When shipping goods internationally, there may be times when a country that is importing has very little or no liquid funds (due to various reasons) to make payments to their exporter.
In such situations, the importing country extends an exchange commodity valued almost the same as the exporting goods. The exporting country accepts the deal as they view it as a way to expand their international markets.
The importing country benefits from the exported goods, making it a win-win situation for both countries. This exchange of goods is referred to as counter trading.
Meaning of Counter Trade
Counter trade is the bilateral or reciprocal trading of goods or services internationally.
This form of trading may use partial payment or not use monetary payment at all in exchange for the services or goods exported. Counter trading is a good way of trading goods for countries with minimal access to liquid funds to offer against goods and services provided.
At the same time, it is beneficial for the exporting countries to expand their international markets and create growth in their industry.
Types of Counter Trade
Counter trading can take place in different ways, such as:
Barter A barter system is the exchange of goods and services equivalent to the value attached to the goods exported. It doesn't require cash payments in trading goods but is based on the exchange of surplus quantities of a commodity they possess. It allows low-finance countries to enter international trading, as money is not a factor.
Offset An offset arrangement involves dealing with expensive industrial items such as military equipment or aircraft. In this agreement, the exporter obliges to the importer's conditions, such as the assembly of exported items in the importing country, marketing their products and more. An offset arrangement is also known as industrial cooperation or industrial compensation.
Counter Purchase In a counter purchase agreement, the exporter agrees to the importer's conditions that the exporter will purchase other goods or services from the importing country. This agreement also mentions a fixed time after the importer buys the goods or services from the exporter. Doing so ensures that neither party vastly benefits from a monetary payment and that it flows between the two countries.
Buyback Buyback refers to when one organization builds manufacturing facilities or provides technology, training, equipment or other services to another company in an international country. In return for the service or goods provided, the providing party receives partial compensation, such as finished goods or other outputs from the facilities by the receiving party.
Example of Counter Trade For example, Country A provides Country B with automotive technology, equipment and workforce. In return, Country B provides country A with a partial payment by providing them with a massive shipment of auto vehicles using the technology, equipment and training provided. This way, both countries have entered into a buyback form of countertrade.
Advantages of Countertrade
Entering into a counter trade with foreign markets can prove beneficial as it:
- Helps financially weak countries to reserve their foreign currency
- Helps to lower unemployment in cash-strapped countries
- Enables better utilization of capital
- Allows countries to enter into a challenging market and promote growth
- Allows low-cash countries to enter into foreign trade as money is not a requisite
- Provides an alternative to traditional trading
- Lets surplus quantity be dispersed before going obsolete or unusable
Drawbacks of Countertrade
Despite the benefits of getting into a counter trade, some limitations shouldn't be overlooked, such as:
- The value promised by both parties may be uncertain, especially for goods that are price sensitive and can change depending on its market position
- There can be complex negotiation terms that can be time-consuming
- It could lead to higher costs of transportation and logistical challenges
- Different conditions set by developing countries can create a sense of discrimination in the global marketplace
Countries that Countertrade Various countries counter trade. These countries are Thailand, Iran, Brazil, Nigeria, Philippines, Somalia, India, Iraq, Malaysia, Pakistan, Colombia, Argentina, Turkey, etc.
Strategies for Counter Trade
The most commonly used strategies of counter trade include barter, offset, buyback and counter purchase.
Most Restrictive Type of Countertrade
Barter is considered the most restrictive type of counter trade, even though it's the simplest. The reasons for its restrictive nature are:
If the goods exchange between the two countries is not done simultaneously, then one party is at the disadvantage of financing the other party till they transfer their goods to the first party.
Secondly, parties involved in the barter system face the massive risk of having to accept goods or services they do not require, cannot resell or use.
It is mainly used as a one-time deal with international partners who lack creditworthiness.
Difference Between Countertrade and Barter
Counter trade refers to the reciprocal exchange of trading of goods and services between companies internationally with either partial or no monetary settlement in which the barter system is a type of conducting counter trade.
A barter system is a type of countertrade where the exchange of goods and services occurs with no cash settlements.
Difference Between Countertrade and Counter Purchase
A countertrade is when the two parties can exchange goods and services without any cash payments.
Counter purchase is a type of countertrade where both parties agree to buy goods and services from each other under separate sale contracts but in a set period.