Counter Trade – Definition Why Counter Trade Types of Counter Trade Pros and Cons
Countertrade is considered to be the oldest methods of payment in the known history Countertrade means exchanging goods or services which are paid for, in whole or part, with other goods or services, rather than with money Countertrade was common in the USSR in the 1960s when its currency was nonconvertible. It was their only means of purchasing foreign goods. Countertrade grew in the 1980s as many other nations did not have the foreign reserves required to make imports. Countertrade increased yet again during the Asian financial crisis in 1997, as many currencies became devalued and had severely limited buying power.
In 2000, India and Iraq agreed on an "oil for wheat and rice" barter deal, 300,000 barrels of oil were delivered daily to India at a price of $6.85 a barrel, while Iraq oil sales into Asia were valued at about $22 a barrel In 1974 Pepsicosigned a trade pact with Russia agreeing to ship Pepsi concentrate in exchange for Stolichnaya Russian vodka. The barter was successful and In 1990 the pact was extended 10 years to last until 2000.. The value of the traded items after resale in their respective counties is $3 billion; thats 3$ billion of Pepsi in the Soviet Union and $3 billion of Stolichnaya in the United States. Examples
A majority of companies participate in counter trade due to a requirement of a foreign government or customer. Those companies that have utilized counter trade have found it to be an effective way of expanding sales and improving efficiency in operations.
Expand or maintain foreign markets Increase sales Sidestep liquidity problems Repatriate blocked funds Clean up bad debt situations Build customer relationships Keep from losing markets to competitors Gain foreign contracts for future sales Find lower-cost purchasing sources
International commerce, possibly as much as 25%, involves the barter of products for other products rather than for hard currency. Countertrade may range from a simple barter between two countries to a complex web of exchanges. The volume of countertrade is growing. In 1972, it was estimated that countertrade was used by business and governments in 15 countries; in 1979, 27 countries; by the start of 1990s, around 100 countries. (Vertariu 1992). A large part of countertrade has involved sales of military equipment (weaponry, vehicles and installations). More than 80 countries nowadays regularly use or require countertrade exchanges.
Types of CTBarterOffset Switch Trading Counterpurchas e Compensation or Buybacks
Direct exchange of goods or services between two parties without a cash transaction. Primarily used for one time deals only with partners who are not creditworthy. Problems with the Barter: If goods are not exchanged simultaneously, one party ends up financing other for a period. Firms end up buying unwanted goods. Barter
It is a reciprocal buying agreement. It occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made. Example: Rolls Royce and Finland Counter-purchase
It means using a specialized third-party trading house in a counter trade agreement. Counterpurchase credits are purchased by a third- party trading house at a discount and sells them to another firm at a profit. Example: Poland and Greece Counterpurchase credits worth $250,000 sold by Greece to a switch trader for $225,000 who in turn sold the credits to a European sultana(Grape) merchant for $235,000.
Agreement that a company will offset a hard - currency purchase of an unspecified product from that nation in the future. By one nation to buy a product from another, subject to the purchase of some or all of the components and raw materials from the buyer of the finished product, or the assembly of such product in the buyer nation Related to very high value of exports and/or medium to high technology capital goods supplied by a multinational corporations or a major manufacturer
Direct Offset: When some components of the item sold are to be manufactured within the buyers country and that the seller agrees to buy those components to use them in-house. Example: An aircraft manufacturer sells a passenger plane to a buyer in another country and agrees with the buyer that some of the spare parts of the plane will be ordered and purchased in buyers country and attach to the plane.
Indirect offset: when the buyer requires the seller to enter into a long term industrial or other co- operation and investment, but this co- operation or investment is not related to goods supplied by the seller. Example: An aircraft manufacturer sells a passenger plane to a buyer in another country, here instead of buying the spare parts of passenger plane from the buyers country, the seller agrees to invest in a chipboard factory in buyers country. (Chipboard is not related to plane)
Occurs when a firm builds a plant in a country - or supplies technology, equipment, training, or other services to the country and agrees to take a certain percentage of the plant's output as partial payment for the contract.
A major benefit of countertrade is that it facilitates conservation of foreign currency. Additional employment generation Higher sales Better capacity utilization Ease of entry into challenging markets. Most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrading
Counter-trade also involves risks: A major drawback of countertrade is that the value proposition may be uncertain, especially in cases where the goods being exchanged have significant price volatility. Complex negotiations most firms prefer to be paid in hard currency May involve the exchange of unusable or poor- quality goods that the firm cannot dispose of profitably Potentially higher costs logistical issues
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