs union, it required higher import tariffs on imports
from former Commonwealth countries. This led to switch in demand towards higher-cost European
countries and caused loss of business for Commonwealth countries
 Increased interdependence on economic performance in other countries in trading block. If Eurozone
goes into recession, it will affect all countries in the Eurozone. However, this is almost inevitable

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 even if countries are not formally in a trading block due to a close relationship between trade cycles
in different countries.
 Loss of sovereignty and independence. A trading block needs to make decisions for the whole area.
This may go counter to the particular wishes of a country.
 Increased influence of multinationals. In a bilateral deal between the US and South-East Asian
trading block. Free trade may come at the price of allowing free movement of capital. This can have
benefits in terms of inward investment. But, can also have costs for higher-cost domestic producers.
Free trade can lead to structural unemployment as resources shift from uncompetitive industries to
newer industries.