NAME: SHAH IMAD ALI

COURSE: IBA 4010 A

(INTERNATIONAL
BUSINESS OPERATIONS)
LECTURER:PROFESSOR
KIRUBI, MICHAEL
SEMESTER: Summer
Semester - 2018
THE GROWTH AND DEVELOPMENT
OF COUNTERTRADE
Term paper
 The growth and Development of countertrade
Introduction
 Countertrade means exchanging goods or services which are paid for, in
whole or part, with other goods or services, rather than with money.
 In the past several years, the use of barter and counter trade has grown to the
extent that it now touches an estimated twenty to thirty percent of all
international trade.
 In any form, countertrade provides a mechanism for countries with limited
access to liquid funds to exchange goods and services with other nations.
 Countertrade is part of an overall import and export strategy that ensures a
country with limited domestic resources has access to needed items and raw
materials.
 Additionally, it provides the exporting nation with an opportunity to offer
goods and services in a larger international market, promoting growth within
its industries.
 Countertrade is often used when a foreign currency is in short supply or
when a country applies foreign exchange controls.
The need for countertrade
 Money: sometime the shortage of cash resources leads nation towards
countertrade.
 Developing nations, particularly, have very limited cash resources but they
generally are abundant in natural resources.
 Protect local industries: by engaging in countertrade, nations ensure that as
they give business to a foreign nation they also create business and job
opportunities for their own people by promoting the traded commodity.
 Balance of trade: Maintaining a positive balance of trade is very important
for every nation.
 Countertrade is a great way for nations to ensure that the import and exports
in the nation are balanced as every commodity that is being bought is
equaled with some commodity being sold.
 Competitive advantage: when it comes to trading there is also competition
between various nations.
 By providing the opportunity of countertrade to other country you gain a
competitive edge over the other nations selling or trading the same product.

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Types of countertrade
 Barter
In Barter, the goods and/or services are exchanged with other goods and/or
services of equal value, where little or no money is paid by the buyer.
 Compensation
Under this type of arrangement, the seller receives a part of the payment in cash
and the rest in shape of products.
 Buyback
Under the buyback agreement, the seller supplies plant, equipment or technology
and agrees to buy goods produced with that plant, or equipment as payment.
 Tolling
In tolling, the seller supplies raw material and receives finished goods produced
from this raw material as payment from the buyer.
 Clearing Arrangement
This type of trading is between two or more than two countries in the shape of an
agreement, under which agreed volume of goods are imported and exported over a
specific time period without the payment of foreign currencies
 Switch Trading
Switch Trading involves the role of third party in a countertrade transaction. If a
seller in the countertrade does not want goods offered by the buyer as payment, it
may bring in third party to dispose of the merchandise offered by the buyer.

 Counter purchase
In counter purchase agreement seller receives the full amount in cash, but agrees to
spend an equal amount of money in that country within a given time.

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  Offset
Offset is the type of countertrade, which is mostly related to very high value of
exports and/or medium to high technology capital goods supplied by a
multinational corporations or a major manufacturer.
Why Countertrade?
 Enable trade in countries that are unable to pay for imports. This can be the
result of a shortage of foreign currency or lack of commercial credit.
 Help find new export markets or protect the output of domestic industries.
 Balance overseas trade.
 Gain a competitive edge over competing suppliers.
 Sidestep the lack of credit or other alternative financing measures.
 Develop a workaround on the rules and regulations of a foreign country.
 Foster customer goodwill. Your willingness as a seller to accept a
countertrade deal fosters long-term customer goodwill. Once the customer’s
country improves, you can capitalize on the customer goodwill cemented
over the years.
 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
 To preserve hard currency
 To improve the balance of trade
 To maintain prices of export goods

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ORIGINS AND GROWTH OF COUNTERTRADE
 The modern era of countertrade began when countertrade helped the German
economy overcome its post world war I recession.
 The practice however really first took hold after world war II when the
Soviet union and its Eastern bloc allies took up countertrade to circumvent
political and economic restrictions on East-West trade.
 The United States government became actively involved in countertrade in
1950 with the development of the Department of Agriculture’s barter
program.
 Countertrade became an increasingly important method of international
trade during the 1970’s , when a sharp rise in oil prices by the organization
of petroleum Exporting countries (OPEC) shook the worlds trading system.
 As the terms of trade deteriorated in most of the non oil exporting third
world ,starting with the explosion in costs of imported energy, thus
countertrade was increasingly seized upon to compensate for these countries
lagging export earnings.
 The 1970s was also a time of rapid industrial growth and increased
production capacity in the Soviet union and Eastern Europe .Despite this fast
growth , however the nations did not capture the needed market shares in the
West to achieve positive trade balances.
 Countertrade by United states firms expanded during the 1970s , coinciding
with the growth in trade between the United States and both third world and
Esatern Eurpoean countries.

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HISTORY OF MODERN COUNTERTRADING

 Throughout history countertrading and barter occurred whenever there was a

shortage of money, or before money even existed.
 In modern times, countertrading arose as a means of conducting
international trade when money was scarce, currencies couldn't be
converted, or they were subject to inflationary and deflationary swings in
value.
 In Germany between the two World Wars and after World War II, money
was scarce and countertrading and barter became a way of conducting
international trade.
 Eastern European countries followed Germany's lead and employed counter
trading to overcome the problems of their own nonconvertible currencies.
 In the 1990s Eastern Europe and the countries of the former Soviet Union
began countertrading with Western nations to overcome difficulties
associated with their currencies.
 Countertrading became more important in international trade in the 1970s as
a result of the oil price increases.
 It expanded greatly in the 1980s and by the middle of the decade had spread
to nearly every country of the world.
 In the United States military offsets were the most common form of counter
trading, accounting for an estimated 80 percent of all U.S. countertrade in
1984.
 In 1985 countertrade may have accounted for 10 percent of all international
trade.

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Pros and cons of countertrade

Pros to countertrade:-
 Allows for entry into difficult markets.
 Increases company sales where you might not otherwise have business.
 Overcomes credit difficulties.
 Allows for disposal of declining or surplus products.
 Gains competitive advantage over competition (you don’t want to lose a
market share as a result of competitors).
 A country can gain access to raw materials, products, and technology that it
needs.
 Allows a country to conserve its hard currencies.
 Counter trade may be required by the government to which a firm is
exporting goods or services which means that counter trade can become a
strategic marketing weapon.
Cons to countertrade:-
 Time-consuming. As in any unconventional tactic, there will be haggling
over the good trades, so expect a long, drawn-out negotiation until all
parties are satisfied.
 Complexity in the nature of the negotiations. What should you do with
the goods being offered?
 Higher transaction costs (including brokerage, for instance). Costs can
quickly add up, especially while looking for a buyer for the goods,
commissions to middlemen and so forth.
 Logistical issues, especially if commodities are involved.
 Greater uncertainty on the value of the goods being traded and
uncertainty on the quality of the goods.

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Reasons for the continued growth of countertrade:-
 Requests for and requirements of countertrade are increasing both in third
world and East European countries in large part due to the world’s present
monetary and debt problems .
 Thus these problems are in part illustrated by the facts that collectively the
Western world’s commercial banks currently hold about $600 billion in
debts from third world and Eastern European countries.
 In addition to the need for acquiring necessities, countertrade practices have
been fueled by the desire of many nations to reduce trade deficits and to
continue their drive toward greater industrialization.
 Countertrade has also been used to foster imports , to maintain and increase
levels of employment , to prevent a further widening of a technology gap,
and to stabilize the prices and demand for commodities exports.
 Some countries also see countertrade as a hedge against rapidly fluctuating
prices for imported commodities due to exchange rate swings.
 As countertrade demands have increased , Western firms have begun to
compete with each other for sales both by complying with counter trade
demands and by proposing innovative counter trade contracts themselves to
finance their sales , thereby assisting in the expansion of the practice
 In addition governments of the industrialized west have both tolerated and
even promoted countertrade to prevent potential defaults by debtor nations
since such defaults would disrupt trade relationships , slow the growth of
both industrialized and developing nations , and create foreign policy
problems.
 Given the present growth of countertrade and the amount of money being
invested by international trading companies. Multinational corporations, and
international banks in the establishment of companies to handle counter
trade transactions.
 Balance of payments Deficits-Another reason generally given for the
attractiveness of countertrade in the 1980s is the Balance of payments
deficits experienced by many countries.
 Countertrade is Demanded by Buyers-that is a firm may have to accept
countertrade in order to make a sale in a foreign country. The only

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 alternative may be to walk away from the sale, In these situations, exporters
are using countertrade as a reactive strategy.
 Countertrade Increases Competitiveness. A willingness to offer countertrade
terms adds to the overall product offering and may provide a competitive
advantage over firms unwilling or unable to offer such terms.
 Countertrade Facilitates Market Entry. This refers to a proactive strategy of
using counter-trade as a marketing tool to make sales in countries that may
not otherwise be willing to purchase imports on conventional terms.
Countries that require countertrade
 Countertrade is increasingly being required under new laws passed by
foreign governments. Most nations insisting on countertrade are those with
debt problems, such as Argentina, South Korea and Mexico.
 Other countries that insist on countertrade include Algeria, Indonesia ,Iran,
Libya and Nigeria, These are nations which all demand counterpurchase
when their state oil bodies negotiate contracts.
 Indonesia appears to lead in all counter purchase agreements, which it has
insisted on since January 1982 for all foreign suppliers.
 China, despite having the sixth largest reserve of foreign exchange and gold
in the world, as well as multibillion dollar trade surpluses every year since
1981 , has pushed counter trade to link Chinese and Western business
interests.
 In addition to acquiring state of the art technology and improving its global
market ties , China is also using countertrade as a source of raw materials
and capital for its provincial officials and plant managers .
 While some countries like Indonesia and Romania , have general counter
trade requirements set out in their laws , most countries impose countertrade
demands based on internal directives or leave countertrade totally to the
discretion of domestic organizations.
Other participants in and and examples of countertrade
 During the past several years, several international trading companies , large
domestic corporations , and banking concerns have established separate
divisions to handle countertrade transactions.

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  International trading companies have found countertrade to be an
inexpensive means of obtaining Third world commodities while still earning
their customary fees.
 Banks such as Citicorp and London Lazard brothers , have established
countertrade departments to compete with the large trading companies and
to generate additional business for themselves in their additional area of
expertise.
 Examples of United states companies involved in countertrade are Control
Data corporation, which began entering into countertrade transactions over
ten years ago with its control data commerce international , Inc , in order to
enable cash short countries to buy the company’s computers.
 General electric, which in one 100 percent countertrade deal agreed to assist
Romania in building a nuclear reactor in return for cement.
 Other Western industrialized nations are actively involved in countertrade.
For example , Japan is building industrial complexes in several countries in
the Middle East in exchange for oil.
Countertrade examples
 "Saudi Arabia agreed to buy ten 747 jets from Boeing with payment in crude
oil, discounted at 10 percent below posted world oil prices.
 The Venezuelan government negotiated a contract with Caterpillar under
which Venezuela would trade 350 000 tonnes of iron ore for Caterpillar
earthmoving equipment.
 Albania offered such items as spring water, tomato juice, and chrome ore in
exchange for a $60-million fertilizer and methanol complex.
 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.
Conclusion
 Both traders and government officials alike generally accept that counter
trade will continue to play a significant role in world trade for at least the
immediately for seeable future.
 Most Third world countries have instituted programs to further encourage
countertrade.

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  Countertrade has increased tremendously over the last several years and
today is growing up by leaps and bounds.
 Although the exact amount of worldwide business represented by
countertrade is not known because such trade is not monitored,Current
estimates are that it presently involves approximately 20%to 30% of all
international trade.

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 REFERENCES

https://www.barternewsweekly.com/2010/03/what-is-counter-trade/

K., & U. (2011, July 17). Countertrade – A Practice of Dubious Benefit to

International Trade, is of Growing Importance. Retrieved from
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1886635

Delaney, L. (n.d.). What Is Countertrade? The Pros and Cons to a Cashless Trade
Payment. Retrieved from https://www.thebalancesmb.com/countertrade-the-pros-
and-cons-1953402

http://www.opentextbooks.org.hk/ditatopic/34373

(n.d.). Retrieved from https://study.com/academy/lesson/countertrade-definition-

types-examples.html

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