Bilateral Trade as a Development Instrument Under Global Trade Restrictions

In their striving toward development, a number of less developed countries have espoused bilateral trade as yet another policy instrument allowing them to increase their acquisition of foreign resources. This has been particularly true of the trade of India, Pakistan, and Egypt, on which some useful empirical studies have been conducted. The target we are interested in is not trade efficiency as an end in itself, but growth. For a number of countries, the ability to grow depends very much on the ability to import. Hence, it is in terms of this target that we propose to evaluate the efficiency of bilateral trade as a policy instrument and to examine a number of related issues, such as the terms of trade, trade diversion, and its effect on resource allocation. A brief description of bilateral trade agreements starts our discussion followed by a three-country model as a theoretical formulation of the problem. Finally, several implications will be derived in relation to the issues mentioned above.