Countertrade

CounterTrade Paper

Countertrade is a trade between two countries by which goods are exchanged for other goods rather than for hard currency. Countertrade is often the solution for exporters that may not be able to be paid in his or her home currency and according to the text few exporters would desire payment in a currency that is not convertible.

"Sometimes both parties are happy with the goods they receive, other times one country will liquidate the received asset, ultimately receiving cash in the deal. This is also referred to as "using barter to complete a trade." (www.investopedia.com, 2004)

An example of countertrade is, the former Soviet Union would often countertrade, agreeing to trade, say, Soviet oil for another country's vehicles.

After researching this subject, I have learned that countertrade is an umbrella term covering a wide range of commercial mechanisms for reciprocal trade. Reciprocal trading (two-sided trading, trade in return) occurs when the trade customers is also a supplier. The reciprocal trading arrangements may or may not be formally linked. In practice, reciprocal trade may strengthen an existing trading relationship, and may even create mutual dependencies, which may create new trade relationship.

Barter is probably the oldest and best known example of countertrading, however others, such as offset, buyback, tolling and switch trading, have also evolved to meet the requirements of a more sophisticated world economy. All of these generally involve the exchange of goods or services to finance purchases, rather than using cash alone.

"The importance of countertrade as a trading tool has increased since early 1970s -especially in markets where there is a shortage of foreign exchange and countertrade may be the only effective marketing mechanism for doing business." (www.barternews.com, 2003)

"One of the unique risks of countertrade transactions is that companies often find themselves handling products with which they are not familiar. This is probably the greatest risk in a countertrade transaction." ((www.barternews.com, 2003)

Approximately 130 out of 192 countries in the world require countertrade, one form or another, in their procurements. Many of them did so after having undertaken intensive and serious studies. Many global companies have dedicated in-house specialists dealing specifically with countertrade. Some 20% to 30% of world trade is countertrade. The annual global market size for countertrade is estimated to be between US$200 to US$500 billion. No one really knows what are the correct percentages are and how large the true market size is. The potential for its growth is so large that efforts were made by some countries to curb the growth of certain forms of countertrade at the World Trade Organization (WTO). Yet the majority of these very countries are the biggest perpetrators of its practices, restricting their practices within the exceptions contained in the agreement promulgated at the WTO. (Verariu, 1996)

The commodity- and resource-rich countries of Asia know what is barter and derivatives of barter known generally as clearing arrangements although not necessarily that it is but only one form of countertrade. They like their western counterparts too practiced these since time immemorial and the practices continue to be prevalent albeit at government-to-government levels mostly.

Soft Currencies

Another name for "weak currency," there is very little demand for this type of currency and values often fluctuate. Currencies from most developing countries are considered to be soft currencies. (www.investopedia.com, 2004)

Hard Currencies

A currency, usually from a highly industrialized country, that is widely accepted around the world. The U.S. Dollar and the British Pound are good examples of a hard currency. (www.investopedia.com, 2004)

There are really two main currency risks. The first is non-convertibility, the currency will not be convertible when received or required. As many countertrade transactions

...