Countertrade is an international trading system in which governments decrease the trade deficits between two or more countries. It entails butter trade instead of currency trade
Countertrade is a system of trade where buyers import machinery, equipment, technology and raw materials from foreign manufacturers on credit bases and consent to pay back with other products or labour in a given time frame. Countertrade in countries having insufficient technology and foreign exchange is useful in purchasing advanced technology and equipment with foreign capital to facilitating a country’s economic development and increase its export volumes.
A Little More on What is Countertrade
Countertrade also referred to as product resale is that the party involved in the countertrade imports the equipment technology on credit basis is given by another party and subsequently uses the produce of the equipment technology to pay back the price and the interest of the imported equipment technology in instalments.
Countertrade association is between the buyer and seller within the scope of international trade. The buyers have complete ownership and use the rights for purchasing machinery, equipment and technical knowledge while the seller who do not have the factory shares. This form makes use of foreign capital in addition to expanding good’s sales channels.
When there is a combination of countertrade and processing trade, three to one supplement results, the inadequacy of funds and foreign exchange among the buyers is solved by the countertrade implementation, and buyers can expand to overseas market to also earn foreign exchange. Sellers can expand their product sales, improve exports in addition to obtaining a stable supply source. On the other hand, the demerits of countertrade include; inflexibility, difficulty in making agreements, cumbersome methods and numerous threats involved. Countertrade has been used by Germany that adopted it in 1931. The Soviet Union and Eastern European countries used the method in trading with the west. China also adopted countertrade after the reformation and expansion.
Initially, countertrade was majorly for the building of large industrial enterprises. For instance, the Soviet Union by then exchanged $860 million cost of mining equipment with 100 million tons of coal as a repayment. Similarly, Poland imported chemical equipment and technology valued at $400 million from the USA to repay the sale of similar industrial products. In the later period, there is diversification of countertrade, and besides large equipment, there are small and medium-sized projects. In the 1980s the Countertrade constituted nearly half of Poland’s electronic and mechanical products exported to West.
China in the 1980s applied the great compensation technology to import foreign advanced technology and equipment even though it was on a small scale and for small projects mostly foreign companies used equipment technology as a foreign direct investment in China resulting to the reduction in countertrade. With the China’s market economic growth, the supremacy of Countertrade in use of foreign capital and sales promotion cannot be underestimated.
The introduction of technology
In normalcy state, the west is reluctant in the provision of innovative technology and equipment to others leading to a high price of technology importation. When innovative technology and equipment are being imported, more consideration to the advancement and reliability of these technologies besides establishment of rational price
Competition and risk
After gaining replacement products, it is advisable for foreign investors to be concerned with the sales channels and markets. In the case of sales channels, market opportunity and the sales price should be regular with our export and sales channels to reduce competition. In the process of replacement trade beginning establishment to the settlement, each other purpose and sales must be understood to make the export for replacement products not replicated with ancient export commodities. Existing export markets and sales channels in China should be avoided to the extent of possibilities and attention should be paid on low-cost selling in the international market even if ancient products are used as replacement commodities.
Being considerate to risks in the international market is significant to protect exporters from undertaking certain changes in the international markets they might ignore to replace products with numerous justifications making it extremely hard for importers to pay back.
In ascertaining the sales cost of the replacement products after gaining the products, some foreign organisations will entrust hand over these products to traders for commission sales. The additional cost will be apportioned to imported technology and equipment’s cost directly increasing them.
Compensation period problem
The period for compensation in countertrade is between 3 to 5 years and block rate can take 20 years even though some companies sign a countertrade agreement with foreign company and they neglect to ascertain a just compensation period resulting to either very short or very long period that cannot be fulfilled or failure of reasonable use of foreign capital.
References for Countertrade
Academic Research for Countertrade
- A note on countertrade: contractual uncertainty and transaction governance in emerging economies, Choi, C. J., Lee, S. H., & Kim, J. B. (1999). Journal of International Business Studies, 30(1), 189-201. The paper establishes a conceptual framework for evaluating organisational impacts on contractual risks in regards to developing economies. Regardless of the ancient explanation by inadequacies of foreign exchange, Arguments of continued international countertrade demonstrates organisational cures to institutional governance transactions deficit
- The economics and politics of countertrade, Banks, G. (1983). World Economy, 6(2), 159-182. The paper concludes that countertrade is of minimal benefits in world trade. Systematic forces in Eastern bloc countries increase the probability of continuous in the countertrade to increase significantly to external trade. In countertrade, powerful domestic interests are significant only in the non-market economies where it is of inflexible source
- Economic incentives for countertrade, Mirus, R., & Yeung, B. (1986). Journal of International Business Studies, 17(3), 27-39. The paper undertakes an examination of countertrade using standard economic theory. The theory demonstrates circumstances under which countertrade is a reasonable response transactional cost, information disproportionateness, ethical hazard-agency challenges and other market defectiveness. The paper also develops an introduction proposition that is capable of experiential examination after improvement.
- Countertrade: Forms, motives, pitfalls, and negotiation requisites, Khoury, S. J. (1984). Journal of Business Research, 12(2), 257-270. This paper observes countertrade from the viewpoint of policy makers and businesses and outlines the definition of countertrade and the types that include barter, counter-purchase, buy-back arrangements and switch trades. Reasons backing the countertrade are discussed from the perception of East Europeans, developing countries and Western organizations. The conclusion states that countertrade is a developing strategy of trade and the need of American businesses adjusting to it to sustain and develop their attractiveness in the global markets.
- Tying trade flows a theory of countertrade with evidence, Marin, D., & Schnitzer, M. (1995). The American Economic Review, 1047-1064. A countertrade contract bonds export to an import. In most cases, countertrade is condemned to be a form of bilateralism and mutuality hence an ineffective form of international trade. In this paper, the authors discuss the situations in which combining of two technologically dissimilar trade movements is probable for efficiency improvements. The authors illustrate that there is a possibility of countertrade being efficient in international trade that provides the solution to moral-hazard problems and reinstates solvency of very obligated countries.
- The transaction-cost rationale for countertrade, Hennart, J. F. (1989). Journal of Law, Economics, & Organization, 5(1), 127-153. The paper defines countertrade as an agreement between the buyer and a seller in which the major transaction is accompanied by extra terms. The major counter trade forms are barter trade, switch trade and clearing arrangements. Most literature is concentrated on the macro-economic and legal factors while no attention is devoted to managerial functions which may not be significant in some types of countertrade like barter is more necessary for complex agreements.
- Countertrade, offsets and barter in international political economy, Hammond, G. T. (1990). The paper refers to countertrade as a set of commercial arrangements between a buyer and a seller in which the main transaction is complemented by numerous conditions. The paper aims at the development of initial grouping of compensatory requests applied in offset deliberations which form part of the highly significant, multifaceted and least documented countertrade forms. The paper is also aimed at the identification of some unexplained challenges to be examined in the coming studies.
- Achieving an advantage with countertrade, Reisman, A., Fuh, D. C., & Li, G. (1988). Industrial Marketing Management, 17(1), 55-63. The paper examines the numerous layouts of countertrade which is the current development of traditional goods exchange trade. The format provides the nomenclature of grouping the ways of the conduct of countertrade which includes; allocates the benefits for the trading partners based on the respective degree of economic development in their home countries, and argues on the process of countertrade generally sufficient to set into every format. The paper also describes product bundling and principles of setting countertrade regulations. Even though the above discussed being universal, some specific example illustrating countertrade is with the People’s Republic of China.
- Some empirical dimensions of countertrade, Hennart, J. F. (1990). Journal of International Business Studies, 21(2), 243-270. The paper studies some of the current theories of reasons for the implementing countertrade barriers and undertakes the comparison of the impacts of these theories with the information from an all-inclusive database of countertrade activities.
- The management of countertrade: Factors influencing success, Lecraw, D. J. (1989). Journal of International Business Studies, 20(1), 41-59. Countertrade victory was found to be higher for firms that had experience in exporting and in countertrade activities, large, were able to withstand countertrade take-backs and valued upright incorporation, high visibility, complex products, had the low reputation for quality and high volumes. Attainments were also higher provided the importer treated quality with utmost considerations, with low technical proficiency inexperienced ion exporting, encountered obligations in export markets, highly expensive forward contracts foreign exchange limitation and challenged low exchange rate.