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 commerce treaty that a nation imposes without regard to others.  It benefits that one country only. It is unilateral because other nations have no choice in the matter. It is not open to negotiation. 

The World Trade Organization defines a unilateral trade preference similarly. It occurs when one nation adopts a trade policy that isn't reciprocated. For example, it happens when a country imposes a trade restriction, such as a tariff, on all imports.

It also applies to a state that lifts a tariff on its partner's imports even that's not reciprocated. A large country might do that to help out a small one. (Source: "Regional Trade Agreements and Unilateral Preferential Arrangements," World Trade Organization.)

A unilateral agreement is one type of free trade agreement. 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's 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 on 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.

In that scenario, other countries would keep their tariffs on U.S. exports. That would give them a unilateral advantage. They could ship cheap goods into the United States, but U.S. exports would be priced higher in their countries. (Source: "Unilateral Free Trade Versus Free Trade Agreements," The Future of Freedom Foundation, August 7, 2013.)

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

Unilateral trade policies such as tariffs work great in the short term. Tariffs raise the price of imports. As a result, the prices of locally made products seem lower in comparison. This boosts economic growth and creates jobs.

Over time, these advantages disappear. That's when other countries retaliate and add their own tariffs. Now the domestic companies' exports drop. As businesses suffer, they lay off recently hired workers. Global trade drops and everyone suffers. 

This occurred during the Great Depression. Countries protected 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. Discover other effects of the Great Depression.

After World War II, the United States started negotiating lower tariffs with 15 countries. They were Australia, Belgium, Brazil, Canada, China, Cuba, Czechoslovakia, France, India, Luxembourg, the Netherlands, New Zealand, South Africa and the United Kingdom.

On January 1, 1948, the General Agreement on Tariffs and Trade went into effect with 23 countries. These were the original 15, plus Myanmar, Sri Lanka, Chile, Lebanon, Norway, Pakistan, South Rhodesia and Syria. This lifted all unilateral trade restrictions and the global economy recovered.

Examples

The United States has unilateral trade policies under the Generalized System of Preferences. That's where developed countries grant preferential tariffs to imports from developing countries. 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 120 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.

 In 2015, total duty-free imports under the GSP was $18.7 billion. 

The GSP's has three goals. The first is to lower the prices of imports for Americans. That's one reason why inflation has subsided. The success of Wal-Mart and other low cost retailers depends on tariff-free production in these countries.

The second goal is to help the countries become a more affluent market for U.S. exports. Since the countries are small, the volume of these goods doesn't offer significant competition to U.S. companies. But they do provide more customers. 

The third goal is to further U.S. foreign policy goals. Countries must abide by U.S. worker rights and intellectual property rights. That helps protect American companies' software, patents and proprietary manufacturing processes.  Worker rights raise the standards of living in those countries. That makes them less competitive against U.S. workers, protecting American jobs. (Source: "Generalized System Preferences," Office of the Trade Representative, December 14, 2016.)