Counter trade

Counter Trade" means any arrangement under which

exports/imports from/to India are balanced either by direct
imports/exports from the importing/exporting country or through
a third country under a Trade Agreement or otherwise.
Exports/Imports under Counter Trade may be carried out
through Escrow Account, Buy Back arrangements, Barter trade
or any similar arrangement. The balancing of exports and
imports could wholly or partly be in cash, goods and/or services.
Countertrade means exchanging goods or services which are
paid for, in whole or part, with other goods or services, rather
than with money. A monetary valuation can however be used in
counter trade for accounting purposes.
Types of countertrade
There are five main variants of countertrade:
• Barter: Exchange of goods or services directly for other
goods or services without the use of money as means of
purchase or payment. One of the largest barter deals to date
involved Occidental Petroleum Corporation´s agreement to
ship supershophric acid to the former Soviet Union for
ammonia urea and potash under a 2 year deal which was
worth 18 billion euros.
• Switch trading: Practice in which one company sells to
another its obligation to make a purchase in a given
country.
• Counter purchase: Sale of goods and services to a country
by a company that promises to make a future purchase of a
specific product from the country.
• Tolling: In a tolling deal, a supplier himself provides the
raw material (steel ingots, say) and hires capacity of the
factory to turn it into finished goods (e.g. steel tubes).
These are then bought by a final customer who pays the
supplier in cash - throughout the process the supplier
retains ownership of the material as it is procecessed by the
factory." - this is similar to Contract Manufacturing
where the Contractor provides much of the materials.
• Buyback: 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.
• Offset: Agreement that a company will offset a hard -
currency purchase of an unspecified product from that
nation in the future. Agreement 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.
• Offset has traditionally been used by governments around
the world when they have made major purchases of
military goods but is becoming increasingly common in
other sectors. 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 unconnnected 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 developiing an indigenous industrial
defence capability."
Necessity
Countertrade also occurs when countries lack sufficient hard
currency, or when other types of market trade are impossible.
In 2000, India and Iraq agreed on an "oil for wheat and rice"
barter deal, subject to UN approval under Article 50 of the UN
Gulf War sanctions, that would facilitate 300,000 barrels of oil
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 2001, India
agreed to swap 1.5 million tonnes of Iraqi crude under the oil-
for-food program.
The Security Council noted: "... although locally produced food
items have become increasingly available throughout the
country, most Iraqis do not have the necessary purchasing power
to buy them. Unfortunately, the monthly food rations represent
the largest proportion of their household income. They are
obliged to either barter or sell items from the food basket in
order to meet their other essential needs. This is one of the
factors which partly explains why the nutritional situation has
not improved in line with the enhanced food basket. Moreover,
the absence of normal economic activity has given rise to the
spread of deep-seated poverty."
Role of countertrade in the world market
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).
More than 80 countries nowadays regularly use or require
hcountertrade exchanges. Officials of the General Agreement on
Tariffs and Trade (GATT) organization claimed that
countertrade accounts for around 5% of the world trade. The
British Department of Trade and Industry has suggested 15%,
while numerous scholars believe it to be closer to 30%, with
east-west trade having been as high as 50% in some trading
sectors of Eastern European and Third World Countries. A
consensus of expert opinions (Okaroafo, 1989) has put the
percentage of the value of world trade volumes linked to
countertrade transactions at between 20% to 25%.
Why Countertrade?
1. The world debt crisis has made ordinary trade financing
very risky.
- large banks and financial institutions are "risk adverse" in
many of the hostile regions of the world opening to trade
2. Many countries cannot obtain the trade credit or financial
 assistance to pay for desired imports.
- the IMF and World Bank are increasingly restrictive in
the way they allow governments to operate
3. Countries are increasingly returning to the notion of
bilateralism as a way to reduce trade imbalances.
- some multilateral blocks have developed - but politics is
easier on a one2one basis - so many nations find it easier to
cur deals directly with another single country
4. Countertrade is often viewed as an excellent mechanism
to gain entry into new markets. The party receiving the
goods may become a new distributor, opening up new
international marketing channels and ultimately expanding
the market.
- especially where 4X problems are challenging to solve
5. Providing countertrade services helps sellers differentiate
its products from those of competitors.
- flexibility is key to winning business in a global market
that is more and more competitive to vendors
2. Expand or maintain foreign markets

3. Increase sales

4. Sidestep liquidity problems

5. Repatriate blocked funds

6. Clean up bad debt situations

7. Build customer relationships

8. Keep from losing markets to competitors

9. Gain foreign contracts for future sales

10. Find lower-cost purchasing sources

11. Money - some people cannot pay in the currency you want

"to enable trade to take place in markets which are unable

to pay for imports. This can occur as a result of a non-
 convertible currency, a lack of commercial credit or a
shortage of foreign exchange"
12. The Political Environment - local jobs and industry

"to protect or stimulate the output of domestic industries

(including agriculture and mineral extraction) and to help
find new export markets"
13. The Political Environment - rules and regulations to protect

the host country

"as a reflection of political and economic policies which
seek to plan and balance overseas trade"
14. "to gain a competitive advantage over competing

suppliers."
Four Countertrade Strategies
Defensive. "Companies with a defensive countertrade
strategy ostensibly do not countertrade at all; however, they
make many countertrade-type arrangements with buyer
countries. These companies will avoid any contractual
countertrade obligations, but they make it clear to the country
that they will reciprocate in some way for the sale. Some
companies will sell their products at rock-bottom prices and
promise to help the country with export development."
Passive. "Companies with passive countertrade strategies
regard countertrade as a necessary evil. They participate in
countertrade at minimal level, on an ad hoc basis. Some
companies operate this way because they have product
leverage (i.e., little or no competition), while others follow
the passive strategy because of disinterest in countertrade."
Reactive. "This is the most common strategy among
American companies. Companies with reacting strategies will
cooperate with the buyer country in offset/countertrade
requirements, they use countertrade strictly as a competitive
tool, on the theory that they cannot make the sale unless they
agree to countertrade."
Proactive. "Companies with proactive strategies have made a
commitment to countertrade. They use countertrade
aggressively as a marketing tool, and are interested in making
trading an active and profitable part of their business. They
regard offset and counterpurchase as an opportunity to make
money through trading, rather than as an inconvenience."
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