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Countertrade Countertrade is an alternative means of structuring an international sale when conventional means of payment are difficult, costly, or nonexistent. We first encountered countertrade in Chapter 9 in our discussion of currency convertibility. There we noted that many currencies are not freely convertible into other currencies. A government may restrict the convertibility of its currency to preserve its foreign exchange reserves so they can service international debt commitments and purchase crucial imports.14 This is problematic for exporters. Nonconvertibility implies that the exporter may not be able to be paid in his or her home currency; and few exporters would desire payment in a currency that is not convertible. Countertrade is often the solution. Countertrade denotes a whole range of barterlike agreements; its principle is to trade goods and services for other goods and services when they cannot be traded for money. Some examples of countertrade are:
The Growth of Countertrade In the modern era, countertrade arose in the 1960s as a way for the Soviet Union and the communist states of Eastern Europe, whose currencies were generally nonconvertible, to purchase imports. During the 1980s, the technique grew in popularity among many developing nations that lacked the foreign exchange reserves required to purchase necessary imports. Today, reflecting their own shortages of foreign exchange reserves, many of the successor states to the former Soviet Union and the Eastern European Communist nations are engaging in countertrade to purchase their imports. Consequently, according to some estimates, more than 20 percent of world trade by value in 1998 was in the form of countertrade, up from only 2 percent in 1975.16 There was a notable increase in the volume of countertrade after the Asian financial crisis of 1997. That crisis left many Asian nations with little hard currency with which they could finance international trade. In the tight monetary regime that followed the crisis in 1997, many Asian firms found it very difficult to get access to export credits to finance their own international trade. Consequently, they turned to the only option available to them--countertrade. Given the importance of countertrade as a means of financing world trade, prospective exporters will have to engage in this technique from time to time to gain access to international markets. The governments of developing nations sometimes insist on a certain amount of countertrade.17 For example, all foreign companies contracted by Thai state agencies for work costing more than 500 million baht ($12.3 million) are required to accept at least 30 percent of their payment in Thai agricultural products. Between 1994 and mid-1998 foreign firms purchased 21 billion baht ($517 million) in Thai goods under countertrade deals.18 Types of Countertrade With its roots in the simple trading of goods and services for other goods and services, countertrade has evolved into a diverse set of activities that can be categorized as five distinct types of trading arrangements: barter, counterpurchase, offset, switch trading, and compensation or buyback.19 Figure 15.5 summarizes the popularity of each of these arrangements as indicated in a survey of multinational corporations. Many countertrade deals involve not just one arrangement, but elements of two or more. Barter Barter is the direct exchange of goods and/or services between two parties without a cash transaction. Although barter is the simplest arrangement, it is not common. Its problems are twofold. First, if goods are not exchanged simultaneously, one party ends up financing the other for a period. Second, firms engaged in barter run the risk of having to accept goods they do not want, cannot use, or have difficulty reselling at a reasonable price. For these reasons, barter is viewed as the most restrictive countertrade arrangement. It is primarily used for onetimeonly deals in transactions with trading partners who are not creditworthy or trustworthy. Counterpurchase Counterpurchase is a reciprocal buying agreement. It occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made. Suppose a US firm sells some products to China. China pays the US firm in dollars, but in exchange, the US firm agrees to spend some of its proceeds from the sale on textiles produced by China. Figure 15.5 Countertrade Practice Source: Reprinted from "The Do's and Don'ts of International Countertrade," by J. R. Carter and J. Gagne, Sloan Management Review, Spring 1988, pp. 31 - 37, Table 2, by permission of the publisher. Copyright 1998 by Sloan Management Association. All rights reserved. Thus, although China must draw on its foreign exchange reserves to pay the US firm, it knows it will receive some of those dollars back because of the counterpurchase agreement. In one counterpurchase agreement, Rolls-Royce sold jet parts to Finland. As part of the deal, Rolls-Royce agreed to use some of the proceeds from the sale to purchase Finnish-manufactured TV sets that it would then sell in Great Britain. Offset Offset is similar to counterpurchase insofar as one party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale. The difference is that this party can fulfill the obligation with any firm in the country to which the sale is being made. From an exporter's perspective, this is more attractive than a straight counterpurchase agreement because it gives the exporter greater flexibility to choose the goods that it wishes to purchase. Switch Trading Switch trading refers to the use of a specialized thirdparty trading house in a countertrade arrangement. When a firm enters a counterpurchase or offset agreement with a country, it often ends up with what are called counterpurchase credits, which can be used to purchase goods from that country. Switch trading occurs when a third-party trading house buys the firm's counterpurchase credits and sells them to another firm that can better use them. For example, a US firm concludes a counterpurchase agreement with Poland for which it receives some number of counterpurchase credits for purchasing Polish goods. The US firm cannot use and does not want any Polish goods, however, so it sells the credits to a thirdparty trading house at a discount. The trading house finds a firm that can use the credits and sells them at a profit. In one example of switch trading, Poland and Greece had a counterpurchase agreement that called for Poland to buy the same USdollar value of goods from Greece that it sold to Greece. However, Poland could not find enough Greek goods that it required, so it ended up with a dollardenominated counterpurchase balance in Greece that it was unwilling to use. A switch trader bought the right to 250,000 counterpurchase dollars from Poland for $225,000 and sold them to a European sultana (grape) merchant for $235,000, who used them to purchase sultanas from Greece. Compensation or Buybacks A buyback occurs when a firm builds a plant in a country--or supplies technology, equipment, training, or other services to the country--and agrees to take a certain percentage of the plant's output as partial payment for the contract. For example, Occidental Petroleum negotiated a deal with the former Soviet Union under which Occidental would build several ammonia plants in the Soviet Union and as partial payment receive ammonia over a 20 - year period. The Pros and Cons of Countertrade The main attraction of countertrade is that it can give a firm a way to finance an export deal when other means are not available. Given the problems that many developing nations have in raising the foreign exchange necessary to pay for imports, countertrade may be the only option available when doing business in these countries. Even when countertrade is not the only option for structuring an export transaction, many countries prefer countertrade to cash deals. Thus, if a firm is unwilling to enter a countertrade agreement, it may lose an export opportunity to a competitor that is willing to make a countertrade agreement. But the drawbacks of countertrade agreements are substantial. Other things being equal, all firms would prefer to be paid in hard currency. Countertrade contracts may involve the exchange of unusable or poor - quality goods that the firm cannot dispose of profitably. For example, a few years ago, one US firm got burned when 50 percent of the television sets it received in a countertrade agreement with Hungary were defective and could not be sold. In addition, even if the goods it receives are of high quality, the firm still needs to dispose of them profitably. To do this, countertrade requires the firm to invest in an in - house trading department dedicated to arranging and managing countertrade deals. This can be expensive and time consuming. Given these drawbacks, countertrade is most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrading. The masters of countertrade are Japan's giant trading firms, the sogo shosha, who use their vast networks of affiliated companies to profitably dispose of goods acquired through countertrade agreements. The trading firm of Mitsui & Company, for example, has about 120 affiliated companies in almost every sector of the manufacturing and service industries. If one of Mitsui's affiliates receives goods in a countertrade agreement that it cannot consume, Mitsui & Company will normally be able to find another affiliate that can profitably use them. Firms affiliated with one of Japan's sogo shosha often have a competitive advantage in countries where countertrade agreements are preferred. Western firms that are large, diverse, and have a global reach (e.g., General Electric, Philip Morris, and 3M) have similar profit advantages from countertrade agreements. Indeed, 3M has established its own trading company--3M Global Trading, Inc.--to develop and manage the company's international countertrade programs. Unless there is no alternative, small and mediumsized exporters should probably try to avoid countertrade deals because they lack the worldwide network of operations that may be required to profitably utilize or dispose of goods acquired through them.20 |
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