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Countertrade

This blog will develop knowledge of Countertrade, which is a marketing technique and is not onlyhelpful in increasing sales during economic and financial crises, but also taken as opportunity bythe marketers to increase sales in good days. Apart from this bankers or financers also studythis topic as this is one of the techniques used in structuring trade finance, especially incommodity financing area in the third world countries and emerging markets.

We will cover the definition of countertrade, its types, history, benefits, drawbacks, strategies andhow to manage risks?

Understanding Countertrade

Countertrade is considered to be the oldest methods of payment in the known history. It meansthe exchanging of goods and services in whole or part, with other goods and services aspayment, rather than with money.

Countertrade is a general term, which can be further divided into barter, compensation, buyback,Tolling, Clearing Arrangement, Switching Trading, Counter Purchase and Offsets

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Types of Countertrade

Barter

In Barter, the goods and/or services are exchanged with other goods and/or services of equalvalue, where little or no money is paid by the buyer. This is the only trade activity with no moneyinvolved. Barter involves a single contract that covers both transaction flows.

Previously, this type of trade activity was more popular among the governments. Now due to theliberalization and privatization of commodities markets a pure barter trade arrangement is rarelyused. This is because, it is said that barter is the most widely known and written about ascompared to other types of countertrade, but least practiced by the governments.

Examples: The Malaysian government purchased 20 diesel electric locomotives from General Electric

against the supply of about 200,000 metric 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 value ofabout $38 million from a Yugoslavian company against iron ore concentrates and pellets of thesame value.(Source:www.citeman.com)

However, barter trade is becoming popular between individuals or small business level instead atgovernment level, especially in the poorer economies or during the crisis. Few interesting stories,which are seen in the news or on internet these days, are as follow

A new barter market named Mercado de Trueque in Mexico City established by local governmentin March 2012 is helping the residents trade their trash for food in an effort to reduce the tons ofwaste by the mega city. The locals who are now making regular visits to the market held once a

month in the city's Chapultepec Park bring glass, plastic and cardboard waste, which isseparated and weighed. They are then given vouchers, which can be exchanged at a nearby

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farmers' market for vegetables. (Source: CNN News 'Trash for food' at Mexico City bartermarket by Rafael Romo, Senior Latin American Affairs Editor on June 19, 2012)

The development in Information Technology sector and reach of internet to every home andoffice has made an age old practice of barter trade a new opportunity for many businessesespecially when they are in the era of financial crises. Many barter trade sites are seen on the

internet. In these sites, instead of simplistic one-to-one direct exchange of goods and services,members go online. Forget cash. They have their own universal currency. Members earn creditsby selling their services and skills. They can then use them to get what they need from othermembers. Some of bigger names in this new emerging industry are Barterxchange, Ormita, andU-Exchange. Mr. Malvin Khoo, an owner of Singapore based printing and packaging firm thatemploys 15 people joined Barterxchange, a network of 600 businesses in Malaysia andSingapore. "I had some customers that I did packaging for, who had surplus plates," explains MrKhoo. "So I structured to trade $20,000 worth of plates to restaurants. Some of them were justopening up so they needed new plates." In return, Mr Khoo scored free meals at variousrestaurants. One of them is Megumi Japanese restaurant, which has sold dining vouchers worthmore than $10,000. "Not only did we get free webpage design and printing services by bartering,we also got some tremendous exposure to the business community," says managing director

Hazel Hok."We used to be a local neighbourhood restaurant, but we have seen a significantincrease in corporate functions." And there is no geographical boundary. Asia's biggest bartertrade site is connected to more than a dozen global websites, where half a million companiesparticipate. "We have even sent electronic goods to Nigeria," says Lee Oi Kum, executivechairman of Barterxchange. The industry is now worth over $8bn annually, according to theInternational Reciprocal Trade Association. And its popularity is rising. Barterxchange has seen a30% jump in its membership since 2007. (Source: Singapore firms turn to bartering by Mariko OiAsia Business Report, BBC World, Singapore on 16 May 2009)

Compensation

Some writers consider compensation and buyback as same type of countertrade, while others

believe as two separate forms of countertrade. Here both compensation and buyback have beendiscussed separately.Under this type of arrangement, the seller receives a part of the payment is cash and the rest inshape of products.

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Examples:

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

McDonnell Douglas agreed to a compensation deal with Thailand for eight top of the range F /A18 strike aircraft. Thailand agreed to pay $578 million of the total cost in cash, and McDonnellDouglas 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)

Buyback

Under the buyback agreement, the seller supplies plant, equipment or technology and agrees tobuy goods produced with that plant, or equipment as payment.

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

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Example:

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

Tolling

In tolling, the seller supplies raw material and receives finished goods produced from this rawmaterial as payment from the buyer. Here also the seller can receive the payment partially infinished goods and partially in cash.

Typically, the tolling is more popular among the industries, where the finished good is alsocommodity. For example: crude oil converted to petroleum products.

Clearing Arrangements

This type of trading is between two or more than two countries in the shape of an agreement,

under which agreed volume of goods are imported and exported over a specific time period

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without the payment of foreign currencies. At the end of the agreed time period, the balance issettled in an agreed foreign currency for example US Dollars.

Let us take an example of two countries Country A and Country B in the below diagram.

Both the countries sign an agreement for the period of one year. The exporters of country A willsend the shipment to the importers of Country B, who instead of paying directly to the exportersof Country A for these shipments will pay to their government in their local currency. Thegovernment of Country B will just inform the government of Country A that the payment has beenreceived. On the information of government of Country B, the government of Country A will payto their exporter in their local currency.

The exporters of Country B and the importers of Country A will also do the same transaction.Now, if you notice in the above example no payment in foreign currency has been done by any ofthe government to other government. Only the information of payments has been shared by boththe governments during the period of the agreement.

At the end of the period of the agreement, only the balance amount (if any) will be paid by one ofthe government in agreed foreign currency for example US Dollars. To understand this point weassume that Country A has exported the goods of US$ 10 million to Country B and Country Bhas exported the goods worth US$ 8 million to Country A. So, Country A has exported more US$2 million (10 8) to Country B. The balance of just US$2 million will be paid by Country B toCountry A at the end of the period of the agreement.

Now again, if we notice only the balance amount in foreign currency has been paid by one of thecountry at the end of period of the agreement, instead of paying the whole value of imports in

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foreign currency by both the countries. This saves the foreign exchange, which can be usedsomewhere else.

Examples: Malaysia has clearing arrangement with twenty-three countries that is Albania, Algeria,

Argentina, Bosnia-Herzegovina, Botswana, Chile, Fiji, Indonesia, Iran, Kyrgyz, Loa PDR, Mexico,

Mozambique, Peru, Philippines, Romania, Seychelles, Thailand, Tunisia, Turkmenistan,Venezuela, Vietnam and Zimbabwe. It is called Bilateral Payment Arrangement (BPA)(Source:Malaysia External Trade Development Corporation The National Trade Promotion Agency ofMalaysiawww.matrade.gov.my)

Asian Clearing Union (ACU) is another example of clearing arrangement. The union wasestablish in December 1974 and now the central banks or monetary authorities of nine countriesBangladesh, Bhutan, India, Iran, Maldives, Myanmar, Nepal, Pakistan and Sri Lanka are itsmembers. (Source: www.asianclearingunion.org)

Switch Trading

Switch Trading involves the role of third party in a countertrade transaction. If a seller in thecountertrade does not want goods offered by the buyer as payment, it may bring in third party todispose of the merchandise offered by the buyer. For example: An exporter in Poland exportstransport equipments to Greece and in return does not want processed food from the importer ofGreece as payment. It can sell the processed food to a German company, which will pay inEuros to the Polish exporter, which is hard and convertible currency. The following diagram willmake the example clearer.

In a typical switch trade transaction a switch dealer or trader is involved. If we again take theabove example, the switch dealer will pay the Polish exporter in hard currency less the switchdealers fee (disagio). The switch trader will find a German company, which will buy processed

food from Greece importer and pay the switch trader in Euros. The following diagram will makethe example clearer.

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Switch Trading not only exists between the individual companies but it also has a role to play inclearing arrangements between the countries. If we consider the example already given underthe previous head Clearing A rrangementthat Country A has exported the goods worth US$ 10million to Country B and Country B has exported the goods worth US$ 8 million to Country A. So,Country A has a surplus balance of US$ 2 million (10 8) with Country B. At the end of the

agreed period, if country B does not have US$ 2 million to pay to the country A, its anothertrading partner Country C will pay US$ 2 million to country A. The following diagram will makethe example clearer.

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It is not necessary that in three of the above examples, the German company, the switch dealeror the country C only pay in hard currencies. Sometimes it is part cash and part goods or evensometimes whole of the payment is in the shape of goods No hard cash.

Counter purchase

In counter purchase agreement seller receives the full amount in cash, but agrees to spend anequal amount of money in that country within a given time. In contrast to bartering, both partiespay for their purchases in cash but agree to fulfill 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 or Parallel Barter.

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

Offset

Offset is the type of countertrade, which is mostly related to very high value of exports and/ormedium to high technology capital goods supplied by a multinational corporations or a majormanufacturer. It may be in many forms such as coproduction, license production, subcontractorproduction, technology transfer, overseas investment, research and development, technicalassistance and training, or patent agreements etc.,

Offset activity can be divided into two main categories direct and indirect:

The offset is said to be directwhen some components of the item sold are to be manufacturedwithin the buyers country and that the seller agrees to buy those components to use them in -house.

Let us take an example that an aircraft manufacturer sells a passenger plane to a buyer inanother country and agrees with the buyer that some of the spare parts of the plane will beordered and purchased in buyers country and attach to the plane. The below diagram will makethe example easier.

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The offset is said to be indirectwhen the buyer requires the seller to enter into a long termindustrial or other co-operation and investment, but this co-operation or investment is not relatedto goods supplied by the seller.

Let us take the same example of directoffsetin which an aircraft manufacturer sells a passengerplane to a buyer in another country but here instead of buying the spare parts of passenger planefrom the buyers country, the seller agrees to invest in a chipboard factory in buyers country.Now the chipboard is not related to passenger plane. This is called Indirect Offset. The belowdiagram will make the example easier.

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The benefits of offset agreement is that the importing country can save the foreign exchange onhigh value imports, avoid an increase in foreign debt, increase local employment, introduce stateof the art technology in local industries, reduce dependence on foreign suppliers, and increasethe level of foreign investment.

Offset has been popular among the governments all over the world, as they have beenpurchasing heavy military equipments, but now it is gaining momentum in other sectors also.Typically, offsets deals are common in defense, aerospace and telecommunications sectors andalso the local content offset is usually not more than 20% to 30% of the deal value.

History of Countertrade

Pre-World War IIBarter transactions started right from the day, when times begin, and during that period thepayments in money were difficult. In the modern era between World War I and II, the Germansand some Eastern European Countries started trading in barter due to inflationary and

deflationary pressures in their economy, which made international transactions difficult.

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Oil Crisis and the Cold WarThe historical events of Middle East war 1973-74, Iranian Revolution in 1979 and Iran-Iraq war in1980 had increased the oil prices, which simultaneously boosted the countertrading activity.Rise in military offsets deals by USA in the cold war had expanded the countertrade action in the1980s and by mid-decade, it was used almost all over the world. However, due to decrease in oilprices and improvement in economic activity in mid-to-late 1980s, the countertrading movement

decreased.

Post-Cold WarAfter the collapse of Communism in Eastern Europe and the Soviet Union in late 1980s and inthe beginning of 1990s, again countertrading started gaining momentum. These Post-Communist states have or had currencies that could not be converted and are short of reservesof foreign currencies that could be converted, making countertrading crucial for them ininternational trade.

Benefits of Countertrade

When there is a shortage of foreign exchange reserves, the countertrade is the best option for

importing countries.

Countertrade is also one of the options to find and enter into new, difficult and challengingmarkets. For example: The former Soviet Union was very difficult market to enter. The PepsiCola Company accepted the challenge to enter this market, and they finally succeeded in 1972by using the technique of countertrade. They sold Pepsi Cola Syrup (Concentrate) andpurchased Stolichnaya Vodka from Russia against it. While telling the success story Mr. John G.Swanhaus Jr. of Pepsico said it took us 13 years to negotiate our firstagreement . They were looking for a way to generate hard currency. When we signedour agreement, it was primarily because of the export trade, not because they were anxious tosell Pepsi-Cola in Russia. They only agreed to buy syrup from us after we agreed to buy vodkafrom them.'' (Source: From Russia With Perestroika: Caution byPenny Singer published in NewYork Times on December 18, 1988)

By adopting the policy of countertrade, a business has a competitive edge over its competitors.Countertrade helps in the sales of surplus stocks produced or stored. For example: With thepolicy of countertrade, the businesses in developed countries can sell their stock, which havebecome outdated or obsolete at home due to the advancement in technology to the developingor poor countries of the world.

If it seems that a sale on credit can lead to bad debt situation, a seller can avoid this situation, byadopting the policy of countertrade.

An interesting thing noticed by adopting countertrade is that the businesses can hide the selling

price of their product. Hiding the price of goods sold sometimes becomes very helpful in somesituations. For example: Price cartels are considered an evil in business practices, in whichproducers in the same industry decide to cut production to raise the price for the consumers. If amember of the cartel wants to sell below the agreed prices, it can be done by countertrade. It isnot easy to know the price of the goods exchanged in countertrade.

Other benefits of countertrade include increased employment and better capacity utilization.

Drawbacks of Countertrade

The goods, which are offered by customers does not have an in-house use. For example amanufacturer or supplier of consumer goods will receive medical equipment in exchange. Now,

the business does not have any experience of handling and marketing of medical equipment.Expertise has to be hired or trained and manufacturing firms have to set up subsidiaries to

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handle countertrade arrangements or employ the services of trading companies specializing inmedical equipments. All this cost more and is time consuming effort.

Lot of time is required to plan and research, what should be taken in exchange of the goodssupplied. For every 10 to 20 deals that are talked about perhaps one gets done.

Countertrade deals are full of risks and uncertainties, especially when the deals are spread overnumber of years. There is a risk of availability and quality of goods to be delivered in futureyears.

Countertrade Strategies

Typically, we can divide the countries or organizations in two types. Each type adopts a differenttype of strategy for countertrade.

The f i rsttype thinks countertrade as a necessary evil. They only apt countertrade when they arefacing some problem. For example: the countries which are facing the problem of less foreignexchange reserves and does not have enough foreign exchange to import, they adopt the policyof countertrade to get out of this problem. The examples are the countries which were part ofFormer Soviet Union or Eastern Europe. Also some countries of Africa, whose currency are notconvertible.

In the same way this type businesses will also ONLY adopt the policy of countertrade if they arerequired by the foreign country to import from their country, otherwise they would not be allowedto export to that country or their own country makes mandatory for them to adopt countertrade ifthey want to import, or they are facing the problem of cash flow or they fear that a certain sale oncredit can lead to bad debt situation, or they want to hide the price of their product due to anyreason or they want to sell their surplus or obsolete stock or any other basis, which compelsthem to accept countertrade deal.

Whenever, these types of businesses come out of above mentioned problems, they will neveragree to countertrade deals.

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The secondtype does not think countertrade as necessary evil, but they take countertrade as anopportunity to enter new, difficult or challenging markets to increase their sales / exports or tohave a competitive edge over their competitors.

Examples: Indian public sector agencies like State Trading Corporation (STC) and Metals and Minerals

Trading Corporation of India (MMTC) are active in counter trade. Government of India set up aspecial cell in the Ministry of Commerce to monitor international developments in counter tradeand to develop appropriate policy to enable Indian canalizing agencies to make best use ofopportunities available to boost India exports through counter trade. (Source: Growth & Reasonsof Counter trade by V S Rama Rao published in Citeman Network - www.citeman.com onNovember 14, 2007)

Malaysia has also been very active in selling their palm oil through countertrade. Someexamples are:

India will construct railway line worth US$ 120 million in 30 months in Malaysia in exchange ofpalm oil of equal value.

Purchase locomotives worth US$ 64.5 million from General Electric Transportation Systems (USA)against palm oil and palm kernel oil of equivalent value.

(Source: Counter-Trade: The Malaysian Experience by N. Balu and Norfadilah - OIL PALMINDUSTRY ECONOMIC JOURNAL (VOL. 2(1)/2002)

Now both the countries (India and Malaysia) in the above example have enough foreignexchange reserves to pay for their imports. They do not face any foreign exchange problem butthey take as an opportunity to increase their exports and save foreign exchange for imports. Alsothey will be able to create more jobs and increase tax revenues in their respective countries.

Managing Risk in Countertrade Deals

There are many risks associated with the countertrade transactions. Below are some of the risksdiscussed with their solutions.

Resale of Products received in payment of Sales

One of the distinctive risks associate with countertrade deals is that businesses often get thosegoods in payment for their sales, with which they are not familiar. This is perhaps the greatestrisk, which any company faces in a countertrade deal. Now two types of risks are more likely toarise.

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The first is that the customers of products, you receive in payment are not satisfied with theproducts as it does not meet the standards generally required, or fail to meet the warranties and/or guarantees for the products being sold.

Secondly, there might be some third parties or stakeholders, which are negatively affected fromthe product received in payment of Sales. A legal claim from them can be an alarming and costlylesson to learn.

The first solution to mitigate this type of risk is NOT to acquire title to the products, which arereceived in payment for the sales, instead hiring an in-house trading company and to act as abroker for the transaction would be a wise decision.

If the countertrade deal has to last for a long time or has to run for years on regular basis, thenestablishing a trading subsidiary offshore in the country with favorable laws or having a joint

venture with other companies such as traders would be a good option to consider.

Both Countertrade Contracts and Sales Contracts influence each other

In the normal transaction of currency, there is only one contract of sale, while in countertradetransaction; there are two contracts that is the sale contract and the countertrade contract. Theproblem in one contract has an impact on the other contract and so there is a risk of failure of thewhole deal.

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Again the solution is the same, hiring of in-house company, offshore trading subsidiary or a jointventure with the traders and consequently signing of two separate contracts, having norelationship. A careful drafting is essential to guarantee that the failed performance in onecontract should not blow the other.

Pricing Risks

Several countertrade deals are longer term contracts, and the price of the products receivedagainst payment (also called countertrade products) can change considerably in internationalmarket over the period of the contract; especially when countertrade products are commodities.The companies having an industrial base, does not have any good understanding ofunpredictable nature of commodity prices in world market and so lack of experience can putthem into losses in the resale of countertrade products.

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The currency risks are of two types: the first is that currency is non-convertible or non-exchangeable to other currencies, when received or required. The second is that the value of thecurrency might fluctuate much and the party to the countertrade might get fewer dollars asexpected.

The solutions to mitigate the risk of currency are the same, which is used in traditional orconventional transactions. They are hedging of foreign currency, political or non-commercial riskinsurance etc.,

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Non-Performance Risk.

Typically, non-performance risks include the shipment, late release of shipment, partial delivery,complete failure to deliver or delivery of damaged, substandard, or out-of-order products.

Unlike conventional transactions, where only importer presumes the risk of non-performance, in

countertrade both the parties to the deal are exposed to such type of risk as both are acceptingthe goods or services in the deal.

One solution to ease non-performance risks in countertrade deal are to appoint an experiencetrader related to the goods to handle the import, which has to be received as payment.

Other solutions are the same as used in traditional transactions by the importers such asperformance bonds / sureties, standby letter of credit, payment into an escrow account, depositof product with the third party etc.,

Force Majeure.

This is legal concept and in simple words, the term Force Majeuremeans non-performance dueto actions beyond the limits of the party in default

We can divide this term in two parts:

The f i rstare the events which incurs due to the acts of god/acts of naturesuch as floods, fire,earthquakes, hurricanes, severe winds etc.,

The secondactions which incurs due to the acts of government are Government may Impose limitations, which could result in obstruction or interruption of the

shipment or payment made by the party in default

War, civil war, revolution or civil disturbances. New trade restriction or embargos Break or diversion of journey resulting in payment of additional freight or insurance charges Any other cause of loss occurring beyond the control of both the importer and exporter

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The solutions to this type of risks are as follows:

The acts of god/acts of naturecan be covered under the general insurance policies, whichindemnifies the loss or damage of goods against fire, floods, earthquakes, hurricanes, severewinds etc.,

The losses by the acts of governmentcan be covered under the political or non-commercialrisk insurance against offered by the credit insurance companies or Export Credit Agencies(ECAs). The example being the Spanish ECACompania Espanola de Seguros de Credito a laExportacion (CESCE) (http://inglaterra.cesce.es/) provides a credit insurance policy called aCompensation Transaction Insurance Policy to Spanish exporters, who sell their products undercountertrade deals.

The confirmed letter of credit is also a good idea as the sellers bank endorses to pay to the

seller.

http://4.bp.blogspot.com/-6xxDvoECmaQ/UWoh_ApbO4I/AAAAAAAAALo/6OliI07HjUY/s1600/Force+Majeure.pnghttp://4.bp.blogspot.com/-6xxDvoECmaQ/UWoh_ApbO4I/AAAAAAAAALo/6OliI07HjUY/s1600/Force+Majeure.png

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Indirect bank guarantees and confirmed standby letter of credit are also the solutions to alleviatethis kind of risk.

Payment Risks and Creditability

In traditional sales, the payment risk is concentrated to payment in some currency, while incountertrade deal; the payment is in the shape of goods and to some extent in the shape ofcurrency.

Also in conventional deals, only the seller faces the payment risk, while in countertrade all theparties to the contract might presume the risk of payment.

The solutions to lessen the payment risk are the same, which is typically used in traditional orconventional sales. They are Letter of Credit, Credit Insurance, Bank Guarantees, purchasing ofinformation from credit rating agencies etc.,

Dumping (Pricing Policy)

In dumping the manufacturer or seller charges a lower price for a product in the foreign marketthan the domestic market. There are two reasons to sell below the domestic market. The first isthat the seller intents to drive the competitors out of the market, or create barriers to entry forprospective new competitors. When the competitors leave the market as they cannot offer lowprices to the customer and the possible new competitors will not enter the market as there are noattractive profits to do the business, predatory price seller will raise the price of the product, asthere is no competition left. Secondly, the governments of exporting country give specialmonetary benefit to their exporters as compared to local sellers in the shape of different type ofexporting scheme to boost the exports in order to increase foreign exchange reserves, increaseinvestment and create more jobs. Now, these special monetary benefits give an opportunity tothe exporter to reduce the prices in international market as compared to the local market to

increase the exports.

The negative effect of dumping to the importing country is that domestic industry is adverselyaffected, which results in increase in unemployment and less revenues to the government in theshape of taxes.

The penalty for dumping is an anti-dumping duty which is chargeable to the importer of theproducts by the custom authorities of the importing country.

In countertrade the risk of dumping is very common as the seller can easily hide the price of theproduct as the payment is in the shape of goods not the currency, which makes it very difficult tocalculate the price and cost of the imported product. Also, as compared to traditional sales,

where there is only one importer of the product, in countertrade both the parties to the agreementare importers to the product, so the risk of dumping lies with both of them. One can easilyunderstand, the charge of anti-dumping duty on imported items means importing of products onthe higher price than the price on which it was originally agreed upon.The solution to avoid this type of risk can be that in the countertrade agreement, a clause can beadded stating that it is the liability of the exporter or seller to indemnify the anti-dumping dutycharged to the importer. A surety bond or a bank guarantee can be demanded by the importer incompensation to the loss in the shape of this type of duty.Another idea is to appoint a trader or to act as an agent / broker and have another party importthe product and take the risk.

Import Quotas

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An import quota is a maximum quantity of a good that can be manufactured aboard and importedand sold domestically in a country in a specific period of time.

The basic objective of import quota is to decreaseimportsand increase domestic production of agood, thus controlling foreign competition. As the quantity of importing the good is limited, theprice of the imported good raises consequently encouraging consumers to purchase more local

goods instead of foreign.

The risk in import quota lies with the importer as for example Country A imposes a textile importquota to protect its domestic industry from foreign competition by restricting the import worth 100million with country B in one year. Now if the textile products worth 100 million have already beenimported in a particular year in Country A and the importer in Country A imports next 2 millionworth textile products. The custom authorities of Country A will not allow these imports to theircountry, until next year. Waiting till next year will certainly affect the profitability of importer ofCountry A.

In countertrade transaction, as both the parties import, if one party is importing a product, whichhas import quota restriction, then it should study how the quota of that particular product isdistributed in exporting country. Normally, the quota distribution is with some chamber ofcommerce, trade body/ association or government department in the exporting country. Afterstudying the quota distribution, checks and balances can be incorporated in the countertradeagreement to avoid such type of risk. Getting help in this regard from a trade consultant or expertin the exporting country will be a good idea to tackle such kind of threat.

Use of Third Parties or Traders

The use of third parties or traders expert in goods received as payment for the sales have beenrepeatedly recommended as they are familiar with their product and most likely have a betteraffiliation and understanding of the problem associated with this product.

However, there are many risks linked with the appointment of third party or traders. They are asfollows:

http://en.wikipedia.org/wiki/Importshttp://en.wikipedia.org/wiki/Importshttp://en.wikipedia.org/wiki/Importshttp://en.wikipedia.org/wiki/Imports

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If the third party or traders is based in another country, especially in some third world country,then there are some more additional risks related to the government and political conditions in

that country. These are as follows:

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The solution to these types of risk can be Letter of Credit (L/C), Bank Guarantees or SuretyBond, Factoring, Forfaiting and Credit Insurance etc.,

If the third party or trader is incorporated in some third world country then confirmed letter ofcredit, Indirect Bank Guarantee, Export Credit Insurance (including non-commercial and politicalrisk coverage) is the answer to cover these sorts of risks.

Posted 14th April byUmar Farooq

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