Definition of a Multilateral Trade Agreement

bazaar trade of various bean image by Maria Brzostowska from Fotolia.com

Multilateral trade agreements are treaties created between three or more nations looking to trade with each other. Trade agreements have exploded in the last 70 years as nations realized that international trade is critical to domestic health. When trade agreements are created between multiple countries, there are upsides and downsides.

TL;DR (Too Long; Didn't Read)

A multilateral trade agreement occurs when three or more nations agree to trade with each other, making concessions that benefit the trading arrangement as a whole.

Multilateral: Meaning and Background

There are essentially two kinds of trade agreements, multilateral and bilateral. “Multi” technically means more than one, so it’s more than one trading partner in the deal. Bilateral, though, means a trade agreement is created between two countries.

Multilateral trade systems have been popular as far back as the days of the Silk Road, but became more prominent after World War II, when nations were picking up the pieces after a global war that had come on the heels of the global economic depression. Nations realized they needed each other for economic growth and for world peace. That’s when the General Agreement on Tariffs and Trades was hammered out in 1947. From 1948 to 1994, the GATT formed the common ground among the world’s trading nations.

Since 1995, that job’s fallen to the World Trade Organization. The WTO today is different from the GATT in that in addition to monitoring and mediating trade agreements, it also monitors the exchange of services as well as the use of intellectual property between nations.

America’s Pivot: Multilateral to Bilateral

U.S. President Donald Trump went on the record against the WTO, claiming it has been “bad” for America since China’s economic rise has skyrocketed since it joined the WTO in 2001. The organization merely helps to facilitate trade and to keep countries playing nicely, and it has proven beneficial for countries trying to increase their trading opportunities.

Where China has excelled at increasing their trading bandwidth is that they create bilateral trade agreements, and this is what makes the difference. It’s easier for a country to negotiate from a position of strength if they’re only negotiating with one other country, which is why powerhouses like the U.S. and China prefer them. This is why, ever since withdrawing from the Trans-Pacific Partnership agreement in 2017, Trump’s administration pursued bilateral agreements.

Features of Multilateral Trade

  • Multilateral agreements mean parties negotiate on more even ground, and they’re also more likely to make concessions for the “good of all” as opposed to the bilateral negotiation that can be done from a defensive stance as countries try to get the best deal for themselves.

  • Multilateral trade tends to benefit growing economies, like how trade exploded for Mexico after NAFTA took effect in 1993. It led to trade growing between the nations by over 300 percent in the next 25 years. American companies benefitted from NAFTA, too, with many moving factories south; American jobs, some would say, were the losers in the deal.

  • Companies love multilateral agreements because it means the trading regulations will be the same for each country behind the pact, simplifying the bureaucracy for businesses — but also potentially giving them new markets to access while keeping their legal costs low.

  • Unfortunately, the many partners of multilateral trade agreements mean the treaties are complex and often misunderstood by the public. Part of this is because of concessions countries make during such large deals, which makes the average voter think their country's coming up empty on the deal.

  • Plus, small businesses often lose out with multilateral trade agreements, since it’s multinational companies who are most likely to profit, thanks to already operating in those regions. It can lead to small and mid-sized businesses having to move operations to new countries and make other big changes just to stay competitive. If their business suffers, it can cause job losses or force businesses to close altogether, making multilateral agreements somewhat unpopular.

References

About the Author

Steffani Cameron is a professional writer who has written for the Washington Post, Culture, Yahoo!, Canadian Traveller, and many other platforms. Some writing projects have included ghost-writing for CEOs and doing strategy white papers. She frequently writes for corporate clients representing Fortune 500 brands on subjects that include marketing, business, and social media trends.

Photo Credits

  • bazaar trade of various bean image by Maria Brzostowska from Fotolia.com