The Trade Numerologist: The Bilateral Trade Deal Tango

With multilateral trade treaties, from the European Union to the Trans-Pacific Partnership, taking hits from protectionist politicians this year, there's been more focus on the importance of bilateral trade deals to offer markets and opportunity for manufacturers, logistics firms and shipping lines.

"I will make bilateral trade agreements with any Indo-Pacific nation that wants to be our partner and that will abide by the principles of fair and reciprocal trade," President Trump said on a trip to Asia last year. "What we will no longer do is enter into large agreements that tie our hands, surrender our sovereignty, and make meaningful enforcement practically impossible."

While an agreement between two separate countries, or between a country and a free trade bloc, also considered a "bilateral" accord, seems simpler in negotiation and execution, it is easier to dismantle, and poses broader risks, say trade historians and analysts.

The tariff wars of the 1930s were exacerbated by a dependency on bilateral trade deals. The prosperous pre-World War One economic globalization was based on over a hundred bilateral trade tries. In 1908, for example, Britain had deals with 46 countries.

However, the reliance on these smaller agreements made it easier to hike tariffs. In the 1930s, "progressive" bilateral trade deals set up in the 19^th century gave way to "pernicious" bilateral trade deals, according to trade historian Doug Irwin.

But after seeing limited use during the second half of the 20^th century, bilateral trade deals have been gaining ground since last decade, when the failure of the Doha Round exposed the limits of global harmonization of trade rules, tariffs and rules for settling arguments over trade imbalances.

There are now hundreds of bilateral trade deals in place, including agreements between economics powers like the US and South Korea, and deals between smaller partners, such as Jordan and Peru. Neighbors, such as the Kyrgyz Republic and Kazakhstan, often have bilateral trade deals. Ethiopia and Kenya have been negotiating new economic ties.

Under President Trump, the US is reportedly looking at the possibility of negotiating a new free trade deal with the EU, Japan or a post-Brexit UK.

"We think we got to have a free trade agreement with Japan and hopefully we get to that stage at some point," US Trade Representative Robert Lighthizer said recently. Japanese officials have said they prefer smaller measures.

An analysis of trade data from the IHS Markit Global Trade Atlas shows that bilateral trade deals do have an immediate impact on total trade between the two countries involved, but that commerce sometimes tapers off after the initial boost.

One of the biggest bilateral deals this decade is the one between the US and South Korea. Since the deal was signed in 2012, total trade between the two countries has increased 17%, to $119.4 billion from $101.9 billion

US-South Korea total trade, 2007-2017

• 2007: $82.9 billion
• 2008: $84.7 billion
• 2009: $66.7 billion
• 2010: $90.2 billion
• 2011: $100.7 billion
• 2012*: $101.9 billion
• 2013: $103.6 billion
• 2014: $115.6 billion
• 2015: $113.9 billion
• 2016: $109.7 billion
• 2017: $119.4 billion
  (*Deal went into effect March 15, 2012)

In contrast, trade between the US and another powerhouse Asian economy, Japan, has declined 6% over that time.

Total trade, US-Japan, 2007-2017

• 2007: $206.6 billion
• 2008: $204.4 billion
• 2009: $146.9 billion
• 2010: $181 billion
• 2011: $194.7 billion
• 2012: $216.4 billion
• 2013: $203.8 billion
• 2014: $201.4 billion
• 2015: $193.8 billion
• 2016: $195.3 billion
• 2017: $204.2 billion

Japan did sign a bilateral deal with an American country, but it wasn't the US. It was Mexico, and trade has almost doubled since that agreement was inked in 2005.

Japan-Mexico total trade, 2004-2017

• 2004: $7.4 billion
• 2005: $9.4 billion
• 2006: $12.1 billion
• 2007: $13.4 billion
• 2008: $13.8 billion
• 2009: $9.7 billion
• 2010: $13.1 billion
• 2011: $14.2 billion
• 2012: $14.9 billion
• 2013: $13.9 billion
• 2014: $14.9 billion
• 2015: $15.2 billion
• 2016: $16.4 billion
• 2017: $17.1 billion
  (*Bilateral deal took effect in 2005)

However, the Japan-Mexico deal also illustrates the limits of bilateral trade deals. After dramatically boosting trade after 2005, Japan-Mexico trade has flattened out.

One of the biggest practitioners of bilateral trade deals is China. Beijing has accords with over a dozen nations, including Pakistan, Switzerland, Chile and New Zealand.

Peru and China signed an agreement that went into effect in 2010, and trade between the two countries has more than doubled.

China-Peru total trade, 2006-2017

• 2006: $3.9 billion
• 2007: $6 billion
• 2008: $7.5 billion
• 2009: $6.3 billion
• 2010*: $9.7 billion
• 2011: $12.5 billion
• 2012: $13.8 billion
• 2013: $14.7 billion
• 2014: $14.4 billion
• 2015: $14.6 billion
• 2016: $15.5 billion
• 2017: $20.1 billion
  (*Bilateral trade deal went into effect)

Countries often sign a bilateral trade deal with specific goals in mind. For example, China has been hungry to ramp up imports of copper, needed to make the wires and pipes essential for economic development. In 2017, Peru shipped $7.1 billion worth of copper to China, or 35% of the total trade between the two nations, compared to 18% in 2010, the year the deal started. When China no longer needs the copper, it will be much easier to pull out of the bilateral deal than it would be to exit a commitment involving other countries.