THE BOOMING BUSINESS OF COUNTERTRADE

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THE BOOMING BUSINESS OF COUNTERTRADE
Source International Business. Czinkota,
Ronkainen, and Moffet. The Dryden Press, Harcourt
Brace College Publishers. ISBN 0-03-022378-4.
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• Several MNCs are turning to barter or
  countertrade arrangements to clear their
  warehouses of everything from corporate jets to
  boxer shorts and dinner mints.
• Barter allows companies to become more flexible
  and quicker in the face of international business

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• I - A Definition of Countertrade

• Countertrade is a sale that encompasses more than
  an exchange of goods, services, or ideas for
  money.
• Countertrade transactions are those transactions
  that have as a basic characteristic a linkage,
  legal or otherwise between exports and imports of
  goods or services in addition to, or in place of,
  financial settlements.
• Countertrade transactions have therefore always
  arisen when economic circumstances made it more
  acceptable to exchange goods directly rather than
  to use money as an intermediary.

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• Conditions that favor countertrade lack of
  money, lack of value or faith in money, lack of
  acceptability of money as an exchange medium.
• In the 1950s, Eastern Europe
• Time Horizon in 1972, 15 countries were pursuing
  countertrade, today more than a 100.
• 25 of the global trade is countertrade related.
• American Countertrade Association

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• II - Pros of Countertrade

1. The world debt crisis has made ordinary trade
financing very risky. 2. The use of
countertrade permits the covert reduction of
prices and therefore allows the circumvention of
price and exchange controls. 3. You scratch my
back and Ill scratch yours Bilateralism 4.
Excellent mechanism to gain entry into new
markets 5. Countertrade can be a good way to
attract new buyers. 6. Countertrade also can
provide stability for long-term sales.
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• III - Cons of Barter

• 1. Instead of there being a double coincidence
  of wants, there is likely to be a want of
  coincidence.
• 2. The ability of countries and their industries
  to adjust structurally to more efficient
  production may be restricted.

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IV - Types of Countertrade
Barter In barter arrangement goods are exchanged
directly for other goods of approximately equal
value.
Counterpurchase the participnat parties sign two
separate contracts that specify the goods and
services to be exchanged. In this way one
transaction can go forward even though the second
transaction needs time.
Buy-Back or Compensation Arrangement One party
agrees to supply technology or equipment that
enables the other party to produce goods with
which the price of the supplied products or
technology is repaid.
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Offset offset arrangements are designed to
offset the negative effects of large purchases
from abroad on the current account of a country.
Ex a country buying an airplace may demand that
parts and components be acquired in the local
economy.
Debt-For-Nature Swap firms or entities buy what
are otherwise considered to be nonperforming
loans at substantial discounts and return the
debt to the country in exchange for the
preservation of natural resources.
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V - Official Attitudes Toward Countertrade
U.S. VIEWS
1. Transactions are purely bilateral in nature
and are not competitive since they squeeze out
competition from a third market or specify the
export market. 2. Countertrade is a second-best
solution 3. Concerns regarding the valuation
of countertrade transactions and with ensuring
that appropriate tax payments are made.
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OTHER GOVERNMENTS

• 1. Indonesia over US 500,000 countertrade is
  mandatory
• 2. Japan and European Nations favored
  countertrade.

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VI - The Corporate Situation

• In the past U.S. companies viewed and claimed
  that countertrade was a hindrance to
  international business.
• Increasingly companies are formulating
  international business strategies and are
  planning to acquire market share from their
  competition by seeking out countertrade
  opportunities.
• Companies and countries imposing countertrade
  requirements believe that there are more merits
  to the transactions than purely conserving
  foreign currency.

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VII - Prepating for Countertrade

• Developing an in-house capability for handling
  countertrade should be done with great caution
• Steps
• 1. Determine the import priorities of its
  products
• 2.