Counter Trade

ACCOUNT FOR THE EXISTENCE OF COUNTER TRADE IN THE WORLD ECONOMY AND EXPLORE THE VIEW THAT ITS INFLUENCE WILL CONTINUE AS A SOLUTION TO THE PROBLEM DEVELOPING COUNTRIES FACE WHEN ATTEMPTING TO EXPORT TO WESTERN MARKETS?

Answer

Introduction

Counter trade is the exchange of goods and services which are paid for in whole or in part, with other goods or services rather than with money.

Counter trade is the practice in international trading of paying for goods in a form other than by hard currency (Oxford 2002). It can also be described as an alternative means of structuring and international sale when conventional means of payment are difficult, costly or non-existent (Hill 2006).

In most cases, counter trading takes place where a company in a country that has little foreign currency wants to purchase goods from a company in another country. As the company cannot obtain the appropriate currency to purchase the goods it want, it offers goods in return for the goods it needs (Leader et al, 1990).

Countertrade consists of transactions which 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 can be used as an effective international business tool. Countertrade makes up an estimated 20-25 per cent of world trade (West 2002). 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. Conditions that favour countertrade are lack of money, lack of value or faith in money, lack of acceptability of money as an exchange medium.

The main disadvantage in a counter trade transaction is that firms often find themselves handling product with which they are not familiar. In addition, counter trade can be expensive and time consuming because of requirement of an in-house trading department to dispose of products profitably.

Counter trade is most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrading. Unlike large enterprises, small and medium size exporters should probably try to avoid countertrade deals unless they have no other option because they lack the worldwide network of operations that may be required to profitably utilize or dispose of goods acquired through them.

Reasons for counter trade existence:

* 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

Types of counter trade

1. Offset

Traditionally used by governments around the world when they have made major purchases of military goods but is becoming increasingly common in other sectors. Suppliers of capital equipment such as aircraft and telecommunications and more especially defence material are obliged to offer offsets in the form of licensing, co-production, technology transfer etc. as sales package. There are two distinct types.

A. direct offset: "the supplier agrees to incorporate materials, components or sub-assemblies which are procured from the importing country. In some large contracts, successful bidders may be required to establish local production. Direct offset has been particularly common for trade in defence systems and aircraft.

B. indirect offset: the purchaser requires suppliers to enter into long term industrial (and other) co-operation and investment but these are unconnected to the supply contract and may be either defence related or in the civil sector.

The overall objective of offset either, direct or indirect, in the defence sector generally to promote import substitution and to minimise the balance of payments deficit for military purchases by developing an indigenous industrial defence capability.

2. Counter purchase

Counter purchase is a situation whereby a seller receives payment in cash but also signs a second contract to purchase a certain amount of goods from the buyer also in cash. This might be for exactly the same amount as the first deal therefore completely offsetting the cash handed over for the first transaction. Counter purchase is generally imposed for two reasons; to stimulate exports and to alleviate the balance of payment deficit from imported goods.

3. Tolling

Manufacturers, in regions such as the Former Soviet