WHILE BILATERAL PAYMENTS arrangements assumed large proportions prior to and after World War II, since then their importance in world trade has been gradually reduced. While it still plays a role, bilateralism in payments and trade no longer interferes as extensively as it once did with the mechanism of a free exchange of goods and services and the movement of capital. Because bilateralism still plays some role in the system of international settlements and trade, it is worthwhile to take a critical look at it; even if we cannot altogether avoid the repetition in the future of mistakes committed in the past, at least we can appraise these errors.
How do the adherents of bilateral payments arrangements justify them? Why do countries enter into and maintain bilateral trade and payments arrangements? Looking at the matter historically, we find that during the general economic upheaval and disorder accompanying the great economic crisis in Europe in the 1930’s, and again after World War II, countries tended to favor bilateral and trade payments arrangements, which were supposed to help to carry out trade and settlements at a time when the multilateral system of trade and payments failed to function satisfactorily and when balance of payments difficulties were very acute.
It is possible to be much more specific about the reasons and aims that act as inducement for various countries to take recourse to bilateral trade and payments arrangements, but the list of such reasons and inducements is relatively long, and only the most important ones’ need be discussed here.
Countries entering into bilateral trade and payments arrangements have generally hoped that such arrangements would assist them in expanding, diversifying, and redirecting their trade. Other countries expect to improve their terms of trade and/or to stabilize their export markets and the prices of exports. Certain countries hope that bilateral arrangements will help them to find new markets for exports and additional markets from which they can draw their imports, so as to become less dependent on traditional markets. Countries are also tempted to conclude bilateral arrangements in order to obtain revolving credits through swing and other loan facilities available under payments arrangements. Another hope is that the introduction of bilateral payments arrangements may serve to liquidate funds of a given country which are blocked by another country; by channeling specified payments through a bilateral account, debtor and creditor countries expect to facilitate the transfer of frozen funds. Certain developing countries that are carrying out economic plans are in favor of bilateral arrangements, as they feel that they would thereby be able to make those plans more efficient.
Last, but not least, a number of countries conclude bilateral arrangements with countries having state trading economies in order to demonstrate their willingness to cooperate with these countries in economic and other fields.