Countertrade

From CEOpedia | Management online

Countertrade - is the term used to specify commercial agreement in which people who seel or export something are required to receive in part of in entire the delivery of products from supplier or the importing country. In fact nations's or company's use of its purchasing power as an influence to power a privat company to purchase to market its unwanted goods, to receive new concesions for finance this imports or in orde to acquire hard currency or technology (Seyoum 2009, p. 271). Nowadays countertrade is assessed to account for 15/20 percent of word trade, it is used to achieve business goals, for example: capital scheme financing manufactures sharing or renewal earnings from countries which has hard currency absence (Seyoum 2009, p. 272). This agreement i salso use to market goods and services which has environmental embarrassment and market deficiency ( Bertrand 2011, p. 336). Though countertrade is a worldide occurrence, countries interpret this agreement differently and use alternative terms to represent the same experiences (Martin 2014, p. 15).

Methods of countertrade

Countertrade commercial exchanges could be carried out in three different methods: barter, counter purchase and buyback (Abdullah, Safari 2018, pp. 159-172):

  • Barter - in this form of trade products or services are exchange of another products or services of sustainable value without payment of money between buyer and seler (Abdullah, Safari, 2018 pp. 159-172).The principle of pure barter is exchange of one good for another good and most ofen they are implemented by govemment to govemment transactions throughout a series of barter exchanges by clearing arrangement. Both parties to this deal accept to purchase a particular value of goods or services from each other over the specified period and then they create an account, which is debited when one of country imports from another and at the end of this period imbalances purged through the transfer of products or hard currency payments (Martin 2014, pp. 15-16).
  • Counter purchase - in this scheme seller agree to purchase products from the asset customer or from a partnership nominated by the buyer or accept to arrange for their purchase by other party. The value of goods is specified in advance in percentage by buyer and seller of the price of the goods exported by merchant (Abdullah, Safari, 2018 pp. 159-172).
  • Buyback - in this program an exporter provide implement or solution accept to buy the goods preapared implement or solution by the government through a scheme which was contained during the negotiations of agreement (Abdullah, Safari, 2018 pp. 159-172).

Types of offset

In countrtrade scheme is used to term: offset program but it specify activities connected with technology transfer and industry capability development. It is divided into two division that are: direct offset and indirect offset (Abdullah, Safari, 2018 pp. 159-172):

  • Direct offset are operations connect to the good being procured such as licensed production, co-production, sub-contracting and Maintenance, Repair and Overhaul (MRO).
  • Indirect offset are operations unrelated with at all to the good being procured, it is realize for the purpose of offset obligations relief such as technology transfer, partnership or any other programs agreed by the procuring party.

Countertrade - benefits

Countertrade is the specify agreement so it has many benefits for the parties, according to literature benefits are divided into two categories that are: benefits for buyer and benefits for exporter (Seyoum 2009, p. 287):

  • Benefits for buyer:
  1. transfer of technology,
  2. composition of payments difficulties,
  3. market access and a stable price.
  • Benefits for exporter:
  1. increased sales capabilities,
  2. access to source of sales
  3. flexible prices at the market.

Examples of Countertrade

  • Barter: Barter is the most common form of countertrade, which involves direct exchange of goods and services without the use of money. It is often used when two countries have different currencies or when there are restrictions on currency exchange. For example, a country may have an excess supply of wheat and need hardwood lumber, but not have enough hard currency to purchase it. In this case, it could offer to exchange its wheat for the lumber, allowing both countries to benefit.
  • Counter Purchase: Counter purchase is a form of countertrade where the seller agrees to accept a portion of the payment in goods or services instead of currency. This is often used when the buyer does not have enough currency to make full payment. For example, a company may agree to accept 10% of the purchase price in the form of goods or services from the buyer.
  • Offsets: Offsets are a form of countertrade where the buyer agrees to purchase goods or services from the seller in exchange for the purchase of its goods or services. This is often used to encourage foreign investment or to promote technological transfer. For example, a company may agree to purchase 10% of the value of the goods it is buying from a foreign company, in exchange for access to the company's technology.
  • Counter-purchase and compensation: Counter-purchase and compensation is a form of countertrade where the seller agrees to accept a portion of the payment in goods or services, as well as a fee or commission. This is often used when the buyer does not have enough currency to make full payment. For example, a company may agree to accept 10% of the purchase price in the form of goods or services from the buyer, plus a 5% commission.

Limitations of Countertrade

Despite the fact that countertrade can be used to achieve a variety of business goals, it also comes with several limitations. These include:

  • Difficulty in evaluating the goods or services being traded. Countertrade often involves goods or services that cannot easily be evaluated in terms of their monetary value. This makes it difficult to determine the true value of the goods or services being traded.
  • Unpredictable exchange rates. Countertrade transactions involve currency exchanges that can be volatile and unpredictable. This can lead to unexpected losses if the exchange rate swings against the trader.
  • High administrative costs. Countertrade transactions often require extensive paperwork and administrative costs that can add up significantly.
  • Difficulty in securing financing. Since countertrade involves complex transactions and non-monetary payments, it can be difficult to secure financing for such deals.
  • Lack of legal clarity. Countertrade transactions often involve novel and complex legal arrangements that can be difficult to enforce in the event of a dispute.

Other approaches related to Countertrade

Countertrade is a form of commercial agreement used to achieve a variety of business goals, from capital scheme financing to market goods and services with environmental embarrassment. Other approaches related to countertrade include:

  • Offset - this agreement is used to compensate a partner for goods or services traded. It can be used to provide goods and services to a partner in exchange for a reduced price.
  • Barter - this is a direct exchange of goods and services between two parties without the use of money. This approach is commonly used in developing countries or regions where money is scarce.
  • Buyback - this agreement involves a company selling goods or services to a partner, with the partner then buying them back at an agreed-upon price. This is often used to finance a purchase or to finance a foreign project.
  • Counter purchase - this approach is similar to barter, but instead of goods being exchanged, services are exchanged. This approach is commonly used when one party does not have the resources to purchase goods or services from the other.

In summary, countertrade is a commercial agreement used to achieve a variety of business goals. Other approaches related to countertrade include offset, barter, buyback, and counter purchase. These approaches are used to compensate a partner for goods or services traded, to directly exchange goods and services, to finance a purchase or foreign project, and to exchange services when one party does not have the resources to purchase goods or services from the other.


Countertrade — recommended articles
Offtake Agreement — Musharaka — Barter transaction — Trade counter — Deal structure — Barter agreement — Home market — Bancassurance — Classification of financial markets

References

Author: Marta Bartula

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