Trade Agreement Between Two Countries
Once negotiated, multilateral agreements are very powerful. They cover a wider geographical area, which gives signatories a greater competitive advantage. All countries also give themselves most-favoured-nation status and grant each other the best reciprocal trading conditions and the lowest tariffs. The WTO also mediates trade disputes between member countries. If the government of one country accuses the government of another country of violating the rules of world trade, a WTO panel decides the dispute. (The panel`s decision may be appealed to an appellate body.) If the WTO finds that the government of a member State has not complied with the agreements it has signed, the member is required to change its policy and bring them into line with the rules. If the Member considers that it is politically impossible to change its policy, it may offer other countries compensation in the form of lower trade barriers for other products. If it decides not to do so, other countries may obtain wto authorization to impose higher tariffs (i.e. retaliatory measures) on products originating in the Member State concerned for its non-compliance. Trade agreements are usually unilateral, bilateral or multilateral.
Some countries, such as Britain in the nineteenth century and Chile and China in recent decades, have made unilateral tariff cuts – reductions made independently and without any reciprocal action by other countries. The advantage of unilateral free trade is that a country can immediately reap the benefits of free trade. Countries that remove trade barriers themselves do not need to postpone reforms as they try to convince other nations to follow suit. The benefits of such trade liberalization are considerable: several studies have shown that incomes rise faster in countries open to international trade than in countries more closed to trade. Dramatic examples of this phenomenon are the rapid growth of China after 1978 and India after 1991, which indicate when major trade reforms took place. However, these advantages must be offset by a disadvantage: by excluding certain countries, these agreements can transfer the composition of trade from low-priced countries that are not parties to the agreement to high-cost countries. The most-favoured-nation clause prevents one of the parties to the current agreement from further removing barriers for another country. For example, Country A could agree to reduce tariffs on certain products of Country B in exchange for reciprocal concessions. In the absence of a most-favoured-nation clause, Country A could further reduce tariffs on the same products from Country C in exchange for further concessions.
Consequently, because of the tariff difference, consumers in Land A would be able to buy the products in question at a lower cost from Land C, while Country B would receive nothing for its concessions. Most-favoured-nation status means that A is required to extend the lowest existing duty on certain products to all its trading partners who enjoy such status. Therefore, if A later accepts a lower rate with C, B automatically gets the same lower rate. The United States has signed bilateral trade agreements with 20 countries, including Israel, Jordan, Australia, Chile, Singapore, Bahrain, Morocco, Oman, Peru, Panama, and Colombia. While virtually all economists believe that free trade is desirable, they differ as to how best to move tariffs and quotas to free trade. The three fundamental approaches to trade reforms are unilateral, multilateral and bilateral. The logic of formal trade agreements is to define what is agreed and the sanctions applicable to derogations from the rules established in the agreement.  Trade agreements therefore make misunderstandings less likely and create confidence on both sides that fraud is punishable; This increases the likelihood of long-term cooperation.
 An international organization such as the IMF can further encourage cooperation by monitoring compliance with agreements and informing third countries of violations.  Monitoring by international agencies may be necessary to detect non-tariff barriers that are disguised attempts to create barriers to trade.  Critics of bilateral and regional approaches to trade liberalization have many additional arguments. . . .