counter trade arrangement

7/31/2019 Counter Trade Arrangement

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SUBMITTED BY :

Ruchi ajmera


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Countertrade means exchanging goods or services whichare paid for, in whole or part, with other goods or services,rather than with money. A monetary valuation can however

be used in counter trade for accounting purposes. Indealings between sovereign states, the term bilateral tradeis used. OR "Any transaction involving exchange of goodsor service for something of equal value."


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: Exchange of goods or services directly forother goods or services without the use ofmoney as means of purchase or payment.

Barter is the direct exchange of goods between two partiesin a transaction.. One of the largest barter deals to date

involved Occidental Petroleum Corporation's agreement toship sulphuric acid to the former Soviet Union for ammoniaurea and potash under a 2 year deal which was worth 18billion euros . Furthermore, during negotiation stage of abarter deal, the seller must know the market price for itemsoffered in trade. Bartered goods can range from hams to

iron pellets, mineral water, furniture or olive-oil allsomewhat more difficult to price and market when potentialcustomers must be sought.


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: Agreement that a company willoffset a hard - currency purchase of an

unspecified product from that nation in thefuture. Agreement by one nation to buy aproduct from another, subject to thepurchase of some or all of the components

and raw materials from the buyer of thefinished product, or the assembly of suchproduct in the buyer nation.

: Compensation trade isa form of barter in which one of the flows ispartly in goods and partly in hard currency .


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: Practice in which one companysells to another its obligation to make a

purchase in a given country. : Sale of goods and services

to one company in other country by acompany that promises to make a future

purchase of a specific product from the samecompany in that country. : occurs when a firm builds a plant in

a country - or supplies technology,

equipment, training, or other services to thecountry and agrees to take a certainpercentage of the plant's output as partialpayment for the contract.


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Countertrade also occurs when countries lacksufficient hard currency, or when other types ofmarket trade are impossible.

In 2000, India and Iraq agreed on an "oil for wheat

and rice barter deal, subject to UN approval underArticle 50 of the UN Gulf War sanctions, that wouldfacilitate 300,000 barrels of oil delivered daily toIndia at a price of $6.85 a barrel while Iraq oil salesinto Asia were valued at about $22 a barrel. In 2001,India agreed to swap 1.5 million tonnes of Iraqi crudeunder the oil-for-food program.

The Security Council noted: "... although locallyproduced food items have become increasinglyavailable throughout the country, most Iraqis do nothave the necessary purchasing power to buy them.

They are obliged to either barter or sell items fromthe food basket in order to meet their other essential


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US economist Paul Samuelson was skepticalabout the viability of countertrade as amarketing tool, claiming that "Unless a hungrytailor happens to find an undraped farmer, who

has both food and a desire for a pair of pants,neither can make a trade". (This is called"double coincidence of wants".) But this isarguably a too simplistic interpretation of howmarkets operate in the real world. In any real

economy, bartering occurs all the time, even ifit is not the main means to acquire goods andservices


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The volume of countertrade is growing. In 1972, itwas estimated that countertrade was used by

business and governments in 15 countries; in1979, 27 countries; by the start of 1990s, around100 countries. (Vertariu 1992). A large part ofcountertrade has involved sales of militaryequipment (weaponry, vehicles and installations).

More than 80 countries nowadays regularly use orrequire countertrade exchanges. Officials of theGeneral Agreement on Tariffs and Trade (GATT)organization claimed that countertrade accountsfor around 5% of the world trade. The British

Department of Trade and Industry has suggested15%, while some scholars believe it to be closer to30%, with east-west trade having been as high as50% in


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The British Department of Trade andIndustry has suggested 15%, while somescholars believe it to be closer to 30%, witheast-west trade having been as high as 50%in some trading sectors of Eastern European

and Third World Countries for some years.A consensus of expert opinions (Okaroafo,1989) has put the percentage of the valueof world trade volumes linked to

countertrade transactions at between 20%to 25%.


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1 Trade can be financed withcountertrade when other means areunavailable. Either credit maybe impossible to arrange.Performance or

payment bank guarantees may be toocostly.The project might call for longer termfinancing then government-supported exportcredit facilities allow. The political situation in

host countries might preclude othergovernment financial aid. The host countrymight not permit currency repatriation


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2. Exporters from the United States

must use counter-trade to remain competitivewith companies from other industrializednations.Japanese and European trading

have used counter-trade for

centuries.Their techniques for arranging dealsand disposing of exchanged goods are wellhoned. If one of these experienced globaltraders really wants an order , a U.S. companywill not stand a chance with traditionalfinancing.With counter-trade,it can at least stayin race.


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Counter-trade provides a

way to make a foreign direct investmentwithout starting from scratch or goingthrough the difficult process of buying agoing business. If structured properly, acoproduction arrangement puts a companydirectly into new .Thismight be in addition to exporting or,in

some cases,access to distribution channelsgained through a direct investment


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4. Long-range managementand technical benefits from joint venture

partnerships can often be achieved throughbuyback counter-trade arrangements,specifically coproduction transactions. In mostcases a host-country partner brings to the

partnership local management techniques andprotocol that might take a foreign companyyears to develop on its own. In some cases, thepartner brings technical or application

techniques unique to the host-country culturalenvironment


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1. To achieve long-termsuccess in counter-trade transactions,acompany must establish internal expertise.This means setting up a departmentdedicated to arranging and managingcounter-trade deals.This can be costlyaddition for a smaller company, and unless

it engages in several counter-trade


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2. Counter-trade contractsinvolving the exchange of goods that cannot brconsumed internally require the sale or trade ofthese goods on the open market. Even with an

in-house trading specialist and assistance froman international consultant,the process is time-consuming and costly. Using a third-partybroker doubles or even trebles the cost ofdisposing of the goods.Added profits on their

resale might compensate somewhat, but thenet effect is often a loss.


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3. Counter-trade dealsrequire a long time to negociate and close.Many months and money can be spenttrying to arrange a transaction, only to have

the deal fall through at the end.


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4. The end results fromcounter-trade transactions are usually veryuncertain. In most cases the final result-that is, the recognition of profits-wont berealized for many years. Political and

economic conditions change rapidly in, and its entirely possiblethat when the deal is finally completed, theresults may be different from those

originally intended

counter trade arrangement

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