A multilateral trade agreement involves three or more countries who wish to regulate trade between the nations without discrimination. They are usually intended to lower trade barriers between participating countries and, as a consequence, increase the degree of economic integration between the participants. Multilateral trade agreements are considered the most effective way of liberalizing trade in an interdependent global economy.
Although multilateral trade existed earlier, it was only after World War II that nations recognized the need for a set of rules with the objective of securing market access for post-war recovering economies. The first such set of rules came in 1947 in the form of the General Agreement on Tariffs and Trade (GATT). GATT was replaced in 1995 by the World Trade Organization, which has more than 150 members. The WTO agreements cover goods, services and intellectual property.
Regional Trade Agreements
Recently, there has been a surge in regional trade agreements involving a relatively small number of countries. Contrary to what the name suggests, these agreements may be concluded between countries in different geographical regions. Examples of regional trade agreements include the North American Free Trade Agreement (NAFTA), which has substantially reduced trade barriers for agricultural commodities, manufactured goods, and services in North America.
Multilateral vs. Bilateral
Trade agreements are either bilateral, involving two countries, or multilateral. While some believe that bilateral free trade agreements are a first step towards multilateral free trade, others point out that bilateral trade agreements are discriminatory and lead to fragmentation of the world trade system and decline of the multilateral free trade.
Many liberal economists argue that free trade among nations leads to win-win outcomes for all. Economist David Ricardo states that welfare is maximized when each country specializes in producing goods that best use that nation's land, labor and capital, then trades its surplus for goods produced by other countries.
International trade takes place in a world of nation-states, without a global authority that can dictate and enforce the rules. Also, trade agreements never make everyone happy. Agreements that increase access to each member country’s markets are supported by sectors that export their products but are opposed by sectors that face competition from imports.