Multilateral Agreement: Everything You Need to Know

A multilateral agreement is a trade agreement established between three or more countries with the intention of reducing barriers to trade, such as tariffs, subsidies, and embargoes, that limit a nation’s ability to import or export goods. They are considered the best method of encouraging a truly global economy that opens markets to small and large countries on an equitable basis.

In general, trade agreements between nations are either bilateral, involving only two nations, or multilateral. By their very nature, requiring concessions by several countries that have traditionally used trade barriers to protect certain industries or domestic goods, multilateral agreements are much more difficult to negotiate than bilateral agreements.

Examples of Multilateral Agreements

Multilateral agreements are usually negotiated between countries that share a geographic region, and some of the most well known regional agreements are the North American Free Trade Agreement (NAFTA) and the Central American-Dominican Republic Free Trade Agreement (CAFTA). However, multilateral agreements can also be international in nature, with perhaps the most successful international trade agreement being the General Agreement on Trade and Tariffs (GATT), negotiated between 153 countries following the end of World War II.

There is a debate as to their effectiveness. For instance, those in favor of multilateral agreements point to the economic benefits they provide smaller countries with emerging markets, while those against them claim that they provide multi-national companies increased control over the individual sovereignty of nations.

Advantages of Multilateral Trade Agreements

Liberal economists are perhaps the leading proponents of using multilateral agreements as the ideal way to encourage free and unencumbered global trade. The benefits they point to include:

• Granting of “favored nation status” – No nation that is a party to a multilateral agreement can be granted more favorable trading rights than any other party to the agreement. Each country is treated as an equal partner.
• Best use of a nation’s resources – Countries can focus on producing only those goods that are deemed valuable by its partners to the agreement, creating efficiencies in the allocation of resources.
• Exported goods are cheaper – Reduced tariffs mean that countries exporting their products no longer face artificial barriers to trade.
• Standardization of regulations - Companies can more easily navigate trade between signatory countries as a result of agreed upon rules of commerce. In addition, international intellectual property rights can receive greater protection.
• One agreement versus many – While multilateral agreements are often complex by their very nature, they actually save countries the time and effort it takes to negotiate separate agreements with every potential trading partner.
• Emerging markets flourish – Bilateral agreements tend to favor the powerful. Multilateral agreements level the playing field for all participants, particularly the little guys who have been pushed around for years.

Disadvantages of Multilateral Agreements

Multilateral agreements also have their opponents. Their reasons for seeing these agreements as failing to provide any lasting benefits include:

• Ceding of sovereign rights – Countries that are partners in a multilateral agreement give up degrees of sovereignty over the way they conduct business with other countries, which often is in direct opposition to the democratic principles on which they were founded.
• Some parties win, but some parties lose – Certain industries within partner countries may be adversely affected by the low cost of imported goods by competing nations.
• Complex and time-consuming negotiations – Due to the complex nature of an agreement that must be negotiated by several countries with often competing interests, multilateral agreements can take a great deal of time to complete. There is no guarantee that after years of negotiation an agreement will actually be reached.
• Misunderstandings and Misconceptions - Negotiations during an agreement are often conducted in a confidential manner that breeds mistrust and controversy between corporations, special interest groups, labor organizations, and the media.
• Rise of multi-national corporations – Smaller businesses often find it difficult to compete with large corporations as traditional borders to trade are erased. This can lead to unemployment in certain industries and lower standards of living as wages are cut in order for these companies to compete.

Since the election of U.S. President Donald Trump, multilateral trade agreements have increasingly been in the news, and the debate as to their merit has grown louder and more contentious. As with any agreement, the devil is in the details, and as our world grows smaller and more interconnected, it is important to strive to reach agreements where all parties win.

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