Bilateral Trade – Definition

Cite this article as:"Bilateral Trade – Definition," in The Business Professor, updated January 10, 2020, last accessed October 22, 2020,


Bilateral Trade Definition

Bilateral trade is a trade agreement between two countries that do not entail the exchange of hard currency as a mode of payment, rather, the countries engage in bilateral deals. In a bilateral trade, the two countries agree to bear equal amounts of profits and risks associated with the trade, this indicates that if during a particular trade, one of the countries has a trade deficit, the other country must incur the same in the next trade so that the countries can have equal trade levels.

Also, in bilateral trade, the two countries agree to reduce tariffs, remove import quotas, export restraints and all other barriers associated with the trade.

A Little More on What is Bilateral Trade

The United States government has a bilateral trade agreement with 12 countries. Based on this agreement, these countries can negotiate lower tariffs, removal of trade barriers, quotas, duties and others. The Office of Bilateral Trade Affairs is in charge of the U.S bilateral trades, with the aim of promoting trade, investment and economic development between countries.

Part of the goals of Bilateral Trade is to foster trade and economic growth between countries. The 12 countries the U.S has a bilateral trade agreement with are; Israel (1985), Jordan (2001), Australia, Chile, Singapore (2004), Panama, Colombia, South Korea (2012) and with  Bahrain, Morocco, Oman (2006), Peru (2007).

Advantages and Disadvantages of Bilateral Trade

One of the advantages of bilateral trade agreements have over multilateral trade agreements is that they can be easily negotiated since the number of countries or parties involved in the trade is limited to two. The multilateral trade agreement, on the other hand, involves many countries, and this often contributes to the failure of multilateral trade agreements.

Examples of Bilateral Trade

The United States is a good example of a country that has bilateral trade with many countries. For instance, the U.S government reached a bilateral trade agreement with Peru in 2016 which led to the removal of trade barriers for the export of beef to Peru. usually, the major benefits that countries enjoying bilateral trade agreements are the removal of import duties and tariffs, export quotas, and other trade barriers.

Reference for “Bilateral Trade” › Investing › US Economy › Glossary › Trade Policy

Academics research on “Bilateral Trade”

[PDF] Determinants of bilateral trade: does gravity work in a neoclassical world?, , Deardorff, A. (1998). Determinants of bilateral trade: does gravity work in a neoclassical world?. In The regionalization of the world economy (pp. 7-32). University of Chicago Press.

The puzzling persistence of the distance effect on bilateral trade, Disdier, A. C., & Head, K. (2008). The puzzling persistence of the distance effect on bilateral trade. The Review of Economics and statistics90(1), 37-48. One of the best-established empirical results in international economics is that bilateral trade decreases with distance. Although well known, this result has not been systematically analyzed before. We examine 1,467 distance effects estimated in 103 papers. Information collected on each estimate allows us to test hypotheses about the causes of variation in the estimates. Our most interesting finding is that the estimated negative impact of distance on trade rose around the middle of the century and has remained persistently high since then. This result holds even after controlling for many important differences in samples and methods.

Port efficiency, maritime transport costs, and bilateral trade, Clark, X., Dollar, D., & Micco, A. (2004). Port efficiency, maritime transport costs, and bilateral trade. Journal of development economics75(2), 417-450. Recent literature has emphasized the importance of transport costs and infrastructure in explaining trade, access to markets, and increases in per capita income. For most Latin American countries, transport costs are a greater barrier to U.S. markets than import tariffs. We investigate the determinants of shipping costs to the United States with a large database of more than 300,000 observations per year on shipments of products aggregated at six-digit Harmonized System (HS) level from different ports around the world. Distance, volumes, and product characteristics all matter. In addition, we find that port efficiency is an important determinant of shipping costs. Improving port efficiency from the 25th to the 75th percentile reduces shipping costs by 12%. Bad ports are equivalent to being 60% farther away from markets for the average country. Inefficient ports also increase handling costs, which are one of the components of shipping costs. In turn, factors explaining variations in port efficiency include excessive regulation, the prevalence of organized crime, and the general condition of the country’s infrastructure. Reductions in country inefficiencies, associated to transport costs, from the 25th to 75th percentiles imply an increase in bilateral trade of around 25%.

Bilateral trade flows, the Linder hypothesis, and exchange risk, Thursby, J. G., & Thursby, M. C. (1987). Bilateral trade flows, the Linder hypothesis, and exchange risk. Bilateral trade flows are used to examine the Linder hypothesis and the effect of exchange-rate variability in a gra vity-type trade model derived from an underlying demand and supply mo del. A behavioral model is used to justify examining these issues joi ntly. The model performs well empirically using a sample of seventeen countries for the period 1974-82. The authors find overwhelming supp ort for the Linder hypothesis and this version of the gravity model. Moreover, they find strong support for the hypothesis that increased exchange-rate variability affects bilateral trade flows.

A generalized design for bilateral trade flow models, Baltagi, B. H., Egger, P., & Pfaffermayr, M. (2003). A generalized design for bilateral trade flow models. Economics letters80(3), 391-397. This paper suggests a full interaction effects design to analyze bilateral trade flows. This is illustrated with an unbalanced panel of bilateral trade between the triad (EU15, USA and Japan) economies and their 57 most important trading partners over the period 1986–1997. Our full interaction model finds empirical support for the New Trade Theory and Linder’s hypothesis. We show that the omission of one or more interaction effects can result in biased estimates and misleading inference.

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