Origins of Countertrade

Countertrade is any commercial arrangement in which sellers or exporters are required to accept in partial or total settlement of their deliveries a supply of products from the import­ing country. In essence, it is a nation’s (or firm’s) use of its purchasing power as leverage to force a private firm to purchase or market its marginally undesirable goods or exact other concessions in order to finance its imports or obtain needed hard currency or technology. Although the manner in which the transaction is structured may vary, the distinctive feature of such arrangements is the mandatory performance element that is either required by the importer or the importer’s government or made necessary by competitive considerations (Verzariu, 1985, 1992).

The origins of countertrade can be traced to ancient times, when international trade was based on the free exchange of goods. Barter flourished in northern Mesopotamia as early as 3000 BC, when inhabitants traded in textiles and metals. The Greeks also profited by the exchange of olive oil and wine for grain and metals sometime before 2000 BC (Anyane-Ntow and Harvey, 1995; Brinton, Christopher, Wolff, and Winks, 1984). Even with the flourishing of a money economy, barter still continued as a medium of exchange. Present-day counter­trade involves more than the use of simple barter. It is a complex transaction that includes the exchange of some currency as well as goods between two or more nations. A counter­trade transaction may, for example, specify that the seller be paid in foreign currency on the condition that seller agrees to find markets for specified products from the buyer’s country.

The resurgence of countertrade has often been associated with East-West trade. At the start of the 1950s, the then-Communist countries of Eastern Europe faced a chronic shortage of hard (convertible) currency to purchase needed imports. In their dealings with Western countries, they insisted that their products be taken in exchange for imports from the latter countries. This practice also proved quite attractive to many developing nations, which also suffer from a shortage of convertible currency. The use of countertrade has steadily increased

and is presently estimated to account for about 20 to 30 percent of world trade (Hennart and Anderson, 1993; Howse, 2010). Although there may be disagreements concerning the current volume of countertrade, the broad consensus is that countertrade constitutes a significant and rapidly growing portion of world commerce (Bost and Yeakel, 1992; McVey, 1984). A large number of U.S. corporations find it difficult to conduct business with many coun­tries without relying on countertrade. For example, about two thirds of foreign purchases of American commercial and military jets are paid for with local products instead of cash (Angelidis, Parsa, and Ibrahim, 2004; Bragg, 1998). Businesses are resorting to countertrade in response to increasing costs and declining availability of trade finance. In response to this growing interest, some U.S. banks have established their own countertrade departments (Welt, 1990).

In the 1980s, countertrade was used mainly as a vehicle for trade finance. It is now used to meet a broad range of business objectives: capital project financing, production sharing, repatriation of profits from countries with hard currency shortages, and competitive bidding on major government procurements (Caves and Marin, 1992; Egan and Shipley, 1996).

Examples of Countertrade

• Malaysia signed a deal swapping palm oil for fertilizer and machinery with North Ko­rea, Cuba, and Russia. Thailand and Iran agreed to barter rice for oil.
• Indonesia negotiated for a power station project with Asea Brown Boveri and for an air traffic control system with Hughes Aircraft. Counterpurchase obligations were to be 100 percent of the FOB values. The firms export, through a trading company, a range of Indonesian products: cocoa to the United States, coal to Japan, fertilizer to Vietnam and Burma.
• Lockheed Martin agreed to sell F-16 military aircraft to Hungary in exchange for large investment and counterpurchase commitments. The firm agreed to buy $250 million (U.S.) worth of Hungarian goods. It established an office in Budapest to participate in tendering and to procure the country’s industrial goods for export.
• Taiwan purchased sixty Mirage between 2000 and 2005 from a French aviation com­pany, Dussault. In return, Dussault undertook a joint venture with Taiwan’s aerospace company, Chenfeng, for the production of key aircraft parts and components for local aircraft and export (Anonymous, 1997a, 1997b, 1997c).

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