Benefits of Countertrade

1. Benefits for Buyers

1.1. Transfer of Technology

In exchange for a guaranteed supply of raw materials or other scarce resources, a developed nation will provide the capital, equipment, and technology that are needed to develop such resources. Western firms, for example, assisted Saudi Arabia in the development of its refin­ery and petrochemical industry in exchange for the right to purchase a certain amount of oil over a given period of time.

1.2. Alleviating Balance-of-Payments Difficulties

The financial crisis, coupled with adverse movements in the price of key export commodities, such as coffee or sugar, left many developing countries with severe balance-of-payments dif­ficulties. Countertrade has been used as a way of financing needed imports without depleting limited foreign currency reserves. Some countries have even used it as a way of earning hard currency by promoting the export of their domestic output. Countertrade has thus helped these nations avoid the burden of additional borrowing to finance imports as well as the need to restrict domestic economic activity. Countertrade is also used as a method of entering a new market, particularly in product areas that invite strong competition.

1.3. Maintaining Stable Prices for Exports

Countertrade allows commodity exporters to maintain nominal prices for their products even in the face of limited or declining demand. The price of the product that is purchased in exchange could be increased to take into account the inflated price of exports. In this way, an exporter can dispose of its commodities without conceding the real price of the product in a competitive market. In the case of cartels, such as OPEC (Organization of Petroleum Exporting Countries), a member could attract customers through countertrade opportuni­ties without violating price guidelines.

2. Benefits for Exporters

2.1. Increased Sales Opportunities

Countertrade generates additional sales that would not otherwise be possible. It also enables entry into difficult markets.

2.2. Access to Sources of Supply

Countertrade provides exporters access to a continuous supply of production components, precious raw materials, or other natural resources in return for sales of manufactured goods or technology.

2.3. Flexibility in Prices

Countertrade enables the exporter to adjust the price of a product in exchange for overpriced commodities (International Perspective 12.1).

Source: Seyoum Belay (2014), Export-import theory, practices, and procedures, Routledge; 3rd edition.

2 thoughts on “Benefits of Countertrade

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