Types of Countertrade PDF

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TYPES OF COUNTER TRADE 1. Barter With Barter, the goods and/or services are exchanged with other goods and/or services of equal value, where no money is paid by the buyer. This is the only counter trade activity with no money involved. Barter involves a single contract that covers both transaction flows.

Previously, this type of trade activity was more popular between governments. Now due to the liberalization and privatization of commodities markets, a “pure” barter trade arrangement is rarely used.

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Examples: The Malaysian government purchased 20 diesel electric trains from GE against the supply of about 200,000 tons of palm oil over a period of 30 months. (Source: www.citeman.com) Minerals and Metals Trading Corporation of India (MMTC) imported 50,000 tons of rails at a value of about $38 million from a Yugoslavian company against iron ore concentrates and pellets of the same value.(Source: www.citeman.com) What are the pros and cons of this trading arrangement?

2. Compensation Some consider ‘compensation’ and ‘buyback’ as the same type of countertrade, while others believe they are two separate forms of countertrade. Here both are discussed separately. Under a ‘Compensation’ arrangement, the seller receives a part of the payment in cash and the rest in the shape of products.

Examples: •

General Motors Corporation sold $ 12 million worth of locomotive and diesel engines to Yugoslavia and took cash and $4 million in Yugoslavian cutting tools as payment. (Source: www.citeman.com)

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McDonnell Douglas agreed to a compensation deal with Thailand for eight top of the range strike aircraft. Thailand agreed to pay $578 million of the total cost in cash, and McDonnell Douglas agreed to accept $93 million in a mixed bag of goods including Thai rubber, ceramics, furniture, frozen chicken and canned fruit. (Source: www.citeman.com)

What are the pros and cons of this trading arrangement?

3. Buyback Typically, the buyback deals are of much longer term and also of larger amounts. The seller of equipment can receive a part of the payment in the shape of products produced by that equipment and the remaining amount in cash.

Example: National Textiles Corporation of India signed a buy back agreement of Indian Rupee 200 million with the Soviet Union to buy 200 sophisticated looms. The buyback ratio was 75% textile produce from these looms and the remaining was in cash. (Source: www.citeman.com)

What are the pros and cons of this trading arrangement?

4. Clearing Arrangements This type of trading is between two or more countries in the shape of an agreement, under which an agreed volume of goods is imported and exported over a specific time period without the payment of foreign currencies. At the end of the agreed time period, the balance is settled in an agreed foreign currency, for example in US $.

Example: • Malaysia has clearing arrangement with twenty-three countries: Algeria, Argentina, Botswana, Chile, Indonesia, Iran, Mexico, Mozambique, Peru, Philippines, Romania, Thailand, Tunisia, Venezuela, Vietnam and Zimbabwe. This is called a “Bilateral Payment Arrangement (BPA)” (Source: Malaysia External Trade Development Corporation – The National Trade Promotion Agency of Malaysia www.matrade.gov.my)

What are the pros and cons of this trading arrangement?

5. Switch Trading Switch Trading involves the role of a third-party in a countertrade transaction. If a seller in the countertrade does not want goods offered by the buyer as payment, it may bring in a third-party to dispose of the merchandise offered by the buyer. For example: an exporter in Poland exports transport equipment to Greece and in return does not want processed food from the Greek importer as payment. It can sell the processed food to a German company which will pay euros to the Polish exporter.

In a typical switch trade transaction a ‘switch dealer’ or trader is involved. If we again take the above example, the switch dealer will pay the Polish exporter in hard currency less the switch dealer’s fee (disagio). The switch dealer will find a German company, which will buy processed food from the Greek importer and pay the switch dealer in euros.

What are the pros and cons of this trading arrangement?

6. Counter purchase In a counter purchase agreement, the seller receives the full amount in cash, but agrees to spend an equal amount of money in that country within a given time. Both parties pay for their purchases in cash but agree to fulfil their counter commitments. At the same time, transactions do not become part of a single contract, but are entered into two different contracts. Counter purchase is also called “Parallel Trading”.

Example: Pepsi Cola sold concentrates in the USSR and got paid in Rubles, which according to the agreement with Russia, these Rubles were spent on Russian products like vodka and wine (Source: www.citeman.com)

What are the pros and cons of this trading arrangement?

7. Offset Offset trading is often associated with very high value exports and high technology capital goods supplied by MNEs. It may be in the form of: co-production, licensed production, subcontractor production, technology transfer, R&D, technical assistance and training, or patent agreements etc., Offset activity can be divided into two main categories direct and indirect:

Direct Offset The offset is said to be direct when some components of the item sold are to be manufactured within the buyer’s country and that the seller agrees to buy those components to use them in-house. For example, an aircraft manufacturer sells a passenger plane to a buyer in another country and agrees with the buyer that some of the spare parts of the plane will be ordered and purchased in buyer’s country and built into the plane. See diagram.

Indirect Offset The offset is said to be indirect when the buyer requires the seller to enter into a long term industrial co-operation or investment, but this is not related to the goods supplied by the seller. For example, an aircraft manufacturer sells a passenger plane to a buyer in another country but instead of buying the spare parts of the passenger plane from the buyer’s country, the seller agrees to invest in a chipboard (Spannplatte) factory in the buyer’s country. This factory is not related to the passenger plane. See below.

Offsets are popular among many governments, especially for purchasing heavy military equipment, but now it is gaining momentum in other sectors also. Typically, offsets deals are common in defence, aerospace and telecommunications sectors. The local content “offset” is usually no more than 20-30% of the deal value. Indirect (non-defence) offsets include everything from backing new technologies or business parks to building hotels, or donating to universities. Here the stated intention is to achieve more general economic or social goals.

What are the pros and cons of this trading arrangement?...