Question

a) What’s Countertrade? What are the types of countertrade? Please use examples , if you can.

b) What are the pros & cons of countertrade?

Answer 1

a) countertrade refers to a range of barter-like agreements that facilitate the trade of goods and services when they cannot be traded for money. A monetary valuation can however be used in countertrade for accounting purposes. In dealing between soverign states, the term bilateral trade is used or “ any transaction involving exchange of goods or service for something of equal value.

The differen types of countertrade are:

1. Barter (countertrade)

-direct exchange of goods and services between two parties without a cash transaction

- two fold problems such as if goods are not exchanged simulatenously, one party ends up financing the other for a period. Goods may be unwanted,unusable or have a low resale value.

2. Counterpurchase

e.g- china buys industrial equipments from a US firm and the firm promises to spend some of the proceeds on chineese textiles

3. Offset

One party agrees to purchase goods and services with a specified percentage of the proceeds from the original sale. Party can fulfill the obligation with any firm in the country to which the sale is being made. Gives exporter greater flexibility to choose goods to be purchased.

4. Switch trading

occurs when a third party trading house buys the firms counter purchase credits and sell them to another firm that can better use them.

5. Compensation or buybacks

Occurs when a firm builds a plant in a country or supplies technology, equipment, training or other services. It agrees to take certain percentage of plants output as partial payment for the contract.

B) pros of countertrade

-gives additional hard currency

- marketing expertise that they may not otherwise have.

-technological advances the country may not poses.

-it gives access to markets

-it helps to conserve foreign currency reserves.

cons of countertrade

- countertrade contracts may involve the exchange of unusable or poor quality goods that the firm cannot dispose of profitably.

-countrttrade is most attractive to large, diverse multinational enterprises that can use their worldwide network of contacts to dispose of goods acquired in countertrade.