TABLE OF CONTENTS. Essay

This essay has a total of 3455 words and 23 pages.


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TABLE OF CONTENTS.

1.0 Introduction

2.0 Definition - What is Counter trade?

3.0 Brief Historical Background of Countertrade.

4.0 The types of Countertrade.

5.0 The examples of Countertrade.

6.0 The advantages and disadvantages of Countertrade.

7.0 Countertrade: The African Perspective.

8.0 The growth of Countertrade.

9.0 The Emergence of New intermediaries.

10.0 The future of Countertrade.

11.0 Summary and Conclusion

12.0 Bibliography






















1.0 INTRODUCTION.

Despite political and economic reforms in many developing countries, countertrade promises
to be a significant tool for consummating international transactions. It is unlikely that
these countries will find all the foreign exchange they need to finance their
restructuring programs. Thus, international managers need to develop a countertrade plan
within their overall international marketing plan. A method to identify and take advantage
of countertrade opportunities also needs to be developed.


There are many facets to establishing a countertrade strategy. One of the perplexing
problems is that countertrade takes so many forms. Despite the potential confusion, the
clear evidence that countertrade arrangements are growing means that they can be more
innovative. Managers can develop new types of countertrade arrangements to fit the
particular deal being negotiated. Any previously developed typology should not constrain
the executor of countertrade.


2.0 DEFINITION - WHAT IS COUNTERTRADE?
Countertrade is the sale that encompasses more than an exchange of goods and services or
ideas for money. In international market, counter trade transactions “are those
transactions which have as a basic characteristic a linkage, legal or otherwise between
exports and imports of goods and/or services in addition to , or in place of financial
settlements” Historically, countertrade was mainly conducted in the form of barter,
which is a direct exchange of goods of approximately equal value between parties, with no
money involved. (At the time when there was no common medium of exchange) However, over
time, money emerged and became the common and convenient medium of exchange.


Countertrade transactions have always risen when economic circumstances made it more
acceptable to exchange goods directly rather than to use money as an intermediary.
Conditions encouraging such business activities include:

Lack of money.
Lack of value of or faith in money.
Lack of acceptability if money and as an exchange medium.
Greater ease of transaction by using goods.

3.0 BRIEF HISTORICAL BACKGROUND OF COUNTER TRADE
Beginning in the 1950’s, countertrade and barter transactions were mainly carried
our with the Eastern bloc countries. This is because:

1. The currencies of these countries were not acceptable elsewhere as they were not freely convertible.
2. The countries did not want their currencies distributed outside of their economic bloc.
3. They did not possess sufficient foreign “hard” currency to make purchases
of crucial goods that were not available within the COMECON countries.


These countries solved their currency problem by depleting their gold reserves - which,
because if the world market price of gold, was an indirect financial transactions.
However, many Eastern bloc countries also insisted in their dealings with Western nations
that the goods they produced be taken in exchange for imports so as to reduce their need
for foreign currencies.


Throughout the decades, the official use of countertrade steadily increased. In 1972,
countertrade was in regular use by only 15 countries. By 1983 and 1995, there were 88 and
105 participating countries respectively .


Increasingly, countries and companies are deciding that countertrade transactions are more
beneficial to then than transactions based on financial exchange alone. This reasons
include:


1. World debt crisis has made ordinary trade financing very risky.
Many countries particularly in the developing world, simply cannot obtain trade credit or
financial assistance necessary to pay for desired imports. Heavily indebted countries,
faced with the possibility of not being able to afford imports at all hasten to use
countertrade to maintain at least some product inflow.


Counter trade does not reduce commercial risk and will, therefore, be encouraged by
stability and economic progress. Countertrade appears to increase with a country’s
credit worthiness, since good credit encourages traders to participate in unconventional
trading practices .


2. Many countries are responding favorably to the notion of bilateralism.
Countries prefer to exchange goods with countries that are their major business partners
(A notion of scratch my back and I’ll scratch yours).


3. The use of countertrade permits the covert reduction of prices.
It allows for circumvention of price and exchange controls. Particularly in commodity
markets with operative cartel arrangements i.e. oil and/or agriculture, this benefit may
be very useful to a producer e.g. by using oil as a countertrade product for industrial
equipment, a surreptitious discount(by using a higher price for the acquired product) may
expand market share.


4. Viewed by many nations and countries are excellent mechanisms to gain entry into new markets.
When a producer believes that marketing is not its strong suit, particularly in product
areas that face strong international competition, it often see countertrade as useful. The
producer often hopes that the party receiving the goods will serve as a new distributor,
opening up new international marketing channels and ultimately expanding the original
market.


5. Countertrade can be a good way to attract new buyers. By providing countertrade
services the seller is in effect differentiating its product from those of its
competitors.


6. Countertrade also can provide stability for long-term sales
For example, if a firm is tied to a countertrade agreement, it will need to source the
product from a particular supplier whether or not it wants to do so. This stability is
often values very highly because it eliminates, or at least reduces, vast swings in demand
and this allows for better planning. It, therefore, can serve as a major mechanism to
shift risk from the producer to another party.


7. Under certain conditions, countertrade can ensure the quality of an international transaction.
In instances where the seller of technology is paid in output produced by the technology
delivered, the sellers revenue depends on the success of the technology transfer and
maintenance services in production.

In spite of all the apparent benefits of countertrade, there are strong economic arguments
against the activity. These arguments are based on the following grounds that Countertrade
erodes the quality and efficiency or products and as lowering world consumption. This
means that instead of balances being settled on a multilateral basis, with surpluses from
one country being balanced by deficits with another, accounts must now be settled on a
country-by-country or even transaction-by transaction basis. Trade then results from the
ability of two parties or countries to purchase specified goods from one another rather
than from competition. As a result, un-competitive goods may be traded. Consequently the
ability of countries and their industries to adjust structurally to more efficient
production may be restricted.


4.0 THE TYPES OF COUNTER TRADE.

1. Counterpurchase or parallel barter agreement.
The participating parties sign two separate contracts that specify the goods and services
to be exchanged. In this way, one transaction can go forward even though the second
transaction needs more time. Such an agreement can be particularly advantageous if
delivery performance is dependent on a future event - for example, the harvest.
Frequently, the exchange is not of precisely equal value; therefore, some amount of cash
will be involved. However, despite the lack of linkage in terms of timing, an exchange of
goods does not take place. A special case of parallel barter is that of reverse
reciprocity “whereby parallel contracts are signed, granting each party access to
needed resources (for example, oil in exchange for nuclear power plants).”


2. Buy-back or compensation arrangement.
In this case, one party agrees to supply technology and equipment that enables the other
party to produce goods with which the price of the supplied products or technology is
repaid. The arrangements often “include larger amounts of time, money, and products
than straight barter arrangements.” They originally evolved in response to the
reluctance of communist countries to permit ownership of productive resources by the
private sector thus restricting foreign direct investment.



3. Clearing account barter.
Here, clearing accounts are established to track debits and credits of trades. The entries
merely represent purchasing power, however, and re not directly withdrawable in cash. As a
result, each party can agree in a single contract to purchase goods or services of
specified value. Although the account may be out of balance on a
transaction-by-transaction basis, the agreement stipulates that over the long term a
balance in the account will be restored. Frequently, the goods available for purchase with
clearing account funds are tightly stipulated. Sometimes additional flexibility is given
to the clearing account by permitting switch-trading, in which credits in the account can
be sold or transferred to a third party. Doing so can provide creative intermediaries with
opportunities for deal making by identifying clearing account relationship with major
imbalances and structuring business transactions to reduce them.


4. Offset arrangement.
These arrangements are most frequently found in defense-related sector and in sales of
large scale, high priced items such as aircraft. They are designed to “offset”
the negative effects of large purchases from abroad on the current account of a country.
For example, a country purchasing aircraft from the United States might require that
certain portions of the aircraft be produced and assembled in the our chasing country.
Such a requirement us often a condition for awarding the contract or is used as a
determining factor in contract decision. Offset arrangements can take on many forms, such
as coproduction, licensing, subcontracting, or joint ventures; they typically are long
term.


5. Debt Swaps.
These swaps are carried out particularly with less-developed countries in which both the
government and the private sector face large debt burdens. The debtors are unable to repay
the debt anytime soon, therefore, debt holders have grown increasingly amenable to
exchange of the debt for something else. There are five types of debt swaps, namely;


a) Debt-for-debt swap: This takes place when a loan held by one creditor is simply
exchanged for a loan held by another creditor. For example, a U.S bank may swap Kenyan
debt for Tanzanian debt with a Swiss bank. Through this mechanism, debt holders are able
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