Bilateral trade refers to an exchange agreement between two parties. Technically, exchanges between a wide range of parties could be considered bilateral trade. The term, however, is generally used to refer to transactions between two nations. This type of trade is usually structured by an agreement that makes it substantially more beneficial for the parties to the agreement to deal with one another than to deal with other parties.
Trade is an important part of operating a government. A country generally does not have everything that it needs, and it may not need everything that it produces. A bilateral trade agreement is an arrangement that helps to improve the process of exchanging goods and services between nations. These agreements can have a substantial impact on a nation's economy.
When such agreements do not exist, there are often a number of obstacles, known as trade barriers, that can make exchange a challenging procedure. Quotas, for example, limit the amount of products that a country will import. This can drastically reduce another country's potential to sell its goods and services. A benefit of bilateral trade agreements is that these barriers are often eliminated for a country's selected partners.
When this happens, a preferential trade relationship is developed. Consider, for example, that a major export in Kenya may be flowers. When dealing with most countries, Kenya may face trade barriers such as quotas and tariffs, limiting its earning potential. There may be some countries such as the United Kingdom and China that agree to eliminate barriers if Kenya is willing to import items from their countries in return. Such an agreement makes it preferable for Kenya to deal with these two countries when selling flowers and importing the specified goods.
Countries have a significant amount of leeway to negotiate these agreements. In many cases, there are bureaus assigned with the tasks of negotiating, implementing, and overseeing trade agreements. For example, in the U.S., the Office of Bilateral Trade Affairs bears this responsibility. These bureaus are not free to act completely according to their own will, however.
The World Trade Organization (WTO) is a global authority that also imposes trade rules that most countries are bound to follow. A major objective of the WTO is to ensure that bilateral trade is just and fair. There is a possibility that if such an authority did not exist developed nations could take advantage of those with more fragile economies. When these types of agreements are made, there are numerous parties that must be considered, such as the governments, the consumers, and producers of goods in both countries.