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rather than with money. A monetary valuation can however be used in counter trade for accounting purposes. In dealings between sovereign states, the term bilateral trade is used. OR "Any transaction involving exchange of goods or service for something of equal value."
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4 References
[edit]Types
of countertrade
Barter: Exchange of goods or services directly for other goods or services without the use of money as means of purchase or payment.
Barter is the direct exchange of goods between two parties in a transaction. The principal exports are paid for with goods or services supplied from the importing market. A single contract covers both flows, in its simplest form involves no cash. In practice, supply of the principal exports is often held up until sufficient revenues have been earned from the sale of bartered goods. One of the largest barter deals to date involved Occidental Petroleum Corporation's agreement to ship sulphuric acid to the former Soviet Union for ammonia urea and potash under a 2 year deal which was worth 18 billion euros. Furthermore, during negotiation stage of a barter deal, the seller must know the market price for items offered in trade. Bartered goods can range from hams to iron pellets, mineral water, furniture or olive-oil all somewhat more difficult to price and market when potential customers must be sought.
Switch trading: Practice in which one company sells to another its obligation to make a purchase in a given country.
Counter purchase: Sale of goods and services to one company in other country by a company that promises to make a
future purchase of a specific product from the same company in that country.
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.
Offset: Agreement that a company will offset a hard - currency purchase of an unspecified product from that nation in the
future. Agreement by one nation to buy a product from another, subject to the purchase of some or all of the components and raw materials from the buyer of the finished product, or the assembly of such product in the buyer nation. [edit]Necessity
Countertrade also occurs when countries lack sufficient hard currency, or when other types of market trade are impossible.
In 2000, India and Iraq agreed on an "oil for wheat and rice" barter deal, subject to UN approval under Article 50 of the UN Gulf War sanctions, that would facilitate 300,000 barrels of oil delivered daily to India at a price of $6.85 a barrel while Iraq oil sales into Asia were valued at about $22 a barrel. In 2001, India agreed to swap 1.5 million tonnes of Iraqi crude under the oil-for-food program.
The Security Council noted: "... although locally produced food items have become increasingly available throughout the country, most Iraqis do not have the necessary purchasing power to buy them. Unfortunately, the monthly food rations represent the largest proportion of their household income. They are obliged to either barter or sell items from the food basket in order to meet their other essential needs. This is one of the factors which partly explains why the nutritional situation has not improved in line with the enhanced food basket. Moreover, the absence of normal economic activity has given rise to the spread of deep-seated poverty." [edit]Role
Noted US economist Paul Samuelson was skeptical about the viability of countertrade as a marketing tool, claiming that "Unless a hungry tailor 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 is arguably a too simplistic interpretation of how markets operate in the real world. In any real economy, bartering occurs all the time, even if it is not the main means to acquire goods and services.
The volume of countertrade is growing. In 1972, it was estimated that countertrade was used by business and governments in 15 countries; in 1979, 27 countries; by the start of 1990s, around 100 countries. (Vertariu 1992). A large part of countertrade has involved sales of military equipment (weaponry, vehicles and installations).
More than 80 countries nowadays regularly use or require countertrade exchanges. Officials of the General Agreement on Tariffs and Trade (GATT) organization claimed that countertrade accounts for around 5% of the world trade. The British Department of Trade and Industry has suggested 15%, while some scholars believe it to be closer to 30%, with east-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 value of world trade volumes linked to countertrade transactions at between 20% to 25%.
According to an official US statement, "The U.S. Government generally views countertrade, including barter, as contrary to an open, free trading system and, in the long run, not in the interest of the U.S. business community. However, as a matter of policy the U.S. Government will not oppose U.S. companies' participation in countertrade arrangements unless such action could have a negative impact on national security." (Office of Management and Budget; "Impact of Offsets in Defense-related Exports," December, 1985). [edit]References
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Verzariu, P., (1992), "Trends and Developments in International Countertrade," Business America, (November 2), 2-6. Okaroafo, S., (1989) "Determinants of LDC Mandated Countertrade," International Management Review, (Winter), 1624
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Countertrade is inherently an ad hoc activity - practice varies according to local regulations and requirements, the nature of the goods to be exported and the current priorities of thee parties involved. Also, the terms used to describe the main modes of trading vary, often interchangeably causing confusion. " - which is a fancy way of saying - countertrade can be a lot of things depending on who is involved
permission to quote , and link, given to Prof. Richardson by Robert Scallon robert.scallon@uk.thalesgroup.com in an email 2004 Dec 02. Copy of the email is on file in Richardson's permissions binder
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Countertrade and Barter - an introduction from www.cob.ohio-state.edu/citm/expa/countertrade.html from Fisher College of Business, Ohio State University "Countertrade consists of transactions which have as a basic characteristic a linkage, legal or otherwise, between exports and imports of goods or services in addition to, or in place of, financial settlements. Countertrade can be used as an effective international business tool. Countertrade plays a part in 20-25 percent of world trade." forms of countertrade http://www.cob.ohio-state.edu/citm/expa/countertrade_list.html
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Countertrade and Barter - an introduction Why Countertrade? 1. The world debt crisis has made ordinary trade financing very risky. - large banks and financial institutions are "risk adverse" in many of the hostile regions of the world opening to trade 2. Many countries cannot obtain the trade credit or financial assistance to pay for desired imports. - the IMF and World Bank are increasingly restrictive in the way they allow governments to operate 3. Countries are increasingly returning to the notion of bilateralism as a way to reduce trade imbalances. - some multilateral blocks have developed - but politics is easier on a one2one basis so many nation some multilateral blocks have developed - but politics is easier on a one2one basis - so many nations find it easier to cur deals directly with another single country 4. Countertrade is often viewed as an excellent mechanism to gain entry into new markets. The party receiving the goods may become a new distributor, opening up new international marketing channels and ultimately expanding the market. - especially where 4X problems are challenging to solve 5. Providing countertrade services helps sellers differentiate its products from those of competitors. - flexibility is key to winning business in a global market that is more and more competitive to vendors
from Fisher College of Business, Ohio State University - with notes added by witiger
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Countertrade Why Countertrade? and Elderkin & Norquist, in their book "Creative Countertrade," say that companies Barter
- an introduction countertrade in order to: Expand or maintain foreign markets Increase sales Sidestep liquidity problems Repatriate blocked funds Clean up bad debt situations Build customer relationships Keep from losing markets to competitors Gain foreign contracts for future sales Find lower-cost purchasing sources
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Countertrade According to the LCR, There are and Four main reasons why countertrade is used: Barter - an Money - some people cannot pay in the currency you want introduction "to enable trade to take place in markets which are unable to pay for imports. This can occur as a result of a non-convertible currency, a lack of commercial credit or a shortage of foreign exchange" The Political Environment - local jobs and industry
"to protect or stimulate the output of domestic industries (including agriculture and mineral extraction) and to help find new export markets" The Political Environment - rules and regulations to protect the host country
"as a reflection of political and economic policies which seek to plan and balance overseas trade" "to gain a competitive advantage over competing suppliers."
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Countertrade from http://www.barternews.com/american_way.htm Strategies By: C.G. Alex and Barbara Bowers Four Countertrade Strategies Defensive. "Companies with a defensive countertrade strategy ostensibly do not countertrade at all; however, they make many countertrade-type arrangements with buyer countries. These companies will avoid any contractual countertrade obligations, but they make it clear to the country that they will reciprocate in some way for the sale. Some companies will sell their products at rock-bottom prices and
promise to help the country with export development." Passive. "Companies with passive countertrade strategies regard countertrade as a necessary evil. They participate in countertrade at minimal level, on an ad hoc basis. Some companies operate this way because they have product leverage (i.e., little or no competition), while others follow the passive strategy because of disinterest in countertrade." Reactive. "This is the most common strategy among American companies. Companies with reacting strategies will cooperate with the buyer country in offset/countertrade requirements, they use countertrade strictly as a competitive tool, on the theory that they cannot make the sale unless they agree to countertrade." Proactive. "Companies with proactive strategies have made a commitment to countertrade. They use countertrade aggressively as a marketing tool, and are interested in making trading an active and profitable part of their business. They regard offset and counterpurchase as an opportunity to make money through trading, rather than as an inconvenience."
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According to the LCR, There are Six main types of countertrade
Types of countertrades
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As explained by the LCF website Types of countertrades FAQ www.londoncountertrade.org/countertradefaq.htm 1. Offset "Offset has traditionally been used by governments around the world when they have made major purchases of military goods but is becoming increasingly common in other sectors. There are two distinct types: A. direct offset: "the supplier agrees to incorporate materials, components or sub-assemblies which are procured from the importing country. In some large contracts, successful bidders may be required to establish local production. Direct offset has been particularly common for trade in defence systems and aircraft." B. indirect offset: "the purchaser requires suppliers to enter into long term industrial (and other) co-operation and investment but these are unconnnected to the supply contract and may be either defence related or in the civil sector." "The overall objective of offset either, direct or indirect, in the defence sector generally to promote import substitution and to minimise the balance of payments deficit for military purchases by developiing an indigenous industrial defence capability."
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2. Counterpurchase
Types of "A foreign supplier undertakes to purchase goods and services from the countertrades purchasing country as a condition of securing the order. Counterpurchase is
generally imposed for two reasons: first, to stimulate exports and second, to alleviate the balance of payment deficit resulting from imported goods."
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3. Tolling Types of countertrades Manufacturers, in regions such as the Former Soviet Union, may sometimes be unable to service customers because they lack the foreign exchange to buy raw materials. In a tolling deal, a supplier himself provides the raw material (steel ingots, say) and hires capacity of the factory to turn it into finished goods (e.g. steel tubes). These are then bought by a final customer who pays the supplier in cash - throughout the process the supplier retains ownership of the material as it is procecessed by the factory." - this is similar to Contract Manufacturing where the Contractor provides much of the materials.
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4. Barter Types of countertrades Barter is one of the most common methods of Countertrade. "In a barter deal, goods are exchanged for goods - the principal export is paid for with goods (or services) from the importing market. A single contract covers both flows and in the simpler case, no cash is involved. In practice, however, the supply of the principal export is often released only when the sale of the bartered goods has generated sufficient cash." This means if Country A sells mining equipment to Country B in return for cigars they will probably hold some of the mining equipment back until they have made some good profit from the cigars.
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5. Buyback Types of countertrades "Here, suppliers of capital plant or equipment agree to be paid by the future output of the investment concerned. For example exporters of equipment for a chemical plant may be repaid with part of the resulting output from the factory. This practice is most common with exports of process plant, mining equipment and similar orders. Buyback arrangements tend to be much longer term and for larger ammounts than counterpurchase or barter deals."
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6. Switch Trading Types of countertrades "Imbalances in long term bilateral trading agreements sometimes lead to the accumulation of uncleared credit surpluses in one or other country, For example, Brazil at one time had a large credit surplus with Poland. These surpluses can sometimes be tapped by third countries so that, for example UK exports to Brazil could be financed from the sale of Polish goods to the UK or elsewhere. Such transactions are known as switch' or swap' deals because they typically involve switching the documentation (and destination) of goods on the high seas."
LCR advises that "...deals seldom fit these categories precisely. It is not unusual for a large export deal to involve several countertrade arrangements - for example, some long term buyback plus counterpurchase or barter to finance initial down payments."
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The L.C.R.
"The London Countertrade Roundtable (LCR) was established in 1988 as a focal point for all those involved in countertrade, offset and related activities. Its main objective is "to bring together companies and individuals engaged in the profession of countertrade in its broadest sense", and to promote co-operation, exchange of information, and opportunities for networking."
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Countertrade Pepsi & Vodka and The countertrade arrangement where the rights to sell Russian vodka in the US in Barter exchange for Pepsi (to be sold in Russia) was a huge story years ago John G. Swanhaus, Jr., vice president, Pepsi Cola Company As president of PepsiCo Wines & Spirits International, a major part of his responsibility was PepsiCo's supply to the U.S. market of Stolichnaya Russian Vodka as part of a countertrade agreement to sell Pepsi products in the Soviet Union. Pepsi & Vodka -how did it work, Pepsi-Cola delivers syrup that is paid for with Stolichnaya Vodka. Pepsi has the marketing rights of all Stolichnaya Vodka in the U.S. Recently Pepsi has made another innovative step by taking 17 submarines, a cruiser, a frigate, and a destroyer in payment for Pepsi products. In turn, this rag tag fleet of 20 naval vessels will be sold for scrap steel, thereby paying for Pepsi products being moved to the Soviet Union. explained at http://www.bart