Seyoum 12

Updated on 05/05/2015

BusAd 175: Introduction to International Trade

Spring 2011

Course #3819

Apr 18 - Jun 8, 2011

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Chapter Outlines, Sample Tests and Review Questions
	with your questions

Chapter 12: Countertrade

The Class Text-Book

Export-Import Theory, Practices and Procedures by Belay Seyoum

(2nd Edition: Routledge, 2009) ISBN: 978-0-7890-3420-5

Click here on this image on the left to browse the information about this book at amazon.com

Chapter Outline

Seyoum Chapter 12

	Sample Multiple Choice Questions
	Talking-Points for the Review Questions

Information and materials on this page are based on those provided by the author, Dr. Belay Seyoum

Chapter Outline

What is Countertrade

	Countertrade is any commercial arrangement in which the exporter is required to accept in partial or total settlement of his/her 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 a leverage to force a private firm to purchase or market its marginally undesirable goods or exact other concessions in order to finance its imports, obtain needed hard currency or technology.
	Barter could be traced to ancient times. It flourished in Northern Mesopotamia as early as 3000 BC when inhabitants traded in textiles and metals.
	Presently, Countertrade is estimated to account for 15-20 % of world trade.

Benefits of Countertrade

	Chapter 01. Growth and Direction of International Trade
	Chapter 02. International and Regional Agreements Affecting Trade
	Chapter 03. Setting Up the Business
	Chapter 04. Planning and Preparations for Export
	Chapter 05. Export Channels of Distribution
	Chapter 06. International Logistics, Risk, and Insurance
	Chapter 07. Pricing in International Trade
	Chapter 08. Export Sales Contracts
	Chapter 09. Trade Documents and Transportation
	Chapter 10. Exchange Rates and International Trade
	Chapter 11. Methods of Payment
	Chapter 12. Countertrade
	Chapter 13. Capital Requirements and Private Sources of Financing
	Chapter 14. Government Export Financing Programs
	Chapter 15. Regulations and Policies Affecting Exports
	Chapter 16. Import Regulations, Trade Intermediaries, and Services
	Chapter 17. Selecting Import Products and Suppliers
	Chapter 18. The Entry Process for Imports
	Chapter 19. Import Relief to Domestic Industry
	Chapter 20. Intellectual Property Rights

Benefits for buyers

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 is needed to develop such resources.
Alleviation of balance of payments difficulties: Countertrade has been used as a way of financing needed imports without depleting limited foreign currency reserves.
Market access and maintenance of stable prices: Countertrade allows commodity exporters to maintain nominal prices for their products even in the face of limited or declining demand.

Benefits for exporters

Increased sales opportunities
1. Countertrade generates additional sales that would not otherwise be possible.
2. It also enables entry into difficult markets.
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.
Flexibility in prices:
Countertrade enables the exporter to adjust the price of a product in exchange for overpriced commodities.

Theories of Countertrade

Countertrade is positively correlated with a country’s level of (a) exports and (b) indebtedness.

Countertrade is partly motivated in order to substitute for foreign direct investment.

The stricter the level of exchange controls, the higher the level of countertrade activity.

Forms of Countertrade

Exchange of goods /services for goods /services

Barter: Direct exchange of goods and services between two trading parties — An exporter from country A to country B is paid by a reciprocal export from country B to country A and no money changes hands.

Switch trading: An arrangement in which the switch trader will buy or market countertraded goods for hard currency — The switch trader will often demand a sizable fee in the form of a discount on the goods delivered.

Clearing arrangement: A method in which two governments agree to purchase a certain volume of each other’s goods/services over a given period of time — In the event of trade imbalance, settlement could be in hard currency payments, transfer of goods, issuance of a credit or use of switch trading.

Parallel transactions

Buy-back: An arrangement in which a private firm will sell or license technology to an overseas customer with an agreement to purchase part of the output produced from the use of such technology. The agreement involves two contracts, both of which are discharged by payment of hard currency.

Counter-purchase: Two parallel transactions in which a firm exports a product to an overseas buyer with a promise to purchase from the latter or other parties in the country goods not related to the items exported.

Offsets: A transaction in which an exporter allows the purchaser, usually a foreign government to reduce the cost of purchasing the exporter’s product by co-production ,sub-contracting, investments and transfers of technology.

Direct offsets:

Co-production: Joint venture or licensing arrangements with overseas customer.

Sub-contractor production: Arrangement for production in the importing country of parts or components of the export product destined to the latter.

Investments and transfer of technology : Certain offset agreements provide for investments and technology transfer to the importing country.
Indirect offsets: Offset arrangements in which goods and services unrelated to the exports are acquired from or produced in the importing country.

Countertrade with the GATT/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 since WWII.
	This movement towards bilateral trading arrangements deprives countries of the benefits of multilateral trade that GATT/WTO negotiated to confer upon members.

Concerns of the GATT/WTO with Countertrade

	Countertrade represents a significant departure from the principles of free trade based on comparative advantage.
	Countertrade results in higher transaction costs.
	Countertrade is inconsistent with the national treatment standard which is embodied in most trade agreements.

Countertrade and the International Monetary Fund

	The International Monetary Fund (IMF) imposes a dual regime: on the one hand, it attempts to deter members from restricting international payments and transfers for current international transactions, while, on the other hand, it permits its members to regulate international capital movements as they see fit.
	Payments for current transactions involve an immediate quid pro quo (i.e., payments in connection with foreign trade, interest, profit, dividend payments, etc.), while capital payments are unilateral (loans, investments, etc.).

Government’s Attitude with Countertrade

U.S. government policy towards countertrade:

U.S. government prohibits federal agencies from promoting countertrade in their business.

Adopts a hands-off approach in relation to private transactions.

Some countries have a countertrade requirement for certain purchases exceeding a given amount. Such transactions are quite common in defense purchases.

Sample Multiple Choice Questions

	True	False
6.			One of the benefits of countertrade for exporters is transfer of technology.
7.			Countertrade is quite common in countries where exchange control restrictions are in place.

		True	False
In 1989, PepsiCo and the former Soviet Union signed a $3 billion deal in which PepsiCo agreed to purchase and market Russian Vodka and ten Soviet-built ocean vessels in return for doubling its Soviet bottling network and nationwide distribution of soft drinks in aluminum and plastic bottles. Is this an example of ...	8.			countertrade?
	9.			barter?
	10			counterpurchase?

Talking-Points for the Review Questions

What are the major factors accounting for the resurgence of countertrade?

East-West trade, shortage of hard currency in many developing/East European countries.

What is the benefit of countertrade for exporters?

Increased sales opportunities, access to sources of supply, flexibility in prices.

“Countertrade is used as a substitute for FDI.” Discuss.

Multinational firms resort to countertrade when host countries impose restrictions on inward FDI.

What is the difference between switch trading and clearing arrangement?

In switch trading, the switch trader will buy or market countertraded goods for hard currency. In clearing arrangements, two governments agree to purchase a certain volume of each other’s goods/services over a given period of time.

Describe the steps involved in a typical barter transaction.

For steps in a typical barter transaction, see International Perspective alongside.

Compare and contrast buyback with counter-purchase arrangement.
Buybacks entail an arrangement in which a private firm will sell or license technology to an overseas customer with an agreement to purchase part of the output produced from the use of such technology. In counterpurchase, a firm exports a product to an overseas buyer with a promise to purchase from the latter or other parties in the country not related to the items exported.

Discuss direct offsets and its components.

Direct offsets: coproduction, subcontractor production, investments, and transfer of technology.

What are the challenges of countertrade with Latin American countries?
Complicated and time-consuming negotiations, increased transaction costs, product mismatch, loss of flexibility (see the International Perspective alongside).

What is the U.S. government attitude toward countertrade?
The U.S. government prohibits federal agencies from promoting countertrade in their business, adopts a hands-off approach in relation to private transactions.

Discuss the concerns of WTO with countertrade.
Countertrade is inconsistent with free trade, national treatment standard, and also results in higher transaction costs.

		True	False
Which of these would you consider to be an example of countertrade?	1.			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.
	2.			Taiwan purchased 60 Mirage 2000-5 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.
	3.			Indonesia negotiated for a power station project with Asea Brown Boveri and for an air traffic control system with Hughes Aircraft.
The U.S. government prohibits ...	4.			the use of countertrade in international business transactions.
The U.S. government prohibits ...	5.			federal agencies from promoting countertrade in their business or official contracts.