Counter trade 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.

Barter :Exchange of goods or services directly for other goods or services without the use of money as means of purchase or payment

Eg:The Malaysian government purchased 20 diesel electric locomotives from General Electric against the supply of about 200,000 metric tons of palm oil over a period of 30 months. (Source: www.citeman.com)

Counter purchase: A foreign supplier undertakes to purchase goods and services from the purchasing country as a condition of securing the order. Counter purchase is generally imposed for two reasons: first, to stimulate exports and second, to alleviate the balance of payment deficit resulting from imported goods.“

Example:

Pepsi Cola sold concentrates in the USSR and got paid in Rubles, which according to the agreement with Russia, these Rubles were spent for purchase of Russian products like Vodka and wine (Source: www.citeman.com)

Example:Pepsi Cola sold concentrates in the USSR and got paid in Rubles, which according to the agreement with Russia, these Rubles were spent for purchase of Russian products like Vodka and wine (Source: www.citeman.com)

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.

Example: National Textiles Corporation of India signed a buy back agreement of Indian Rupee 200 million with the Soviet Union to buy 200 sophisticated looms. The buyback ratio was 75% textile produce from these looms and the remaining was in cash. (Source: www.citeman.com)

National Textiles Corporation of India signed a buy back agreement of Indian Rupee 200 million with the Soviet Union to buy 200 sophisticated looms. The buyback ratio was 75% textile produce from these looms and the remaining was in cash. (Source: www.citeman.com)

Switch trading: Switch Trading involves the role of third party in a countertrade transaction.  If a seller in the countertrade does not want goods offered by the buyer as payment, it may bring in third party to dispose of the merchandise offered by the buyer.

Example: Country A has exported the goods worth US$ 10 million to Country B and Country B has exported the goods worth US$ 8 million to Country A. So, Country A has a surplus balance of US$ 2 million (10 – 8) with Country B. At the end of the agreed period, if country B does not have US$ 2 million to pay to the country A, it’s another trading partner Country C will pay US$ 2 million to country A.

Offset: Offset is the type of countertrade, which is

mostly related to very high value of exports and/or medium to high technology capital goods supplied by a multinational corporations or a major manufacturer.

Offset activity can be divided into two main categories

1)Direct 2)Indirect

DIRECT OFFSET: The offset is said to be direct when some components of the item sold are to be manufactured within the buyer’s 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 buyer’s country and attach to the plane.

INDIRECT OFFSET : The offset is said to be indirect 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.

Tolling:In tolling, the seller supplies raw material and receives finished goods produced from this raw material as payment from the buyer. Here also the seller can receive the payment partially in finished goods and partially in cash. 

Typically, the tolling is more popular among the industries, where the finished good is also commodity. For example: crude oil converted to petroleum products.

Clearing Arrangements:This type of trading is between two or more than two countries in the shape of an agreement, under which agreed volume of goods are imported and exported over a specific time period without the payment of foreign currencies. At the end of the agreed time period, the

balance is settled in an agreed foreign currency for example US Dollars.    

Establishes long term relationship with international buyers thereby increasing profit and market share.

Importers in low income countries face a scarcity of foreign exchange to finance their imports so counter trade can act as an effective source.

Clean up bad debt situations.

Build customer relationships

Gain foreign contracts for future sales

When there is a scarcity and restrictive foreign exchange reserves, the countertrade is the best option for importing countries.

Countertrade is also one of the options to find and enter into new, difficult and challenging markets.

By adopting the policy of countertrade, a business has a competitive edge over its competitors.

If it seems that a sale on credit can lead to bad debt situation, a seller can avoid this situation, by adopting the policy of countertrade. 

Other benefits of countertrade include better capacity utilization.  

The goods, which are offered by customers does not have an in-house use. For example a manufacturer or supplier of consumer goods will receive medical equipment in exchange. Now, the business does not have any experience of handling and marketing of medical equipment.  Expertise has to be hired or trained and manufacturing firms have to set up subsidiaries to handle countertrade arrangements or employ the services of trading companies specializing in medical equipments.  All this cost more and is time consuming effort. 

Lot of time is required to plan and research, what should be taken in exchange of the goods supplied.  For every 10 to 20 deals that are talked about perhaps one gets done.

Countertrade deals are full of risks and uncertainties, especially when the deals are spread over number of years. There is a risk of availability and quality of goods to be delivered in future years.   

STC (STATE TRADING COPPORATION IN INDIA) has been a nodal agency to monitor counter trade commitments arising out of purchases made by various departments of Govt. of India and has monitored such offset transactions worth over 1 billion USD in the last two decades.

The international partners with whom counter trade transactions were handled by STC in the past include Bofors, Boeing, British Aerospace, General Electronic, Pratt & Whitney etc.

  Air India and Indian (Erstwhile Indian Airlines ) have entered

into purchase agreements with the Boeing Company, USA, Airbus, France, General Electric Company, USA & CFM International, France for supply of 111 aircrafts/ engines.

These agreements have commitment from these overseas manufacturers to fulfill offset obligations/ counter trade programme to the extent of agreed percentages.

In line with this STC has entered into agreements with these companies for implementation and monitoring of such offset obligations/ counter trade programme.