Principles of Countertrade

Principles of Countertrade

Countertrade is a resourceful way to arrange for the sale of a product from an exporter to a company in a country that does not have the resources to pay for it in hard currency. Forms of countertrade range from simple barter, which is a direct exchange of goods or services of approximately equal value, to buybacks, where the exporter takes back output from the equipment he exported. "Countertrade can be used as an effective international business tool. Countertrade plays a part in 20-25 percent of world trade."(ExPA) I will examine the different types of countertrades and examine the pros and cons.

Barter - The simultaneous exchange of goods without money.

Counter purchase - Offsets the timing of a contract so that one transaction can go forward even though the second transaction requires more time. The participating parties sign two separate contracts that specify the goods and services to be exchanged. This type of countertrade is useful if delivery depends on a future event, like a harvest. Since the goods are often not of equal value, some cash is usually involved.

Buy-back - One party agrees to provide equipment or technology that enables the other party to produce goods, which are used to pay for the supplied equipment.

Production sharing - Similar to buyback, but used in mining and energy projects where the developer is paid out of a share of the production of the mine or well.

Offsets - These arrangements are frequently found in the defense-related sector and in the sales of large-scale, high-priced items such as aircraft. It was designed to offset the negative effects of large purchases from abroad on the current account of a country. Sometimes it may be required that certain portions of the purchased product be produced or assembled in the purchasing country.

Swaps - Used in countries in which both the government and the private sector face large debt. It involves swapping debt for something else such as other debt, equity, products, or education.

Clearing Arrangements - Transactions that extend over long time periods and involve a basket of goods. Clearing accounts are established to track debits and credits of trade. These entries represent purchasing power and are not directly withdraw able in cash. The agreement says that the accounts must balance in the long term.

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