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The agreement between two countries to extend to each other specific privileges in their international trade which are not extended to others. These privileges may, for instance, take the form of generous import quotas or favourable import duties. In so far as such agreements tend to proliferate, and in that they impose artificial restraints on the free movements of goods between countries, in the long run they could have an unfavourable effect on international trade compared with multilateralism, under which there is no discrimination by origin or destination. Bilateralism became widespread in the inter-war period as countries tried to protect themselves from the fall in international trade during the depression. After the Second World War, there was a fear that a restrictionist policy would be followed by the Commonwealth and Western European countries in order to protect themselves from the influence of the U.S., which had emerged from the war in a relatively strong position. However, the General Agreement on Tariffs and Trade was established in 1947 on multilateral principles, and has since been pursuing a policy designed to eliminate bilateralism and other restrictions on international trade. The success of this policy has been somewhat constrained by the setting up of a number of trading areas.

Reference: The Penguin Dictionary of Economics, 3rd edt.