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Counter trade

Counter Trade" means any arrangement under whichexports/imports from/to India are balanced either by direct

imports/exports from the importing/exporting country or througha third country under a Trade Agreement or otherwise.Exports/Imports under Counter Trade may be carried outthrough Escrow Account, Buy Back arrangements, Barter tradeor any similar arrangement. The balancing of exports andimports could wholly or partly be in cash, goods and/or services.

Countertrade means exchanging goods or services which arepaid for, in whole or part, with other goods or services, ratherthan with money. A monetary valuation can however be used incounter trade for accounting purposes.

Types of countertrade

There are five main variants of countertrade:

Barter: Exchange of goods or services directly for othergoods or services without the use of money as means ofpurchase or payment. One of the largest barter deals to dateinvolved Occidental Petroleum Corporations agreement toship supershophric acid to the former Soviet Union forammonia urea and potash under a 2 year deal which wasworth 18 billion euros.

Switch trading: Practice in which one company sells toanother its obligation to make a purchase in a givencountry.

http://en.wikipedia.org/wiki/Barterhttp://en.wikipedia.org/wiki/Barter

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Counter purchase: Sale of goods and services to a countryby a company that promises to make a future purchase of aspecific product from the country.

Tolling: In a tolling deal, a supplier himself provides theraw material (steel ingots, say) and hires capacity of thefactory to turn it into finished goods (e.g. steel tubes).These are then bought by a final customer who pays thesupplier in cash - throughout the process the supplierretains ownership of the material as it is procecessed by thefactory." - this is similar to Contract Manufacturingwhere the Contractor provides much of the materials.

Buyback: occurs when a firm builds a plant in a country -or supplies technology, equipment, training, or otherservices to the country and agrees to take a certainpercentage of the plant's output as partial payment for thecontract.

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 aproduct from another, subject to the purchase of some or allof the components and raw materials from the buyer of thefinished product, or the assembly of such product in thebuyer nation.

Offset has traditionally been used by governments aroundthe world when they have made major purchases ofmilitary goods but is becoming increasingly common inother sectors. There are two distinct types:

A. direct offset: "the supplier agrees to incorporatematerials, components or sub-assemblies which areprocured from the importing country. In some largecontracts, successful bidders may be required to establish

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local production. Direct offset has been particularlycommon for trade in defence systems and aircraft."

B. indirect offset: "the purchaser requires suppliers to

enter into long term industrial (and other) co-operation andinvestment but these are unconnnected to the supplycontract and may be either defence related or in the civilsector."

"The overall objective of offset either, direct or indirect, inthe defence sector generally to promote import substitutionand to minimise the balance of payments deficit formilitary purchases by developiing an indigenous industrial

defence capability."

Necessity

Countertrade also occurs when countries lack sufficient hardcurrency, 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 UNGulf War sanctions, that would facilitate 300,000 barrels of oildelivered daily to India at a price of $6.85 a barrel while Iraq oilsales into Asia were valued at about $22 a barrel. In 2001, Indiaagreed 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 thecountry, most Iraqis do not have the necessary purchasing powerto buy them. Unfortunately, the monthly food rations representthe largest proportion of their household income. They areobliged to either barter or sell items from the food basket in

http://en.wikipedia.org/wiki/Hard_currencyhttp://en.wikipedia.org/wiki/Hard_currencyhttp://en.wikipedia.org/wiki/Iraqhttp://en.wikipedia.org/wiki/Oil_for_foodhttp://en.wikipedia.org/wiki/UNhttp://en.wikipedia.org/wiki/UN_Security_Councilhttp://en.wikipedia.org/wiki/Hard_currencyhttp://en.wikipedia.org/wiki/Hard_currencyhttp://en.wikipedia.org/wiki/Iraqhttp://en.wikipedia.org/wiki/Oil_for_foodhttp://en.wikipedia.org/wiki/UNhttp://en.wikipedia.org/wiki/UN_Security_Council

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order to meet their other essential needs. This is one of thefactors which partly explains why the nutritional situation hasnot improved in line with the enhanced food basket. Moreover,

the absence of normal economic activity has given rise to thespread of deep-seated poverty."

Role of countertrade in the world market

The volume of countertrade is growing. In 1972, it wasestimated that countertrade was used by business andgovernments 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 requirehcountertrade exchanges. Officials of the General Agreement onTariffs and Trade (GATT) organization claimed thatcountertrade accounts for around 5% of the world trade. TheBritish 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 tradingsectors of Eastern European and Third World Countries. Aconsensus of expert opinions (Okaroafo, 1989) has put thepercentage of the value of world trade volumes linked tocountertrade transactions at between 20% to 25%.

Why Countertrade?

1. The world debt crisis has made ordinary trade financingvery risky.- large banks and financial institutions are "risk adverse" inmany of the hostile regions of the world opening to trade2. Many countries cannot obtain the trade credit or financial

http://en.wikipedia.org/wiki/General_Agreement_on_Tariffs_and_Tradehttp://en.wikipedia.org/wiki/General_Agreement_on_Tariffs_and_Tradehttp://en.wikipedia.org/wiki/General_Agreement_on_Tariffs_and_Tradehttp://en.wikipedia.org/wiki/General_Agreement_on_Tariffs_and_Trade

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assistance to pay for desired imports.- the IMF and World Bank are increasingly restrictive inthe way they allow governments to operate

3. Countries are increasingly returning to the notion ofbilateralism as a way to reduce trade imbalances.- some multilateral blocks have developed - but politics iseasier on a one2one basis - so many nations find it easier tocur deals directly with another single country4. Countertrade is often viewed as an excellent mechanismto gain entry into new markets. The party receiving thegoods may become a new distributor, opening up new

international marketing channels and ultimately expandingthe market.- especially where 4X problems are challenging to solve5. Providing countertrade services helps sellers differentiateits products from those of competitors.- flexibility is key to winning business in a global marketthat is more and more competitive to vendors

2. Expand or maintain foreign markets3. Increase sales4. Sidestep liquidity problems5. Repatriate blocked funds6. Clean up bad debt situations7. Build customer relationships8. Keep from losing markets to competitors9. Gain foreign contracts for future sales10. Find lower-cost purchasing sources11. Money - some people cannot pay in the currency you want

"to enable trade to take place in markets which are unableto pay for imports. This can occur as a result of a non-

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convertible currency, a lack of commercial credit or ashortage 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 helpfind new export markets"

13. The Political Environment - rules and regulations to protectthe host country"as a reflection of political and economic policies whichseek to plan and balance overseas trade"

14. "to gain a competitive advantage over competing

suppliers."

Four Countertrade Strategies

Defensive. "Companies with a defensive countertradestrategy ostensibly do not countertrade at all; however, theymake many countertrade-type arrangements with buyercountries. These companies will avoid any contractual

countertrade obligations, but they make it clear to the countrythat they will reciprocate in some way for the sale. Somecompanies will sell their products at rock-bottom prices andpromise to help the country with export development."

Passive. "Companies with passive countertrade strategiesregard countertrade as a necessary evil. They participate in

countertrade at minimal level, on an ad hoc basis. Somecompanies operate this way because they have productleverage (i.e., little or no competition), while others followthe passive strategy because of disinterest in countertrade."

Reactive. "This is the most common strategy among

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American companies. Companies with reacting strategies willcooperate with the buyer country in offset/countertraderequirements, they use countertrade strictly as a competitivetool, on the theory that they cannot make the sale unless theyagree to countertrade."

Proactive. "Companies with proactive strategies have made acommitment to countertrade. They use countertradeaggressively as a marketing tool, and are interested in makingtrading an active and profitable part of their business. They

regard offset and counterpurchase as an opportunity to makemoney through trading, rather than as an inconvenience."

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