Officials of the GATT organization, claim that counter-trade alone 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 counter-trade transactions at between 20% to 25%.
Why counter-trade:
- Lack of “hard” currency
- Desire for bilateral trade relations
- A mode of entering a foreign market
The pro’s of counter-trade are:
1. The world debt crisis has made ordinary trade financing very risky.
2. The use of countertrade permits the covert reduction of prices and therefore allows the circumvention of price and exchange controls.
3. “You scratch my back and I’ll scratch yours” – Bilateralism
4. Excellent mechanism to gain entry into new markets
5. Countertrade can be a good way to attract new buyers.
6. Countertrade also can provide stability for long-term sales.
Counter-trade is generally conducted between governments, large corporations, consists of several different types:
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Barter |
The direct exchange of goods or services of approximately equal value. |
Not used very often because difficult to find goods of equal value.
Assessing value and disposing of goods is also a problem.
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Swap / Parallel Barter |
Both parties sign two separate contracts that specify the goods and services to be exchanged between them at different times. |
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Counter-purchase |
Seller gets paid but agrees to purchase goods worth the same amount from the buyer. |
This form of counter-trade provides the participants more flexibility in selecting goods and in assessing value.
In this way one transaction can go forward even though the second transaction needs time. |
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Buy-back or Compensation |
One party agrees to supply technology or equipment that enables the other party to produce goods.
Seller agrees to accept as payment a portion of the output or buy it back. |
Technology transfer, quality assurance, and assured payment.
Usuallyutilized in developing or newly-industrialized nations.
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Offset |
Offset arrangements are designed to offset the negative effects of large purchases from abroad on the current account of a country. Ex: a country buying an airplace may demand that parts and components be acquired in the local economy. |
Used frequently by countries to ensure stable currency flow and employment.
Allows countries and organizations to offset the negative impact of large purchases on balance of payments. |
Variations of counter-trade include:
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Switch trading |
Allows credits to be sold on to a third party |
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Clearing account barter |
As with a retail barter exchange – credits and debits in a barter account with a number of participants |
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Debt-swaps |
Less developed countries with large debt burdens |
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Debts-for-equity swaps |
Debt converted into equity in the debtors firm |
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Debt-for-product |
Debt converted into product from the debtors firm/country |
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Debt-for-nature swaps |
firms or entities buy what are otherwise considered to be nonperforming loans at substantial discounts and return the debt to the country in exchange for the preservation of natural resources |
A great deal of counter-trade involves the partial payment of goods or services in cash.
Most emerging market economies have favoured countertrade for economic reasons.
Newly Industrialized Countries favour for competitive reason with countries in Western Europe, Japan, New Zealand, and Australia actively participating and promoting counter-trade.
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