Countertrade and the WTO

The prevalence of countertrade practices has directed the attention of policymakers to its po­tentially disruptive effects on international trade. Trade experts claim that countertrade repre­sents a significant departure from the principles of free trade and could possibly undermine the delicate multilateral trading system that was carefully crafted after World War II. This move­ment toward bilateral trading arrangements deprives countries of the benefits of multilateral trade that GATT/WTO negotiated to confer upon members. Private countertrade transactions, however, fall outside the purview of the GATT, which regulates only governmental actions.

In addition, countertrade tends to undermine trade based on comparative advantage and prolongs inefficiency and misallocation of resources. A country, for example, may have to purchase from a high-cost/low-quality overseas supplier to fulfill its obligation under the ex­port arrangement. Countertrade also slows down the exchange process and results in higher transaction costs in the form of converting goods into money, warehousing, and discounting to a trader when it cannot use the goods received.

Countertrade is also inconsistent with the national treatment standard, which is embod­ied in most international and regional trade agreements. The national treatment standard of the GATT/WTO, for example, requires that imported goods be taxed and regulated in the same manner as domestically produced goods. Any commercial transaction that requires the overseas supplier (exporter) to purchase a specified portion of the value of the exports from the purchaser would violate the national treatment standard (Roessler, 1985).

Countertrade constitutes a restriction on imports. The GATT/WTO prohibits restrictions other than duties, taxes, or other charges applied to imports. This means that if import licenses are granted on the condition that the imports are linked to exports, such countertrade prac­tices would constitute a trade restriction prohibited under the general agreement. Without this government restriction, the producer would be able to import any amount of product that ef­ficiency and consumer demand dictated. Such restrictions are in conformity with the agreement if they are imposed to safeguard a country’s balance of payments (external financial position), as well as to protect against a sudden surge in imports of particular products. (emergency actions).

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