COUNTER TRADE

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At the end of this module, the learning outcomes are 1.What are the concepts of counter trade 2.Benefits of counter trade 3.Types of counter trade 4.How is counter trade seen in many countries
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Suggested readings 1.International Business by Czinkota & Ron Kainen Chapter 18 2.International Marketing by Onkvisit & Shaw chapter 7

COUNTER TRADE
What is counter trade Those transactions which have as a basic characteristics a linkage legal or otherwise, between exports and imports of goods or services in addition to or in place of financial settlements. Historically barter Money was not used Barter still used
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Why counter trade Lack of money Lack of value Lack of faith in money Ease of transactions

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Quite prevalent in East European countries Poor financial conditions Increasing counter trade
1972 15 nations 1983 88 nations 1995- 105 nations

15 20% of world trade (estimate)

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Benefits of counter trade Heavy debt of developing countries No further credit How to trade Exchange goods Permits covert reduction of prices Avoid price and exchange controls
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OPEC Oil Cartel Agreed prices How to get discount Counter trade Increasing bilateralism You scratch my back and Ill scratch yours Example of Turkmenistan
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Entry into new markets Counter trade NEC Japan and Egypt Increasing Japanese tourists to Egypt New opportunities for developing countries

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Organizations Stability for long term sales Long term contracts Avoids problem of fluctuating prices

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Criticism of Counter trade Need for surplus at both ends Leads to trading of inefficient goods Uncompetitive goods traded in Discourage efficient production Lowers quality

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Types of Counter trade 1.Barter Simplest Exchange Assessment of value

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2. Counter purchase (parallel barter) Barter is single transactions Counter purchases involves two separate transactions Each with its own cash value

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Example - Counter purchase Iraq buying New Zealand meat Deal for 200 million $ New Zealand buys Iraqi oil Supplied at future date No cash outflow Future date
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Compensation trade Counter purchase Two unrelated products Related Japanese Co supplies textile machinery to Chinese Co Chinese uses machines to make garments Supplies garments back to Japan
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4. Switch Trading Problems of non requirement of full consignment Bilateral What to do Involve third party New Zealand sell milk to Kuwait Full requirement not consumed by Kuwait Involve a party from Switzerland
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Switch Trading Switzerland supplies other material to Kuwait Switzerland buys from New Zealand the shortfall at discount. Switzerland sells these to fourth party in England
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5. Offset Foreign supplier required to produce locally Defence deals Purchaser insists to manufacture locally Could be
Licensing Subcontracting Joint venture

Major way of doing business

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6. Debt Swap Less developing countries Huge debt Unable to pay Exchange debt for something else Five types of Swaps
Debt for debt swap Debt for equity swap Debt for product swap Debt for nature swap Debt for education swap
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ATTITUDES TOWARDS COUNTERTRADE Many condemn Encourages inefficiency Some are neutral Still many are constrained to do this Bad economic situation of developing countries Refusal may mean loss of business
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More companies in counter trade Improve market position Mercedes Benz Established subsidiary Sells trucks Buys hand tools Some sale better than no sale
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Pepsi Cola Pioneers in counter trade Russia and East European countries Expand operations How? Accepted Vodka from Russia Accepted Wines from Romania To finance Pepsi Cola bottling plants in these countries Profitable arrangement for all
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Benefits to developed nations Counter trade Creation of new markets Pepsi in USSR Maintain market share Barriers for entry of competitors Pepsi exclusive arrangements in USSR
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Pepsi in USSR Build good relationship with governments gives access to market other products Socialist countries in particular State owned organizations Expand bottling operations Pepsi in Ukraine Pepsi marketing Ukrainian made commercial ships for 8 year period
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Pepsi in USSR 1 billion $ order. Pepsi dominates Cola market in former USSR Republics Exclusive arrangements No arrangements with Coke Coke could not enter for 12 years Clear advantage for Pepsi
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Risks with counter trade There are risks Counter trade partner Goods specification Delivery time Reliability

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Impact of counter trade on future prices Contracts period longer Goods obtained at future date Looks profitable at the time of agreement May not be six years down the line Supply demand equation

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Barter Houses Specialist in counter trade Counter trade requires time Find partner Puts financial strain Capital tied up for longer time than normal transactions
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Citi Bank Created counter trade department Consultant and financing of bartered goods Universal Trading Exchange New York company Clearing house for bartered goods 500 barter exchange houses in US
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Motors Trading co A subsidiary of General Motors Develops market for General Motors products Cash deals are not possible Counter trade with 20 countries More than 50% business in former USSR republics A well developed strategy for counter trade can be successful.
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