Unilateral Trade Agreements: Definition, Examples

Pros, Cons and Examples

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An Afghan man organizes a pile of threads after being dyed at a carpet manufacturer on January 8, 2010 in Kabul, Afghanistan. The highly prized and typically expensive carpets and rugs, the most distinctive of all oriental floor coverings, are one of Afghanistan's best recognized exports. Photo by Majid Saeedi/Getty Images

Definition:  A unilateral trade agreement is a treaty that's imposed on one nation by another. It benefits one nation only. The World Trade Organization defines a unilateral trade preference, or a preferential trade agreement,  as any trade agreement granted by one nation that isn't reciprocated in return. Unilateral trade policies occur whenever one country imposes a trade restriction, such as a tariff, on all imports.

A unilateral agreement is one type of a free trade agreements. Another type is a bilateral agreement between two countries. It is the most common because it's easy to negotiate. The third type is a multilateral agreement. It is the most powerful, but takes a long time to negotiate.

Some conservatives define unilateral trade policies as the absence of any trade agreement whatsoever. In that definition, the United States would lift all tariffs, regulations and other restrictions to trade. It's unilateral because it doesn't require other nations to do the same. The argument is that the government should not restrict the rights of its citizens to trade anywhere in the world. But other countries would keep their tariffs on U.S. exports. That would give them an unilateral advantage. They could ship cheap goods into the United States, but U.S. exports would be priced higher in their countries.

Emerging market nations are afraid of any trade agreements with developed nations.

They worry that the imbalance of power would create a unilateral benefit to the developed nation. 

Advantages and Disadvantages

Initially, unilateral trade policies such as tariffs work great. Since imports cost more, locally-made products are more competitive. This boost economic growth and jobs.

Over time, the disadvantages appear.

Other countries retaliate and add tariffs of their own. Soon, local companies' exports drop, business suffers and they may even have to lay off recently hired workers. Global trade drops, and everyone suffers. 

This occurred during the Depression as countries sought to protect domestic jobs by raising import prices through tariffs. This trade protectionism soon lowered global trade overall, as country after country followed suit. As a result, global trade plummeted 65 percent.

After World War II, the United States started negotiating lower tariffs with 15 countries (Australia, Belgium, Brazil, Canada, China, Cuba, Czechoslovakia, France, India, Luxembourg, the Netherlands, New Zealand, South Africa, the United Kingdom, and the United States). On January 1, 1948, the General Agreement on Tariffs and Trade (GATT) went into effect with 23 countries (the original 15, plus Burma, Ceylon, Chile, Lebanon, Norway, Pakistan, South Rhodesia, and Syria). As a result, unilateral trade restrictions were lifted, and the global economy recovered.

Examples

The United States has unilateral trade policies under the Generalized System of Preferences (GSP). That's where developed countries grant preferential tariffs to imports from developing countries.

The goal is to lower the prices of the products, stimulate demand, and help the struggling nations to grow. It furthers foreign policy goals while lowering the prices of imports for Americans. Since the countries are small, the volume of these goods don't offer significant competition to U.S. companies. As the countries grow, they become a more affluent market for U.S. exports.  It was instituted on January 1, 1976, by the Trade Act of 1974. 

The U.S. GSP offers duty-free status for 5,000 imports from 122 countries. That includes 43 of the Least Developed Beneficiary Developing Countries. These include Afghanistan, Bangladesh, Bhutan, Cambodia,  Nepal, and Yemen. It also includes 38 African countries that are under the African Growth and Opportunity Act (AGOA).  In 2015, total duty-free imports under the GSP was $17.4 billion.

(Source: "Generalized System Preferences," Office of the Trade Representative, December 14, 2016.)