Jack G. Kaikati
The Reincarnation of
Barter Trade as a
Marketing Tool
Barter trade has become one of the most rapidly growing
tools of international and domestic marketing.
T
HE great economist Adam Smith criticized
barter trade as a primitive, crude, and unrefined system of exchange. Yet in 1976, two
hundred years after Smith wrote his Wealth of
Nations, barter has become one of the most
rapidly growing tools of international and domestic marketing. It is no longer being used solely by
the Communist bloc and the developing nations,
but is now employed by the sophisticated marketers of the West as well.
The new barter business is centered in the old
cities of London and Vienna as well as the trading
ports of Hamburg and Rotterdam. These cities
now serve not only as the entrepots for the landlocked countries of Eastern Europe, but also as
exchanges for the surplus commodity exports of
the developing world. Moreover, in the U.S. domestic market a great deal more barter trading is
being done now than ever before.
This article attempts to explain the basis of the
current revival of barter in modem business and
to provide background information for executives
contemplating the possibilities of barter. First, the
major economic, political, and cultural factors
that currently favor barter trade on an international level are examined. Then, the major types
of international barter transactions currently being negotiated regularly are categorized, and the
challenges facing Western managers contemplating such deals are discussed. Finally, a similar
classification scheme is applied to domestic barter, and the author points out some of the legal
and tax implications of these domestic barter
transactions.
Factors Favoring International
Barter Trade
At least four prevailing factors have led to the
increase in international barter trade: (1) the expansion of East-West trade, (2) the importance of
barter trade in developing nations, (3) the energy
crisis, and (4) the evermounting inflation and
worldwide recession.
The Expansion of East-West Trade
The policy ot East-West detente has facilitated
the relaxation of unilateral Western trade barriers
and has encouraged more "cooperative agreements" between East and West. The current interest in East-West trade has resulted in a
plethora of articles dealing with marketing in the
Communist world. These articles were written by
professional academicians' and business executives^ who had frequent contact with the Eastern
1. See, for example. Gabor Hovanyi, "Marketing Strategy
in Socialist Industrial Enterprise," European Journal of
Marketing, Vol. 6 (Spring 1972), pp. 42-52; G. Peter Lauter,
"The Changing Role of Marketing in Eastern European
Socialist Economies," JOURNAL OF MARKETING. Vol. 35 (October 1971), pp. 16-20; A. Coskun Samli, "A Comparative
Analysis of Marketing in Romania and Yugoslavia," Southem Journal of Business, Vol. 5 (July 1970), pp. 108-113; and
David B. Zenoff and Donald L. Cuneo, "Formulating
Strategy for U.S. Business with Eastern Europe," Financial
Analyst Journal, Vol. 27 (July-August 1971), pp. 67-80, 91-94.
2. See, for example, J. H. Giffen, "Developing a Marketing
Program for the USSR," Columbia Journal of World Business. Vol. 8 (Winter 1973), pp. 61-68; Clyde D. Hartz, "A
Business Trip to Eastern Europe: Buying, Selling and
Journal of Marketing, Vol. 40 (April 1976), pp. 17-24.
17
18
Journal of Marketing, April 1976
TABLE 1
U.S. EXPORTS TO EASTERN EUROPE, U.S.S.R., AND CHINA
ACTUAL FOR 1971-1975 AND PROJECTED FOR 1978
(In millions of current dollars)
Projected Exports'
Actual Exports
Trade Partner
1971
1972
Eastern Europe
221
268
606
820
480
U.S.S.R."
161
484
1,187
612
525
China
—
63
1973
689
1974
820
Estimate
148
High
Middle
Low
High
Middle
Low
N/A
1978
If Trade Is
"Maintained"
1978
If Trade Is
"Normalized"
607
465
356
357
1,550
1,239
888
1,051
232
N/A
684
N/A
' First six months only.
" Actual includes grain.
' The procedure underlying the forecasts is: (1) to exclude the abnormal 1972-73 grain deal, which explains why the forecasts
seem low in comparison to actual 1972-73 U.S. exports to the U.S.S.R.; (2) to present two principal variants: with and without
relaxation of discriminatory controls and, within each variant, high, middle, and low estimates representing the fitting of
different curves to different time periods; and (3) to make the assumption that the "normalized" U.S. share of manufactured
goods imported by EE and Russia would have the same competitive position in EE and Russian markets as in Western
markets. "Normalization" includes abolition of all U.S. export controls that are more severe than those of principal competitors as well as the limitations on Export-Import Bank credit guarantees.
Sources: (1) Actual (1971-75): U.S. Department of Commerce, The United States Role in East-West Trade: Problems and
Prospects (Washington, D.C: U.S. Government Printing Office, August 1975); (2) Projected 1978: Erast Borrisoff and Stephen
Sind, "Projections of U.S. Exports to USSR and Eastern Europe," Research Note 3, Analysis Division, Bureau of East-West
Trade, U.S. Department of Commerce, May 1973.
bloc. Some of these articles stress the importance
of barter trade when dealing with the Communist
countries.
U.S. exports to the Communist bloc have grown
at an impressive rate over the past few years.
Table 1 provides a breakdown of U.S. exports to
Eastern Europe, Russia, and China. By far the
most important factor explaining the explosive
growth of U.S. exports to Russia in 1972 and 1973
was the first wheat deal. By 1974, there was a 50%
decline in U.S. shipments to the Soviet Union due
primarily to the phasing out of grain exports.
However, the second wheat deal, which firmly
commits the Soviets to buy at least six million
tons of U.S. wheat and corn annually over the
next five years, will certainly improve U.S. exports to Russia. Moreover, the U.S. Department of
Licensing," Business Economics, Vol. 9 (May 1974), pp.
39-45; Clyde D. Hartz, "A Business Trip to Eastern Europe:
Joint Ventures and Practical Lessons," Business Economics,
Vol. 9 (September 1974), pp. 34-44, and E. J. Milosch,
"Imaginative Marketing in Eastern Europe." Columbia
Journal of World Business, Vol. » (Winter 1973), pp. 69-72.
• ABOUT THE AUTHOR.
Jack G. Kaikati is a doctoral candidate in marketing
in the College of Business, Florida State University,
Tallahassee.
Commerce estimated that in 1975 there would be
a further strengthening in the relative share going
to manufactured exports.^
Table 1 also presents projections of U.S. exports
to the U.S.S.R. and Eastern Europe, which were
made by two experts on the staff of the U.S. Department of Commerce's Bureau of East-West
Trade. As a rough approximation, U.S. exports to
Eastern Europe could double in five years from
the relatively high 1973 level of $606 million to
about $1.2 billion in 1978, according to the "normalized" middle-level forecast."
Contrary to the above rosy forecasts, however,
recent trade relations between the U.S. and the
Soviet Union are not as firm and mutually satisfying as they were before Congress imposed some
restrictions late in 1974 via the Trade Reform Act
and the Export-Import Bank (Eximbank) Extension Bills. Specifically, the Russians objected to:
(1) the Congressional demand that the Soviets
should adopt a liberalized emigration policy—
3. 'World Trade Outlook tor Eastern Europe, Union of
Soviet Socialist Republic and People s Republic of China,"
Overseas Business Reports, U.S. Department of Commerce,
March 1975, p. 6.
4. Erast Borrisoff and Stephen Sind, "Projections of U.S.
Exports to U S S R , and Eastern Europe," Research Note 3,
Analysis Division, Bureau of East-West Trade, U.S. Department of Commerce, May 1973.
19
The Reincarnation of Barter Trade
mainly for Jewish people—in order to get "mostfavored-nation" tariff treatment from the U.S.;
and (2) a House-Senate limit of $300 million on
credits from the Eximbank over a four-year period. The Soviet Union considers the restrictions to
be unacceptable meddling on the part of the U.S.
Congress into its internal affairs and so has abrogated the 1972 trade expansion agreement with
the U.S.
In spite of the rupture in the trade pact, the
U.S.-U.S.S.R. Trade and Economic Council is optimistic about the Ford administration's effort to
formulate new legislation that is more favorable
to a renewal of trade with Russia.^
The Importance of Barter Trade
in Oeveioping Nations
For most developing countries, barter trade
holds several potential advantages. First, for a
country like Sudan, which relies heavily on the
unstable cotton market to provide the wherewithal for purchasing capital goods, barter trade
permits a certain degree of planning. A second
advantage is that barter may be used by developing countries as a source of financial aid. For
example, the clearing agreement between Ghana
and the U.S.S.R. provided that either side might
accumulate an import or export surplus of four
million Ghanian pounds before remedial action
needed to be taken.^ Thus, the agreement provided Ghana with an opportunity to obtain four
million Ghanian pounds worth of Soviet goods at
minimal cost.
Also, bilateral trade does not involve the use of
scarce foreign exchange. The lack of hard convertible currency needed to acquire capital goods
tends to compel these developing countries to rely
more heavily on barter trade. For example, a recent survey of Pakistani commerce showed that
60% of its trade with Eastern Europe had been in
barter deals, which increased four-fold in the
1960s, with Pakistan swapping shoes, cotton, and
jute for industrial machinery from Russia and its
satellite countries.'
The Energy Crisis
The current energy crisis has also had a favorable impact on barter trade. The crisis has added
a great deal of respectability to bilateral barter
deals. Public announcements indicate that Westem and Japanese governments have promised to
5. "U.S.-U.S.S.R. Council Optimistic on Trade," Industry
Week, February 3, 1975, pp. 20-21.
6. Ghana Treaty Series (Accra, 1961), No. 57.
7. Michael Kidron, Pakistan s Trade with Eastern Bloc
Countries (New York: Praeger, 1972).
provide the oil-producing nations with everything
from refineries and chemical plants to arms in
return for guaranteed supplies of oil. Typical is
the French agreement to barter a long list of industrial products, hydroelectric power stations,
and defense equipment in return for a guaranteed
supply of Iraqi oil. Britain negotiated a smeiller
deal to swap $242 million worth of industrial
equipment for 100,000 barrels per day of lowerpriced Iranian oil during 1975. Numerous other
barter deals of this nature have been conducted
during the last year, and the tempo gives every
indication of increasing.*
The international oil companies, however, show
signs of reluctance to further extend barter trade
in exchange for oil supplies. The oil companies
apparently fear that bilateral barter deals at artificially high prices will make negotiating longterm agreements difficult, because the oil-producing countries will probably use the high price of
the barter deal as a bargaining counter.
The Current Worldwide
Inflation and Recession
In addition to the devastating energy crisis,
worldwide inflation and recession have also
boosted barter trade. Historically, barter trade
usually reappears during periods of economic distress.^ For example, the depletion of most trading
nations' foreign trade reserves after World War I
led to an upsurge of barter trade in the 1920s.
Barter trade which started in Europe during the
Great Depression had spread throughout the
world prior to the Second World War. Following
World War 11, it reappeared due to the paucity of
foreign e.xchange. Since then, most of the world,
except Eastern Europe, the Soviet Union, and
mainland China, has moved away from barter
trade. Now a barter system is reemerging in the
Western world as a result of the disturbing economic conditions of rampant inflation, persistent
recession, chronic balance of payments deficits,
and widespread shortages of raw materials.
Perhaps it is this long-time association of barter trade with chaotic economic conditions that
caused the U.S. secretary of state to condemn oil
8. "France: Government-to-Govemment Deals," The Petroleum Economist, Vol. 41 (January 1974), p. 12; "Scramble
to Make Barter Deals," The Petroleum Economist, Vol. 41
(February 1974), p. 51; "Trade: A Payments Deficit Haunts
Oil Consumers," Business Week, February 9, 1974, p. 37;
"France Goes It Alone," The Petroleum Economist, Vol. 41
(March 1974), pp. 87-89; "Iran Economic Agreement with
France," The Petroleum Economist, Vol. 41 (August 1974), p.
295; and "Barter Deals Cut the Price of Oil," Business Week,
May 12, 1975, p. 30.
9. Vladimir Pertot, International Economics of Control
(Edinburgh: Oliver and Boyd, 1972), p. 238.
Journal of Marketing, April 1976
20
barter deals as threatening the world with a vicious cycle of competition, anarchy, rivalry, and
depression similar to those conditions that led
to the collapse of world order in the 1930s. Fear
of such a happening has led Dr. Kissinger to urge
Western governments to stall bilateral barter
agreements with the oil-producing countries
while he strives for a stable and multinational
solution to the oil problem.'° Nevertheless, in
1975 the U.S. was negotiating an accord under
which Russia would deliver 200,000 bbl. per day
of crude oil to the United States. Such an agreement with the Soviet Union, of course, would represent a reversal of the U.S.'s initial position toward oil bilateral deals.
Types of International Barter Deals
Four major types of barter deals are now regularly negotiated:" (1) clearing agreements, (2)
switch trading, (3) parallel barter, and (4) buyback barter. To understand the significance of
each of these types, a detailed analysis is necessary.
Clearing Agreements
This system of "straight" barter is particularly
suitable for countries that lack a generally acceptable hzird currency and that have centrally planned economies. These characteristics, of
course, best describe the economies of the Communist bloc; nearly all trade within Eastern
Europe, as well as the majority of the trade of
Eastern Europe and Russia with the developing
countries, is done on this basis.
What happens in a clearing agreement is that
the contracting parties make a list of the commodities available for trade and agree each year
10. "Trade: A Payments Deficit Haunts Oil Consumers,"
same reference as footnote 8.
11. William A. Dymsza, "East-West Trade: Types of Business Arrangements," MSU Business Topics, Vol. 19 (Winter
1971), pp. 22-28; R. J. Familton, "East-West Trade and
Payments Relations," IMF Staff Papers, Vol. 17 (March
1970), pp. 170-210; Marshall I. Goldman, Detente and Dollars: Doing Business with the Soviets (New York: Basic
Books, 1975), pp. 177-180; Albert Masnata, East-West
Economic Cooperation: Problems and Solutions (Lexington,
Mass.: Lexington Books, 1974); David St. Charles, "EastWest Business Arrangements: A Typology," in Changing
Perspective in East-West Commerce, Carl H. McMillan, ed.
(Lexington, Mass.: Lexington Books, 1974), pp. 105-124;
Hon. A. Maxwell Stamp, "Services by Specialist Organizations which Encourage East-West Transactions," in Financing East-West Business Transactions (New York: American
Management Assn., Series No. 119, 1968), pp. 44-48; "Back
to Barter," The Economist, December 14, 1974, pp. 52-53;
Developing the East European Market (Geneva, Switzerland:
Business International, 1966), pp. 47-51; and East-West
Trade: The Lessons from Experience (New York: The Conference Board, Report No. 527, 1971).
on the quantities and values to be exchanged. The
aim is equal exchange so that no transfer of
money need occur. However, clearing agreements
normally provide a certain flexibility so that either side may accumulate limited export or import surpluses for short periods.
The system of "clearing arrangements" has also
been widely used by Russia and its satellites to
establish new trading areas, particularly in the
developing world. Typical is the major barter deal
between Russia and Morocco that was negotiated
in early 1974. The specifications of the agreement
call for Russia to build a phosphate mine in
Morocco in return for up to five million tons of
phosphate a year through the 1980s and ten million tons a year thereafter. The agreement seems
straightforward enough, but tied to it is a commitment by Morocco to import Russian petroleum products, timber, and industrial plant in return for citrus fruits.
One disadvantage of this sort of deal is that
countries can easily find themselves saddled with
barter goods for which they have no use in the
long run and which they must eventually "dump"
on the world market. In fact, this very disadvantage has led to a secondary barter market: the
"switch trading" system. In this system, the services and expertise of professional switch dealers
are used.
Switch-Trading System
The switch-trading technique is required when
a Western firm accepts payment from the East in
the form of "clearing dollars" for which it has no
direct use.'^ These clearing dollars represent a
bookkeeping unit that is universally accepted for
the accounting of trade between countries and
parties whose commercial relationship is based
on bilateral agreements. Recently, the use of
clearing dollars has become more and more popular in East-West trade. Since the Western firm is
not equipped to handle the accumulated clearing
dollars, it is advisable to hire professional switch
dealers who can assist in arranging such transactions.'^ To understand how the switching system
12. Donald V. Petroni, "Doing Business in Eastern European Countries," in Private Investors Abroad: Structures and
Safeguards, Virginia Shook Cameron, ed. (New York: Matthew Bender and Co., 1966), pp. 261-326; Isaac Shapiro,
"Obstacles to Trade with and Investment in the Soviet
Union and Eastern Europe," Private Investors Abroad: Problems and Solutions in International Business in 1969, Virginia Shook Cameron, ed. (New York: Matthew Bender and
Co., 1969), pp. 173-190; and Charles H. Baudoin, "The Use of
Switch Financing to Facilitate East-West Business Transactions," in Financing East-West Business Transactions (New
York: American Management Assn., Series No. 119, 1968).
13. Stamp, same reference as footnote 11.
The Reincarnation of Barter Trade
works, let us consider the following hypothetical
example.
East Germany, a "soft-currency" country, has a
bilateral agreement with a Swedish firm to swap
$10 million worth of goods. The Swedes may find
only $5 million of East German goods that they
consider worth exchanging, so they have a $5 million credit. The switch dealer buys the credit for
hard currency at a discount of 7% or more.'"* He
then persuades an Indian importer to buy tractors
in East Germany. His inducement would be a
percentage of the dfscount he received when he
bought the credit. He now has a credit in rupees,
also a soft currency. He shops around and finds an
Austrian firm that wants Indian cotton and is
willing to pay hard currency for it. His inducement to the Austrian firm would be another percentage of the initial discount.
As the above example indicates, the task of the
switch dealer can become fantastically complicated. It involves selling a commodity for a soft
currency, using the soft currency to buy another
commodity, and repeating the process until the
switcher gets a commodity that can eventually be
sold for a hard currency." The ultimate possession of the hard currency brings an end to the
switching process and the switch dealer is then
ready to begin another deal.
Parallel Barter
Another barter system familiar to Western
businesspeople is most often called "parallel barter" or "compensation trading." A major portion
of the West's trade with Eastern Europe and Russia is done under this system. The fact that most
Western countries will only provide credit for exports that are paid for in cash presents a problem
for Eastern European economies, which are notoriously short of hard cash. The parallel barter
agreement circumvents this difficulty by arranging two separate contracts. The trading begins
when the Western manufacturing company negotiates an export contract for cash settlement; then
under a quite separate contract, the Western
company undertakes to buy goods from the importing country. The Western company then sells
these goods and completes the trading cycle. The
final result is a reduction in the net outflow of
currency from the importing country.
Thus, a British exporter of a chemical plant to
14. For a recent listing of clearing discounts, refer to
Robert S. Kretschmar, Jr. and Robin Foor, The Potential of
Joint Ventures in Eastern Europe (New York: Praeger, 1972),
p. 99.
15. Paula Smith, "The Answer Man in Soviet Trade,"
Duns Review, Vol. 106 (October 1975), pp. 58-61 ff.
21
Poland may find himself selling Polish-built Fiat
cars in Argentina in order to get his money. Typical is the recent barter deal between General
Motors and Russia. General Motors agreed to
supply Russia with $100 million worth of earthmoving equipment in return for timber—a product for which General Motors has little direct use,
but for which it can easily find a cash market
elsewhere. Another example is the barter deal between PepsiCo and Russia. PepsiCo agreed to
swap Pepsi syrup and bottling plants for Russian
vodka.
A specialized barter trader normally negotiates
the terms of these parallel barter deals.'* The
goods offered are usually those that, by definition,
are hardest to market for cash. The barter trader
therefore will scan the products carefully, assessing "where in the world" he will be able to sell a
cargo of, say, Russian vodka for convertible currency. The fee that the barter trader charges the
exporter for taking on the counterpurchase commitment depends on what sort of goods he is offered and how he can sell them.
Buy-Back Barter
Among the international barter systems, buyback is frequently used by "transideological corporations, " which are jointly owned and operated
by a Western firm and a Communist country.'^
Under this barter system, the transideological
corporation in the West barters technical knowledge to build, or actually builds, a factory in return for promising to purchase some of its output
once it is in operation.
These buy-back barter deals are attractive to
both parties of the agreement. For example, the
Western partner will find that production within
an Eastern country can be a way of reducing
costs, as labor costs in the Communist countries
are relatively low by Western standards. In fact,
for many products marketed by transideological
corporations in the West, the labor-cost differential more than offsets the transport costs involved
in importing the product to the West.'* Further16. A sample of major switch and barter houses can be
found in Christopher E. Stowell, Scn-iet Industrial Import
Priorities: With Marketing Considerations for Exporting to the
USSR (New York: Praeger, 1975), Appendix 12D, pp. 491494; Developing the East European Market, same reference as
footnote 11, p. 48; and Stamp, same reference as footnote
11.
17. H. V. Perlmutter, "Emerging East-West Ventures: The
Transideological Enterprise," Columbia Journal of World
Business, Vol. 4 (September-October 1969), pp. 39-50.
18. G. Peter Lauter and Paul M. Dickie, "Multinational
Corporations in Eastern European Socialist Economies,"
JOURNAL OF MARKETING, Vol. 39 (October 1975), pp. 40-46;
and Leon Zurawicki, "The Cooperation of the Socialist State
22
more, production in the East may be seen by
some transideological corporations as a means of
offsetting the emerging countervaihng power of
muhinational unionism." Communist countries
are notorious for keeping labor unions in line; unlike their Western counterparts, labor unions in
most of these countries do not have the power to
strike.
Such deals are equally advantageous for the
Eastern partner. For one thing, they are a way of
committing Western enterprises more deeply to
the success of each project. Most Easterners are
becoming increasingly unhappy with the straight
licensing deals that were forerunners of the
emerging "transideological joint ventures": the
royalties were expensive in hard currency, the
processes often broke down for want of servicing
or advice, and there was no guarantee of markets
in the West for the goods produced. The buy-back
system requires the careful planning and involvement of the Western partner at all phases of
the operation. In addition, such deals enable the
Communists to master and apply the latest Westem organizational and management methods as
well as the marketing techniques that produce results in the highly competitive Western markets.'^
The remarkable Mr. Hammer of Occidental Petroleum has undoubtedly set a pattern in the use
of the buy-back barter system by offering to take
payment in goods in every one of his many deals
with Russia.^' In a less publicized move, Wilkinson Sword recently built a factory in Russia and
has undertaken to buy back a proportion of the
blades it produces.
One drawback to the buy-back barter system is
that the Western corporation often finds itself
having to take back products that compete with
its own production in the West, and so it is helping to build up a potential competitor. MasseyFerguson, for example, recently made a buy-back
deal with Poland under which it will import tractor parts from Poland to assembly plants in Western Europe and Canada that directly compete
with its own plant. Similarly, Fiat is currently
facing severe competition from the Togliattigrad
auto plant, which was designed and built by Fiat
engineers in the Soviet Union. The Russians are
with the MNC's," Columbia Joumal of World Business, Vol.
10 (Spring 1975), pp. 109-115.
19. John Alan James et al., "Multinational Trade Unions
Muscle Their Strength," European Btisiness, No. 39 (Autumn
1973), pp. 36-46; and "The Unions Move Against Multinationals," Business Week, July 24, 1971, pp. 48-52.
20. Same reference as footnote 14, pp. 15-16.
21. "Armand Hammer: On Trade With Russia," BM5i>iess
Week. July 13, 1974, pp. 64-66.
Journal of Marketing, April 1976
exporting the Russian-built Fiats to Western
Europe, where they are underselling Fiat."
To avoid a similarly disastrous situation, General Motors is seeking more stringent clauses as
part of its buy-back deal with Poland. GM will
supply licenses and technology to produce lightweight vans; in return, GM will get a portion of
the output as barter payment. The giant American automaker is trying to obtain the exclusive
rights to market the bartered Polish-built vans
anywhere outside Poland.^^
Chaiienges of internationai
Barter Deals
While international barter deals have proved
beneficial for many Western corporations, these
firms have had to come to grips with new and
different bureaucratic, organizational, social, and
economic problems. Negotiating such deals can
be a painful experience.^'' Barter negotiations
with the Eastern bloc take an extraordinarily long
time due to a variety of bureaucratic problems.
Patience on the part of the Western businessperson is more than a virtue; it is a necessity if a deal
is to materialize.
Western managers are also finding that radical
changes in organizational structures may be necessary to cope with special problems of East-West
trade. Noteworthy is the apparent trend toward
setting up a regional sales or coordinating office
for marketing in the Communist countries. Siemens of West Germany, for example, centralized
much of its East-West activity in its new Zentralvertrieb Ost (ZVO) several years ago. ZVO is basically a staff department that does market research, airranges for a coordinated company
exhibition at Eastern trade fairs, and signs company cooperation agreements with the Communist agencies. It also coordinates purchases
under barter agreements, because a division selling to the East may not realize that another
Siemens division can use the Eastern product
being offered in exchange.-'
But perhaps the most important challenge facing Western managers is to leam to handle the
different economic and social systems encoun22. "A Russian-Made Fiat Gives Fiat Competition," Business Week. June 9, 1975, p. 38.
23. "East Bloc: Where the Demand for Trucks is Booming, " Business Week, October 20, 1975, p. 60; and "World
Roundup: Poland," Business Week, October 27, 1975, p. 39.
24. East-West Trade: The Lessons from Experience, same
reference as footnote 11.
25. Thomas A. Wolf, "New Frontiers in East-West Trade,"
European Business. No. 39 (Autumn 1973), p. 35.
23
The Reincarnation of Barter Trade
tered in the Communist world." East-West trade
may be an important test for the Western company's ability to survive in a completely different
social context. Those executives who are able to
play East-West business and excel may well be
the entrepreneurs who will be charting new directions for the Western corporations in the remaining two decades of this century.
Types of Domestic Barter Deals
The preceding discussion focused on international barter trade and the challenges associated
with it. However, barter deals are also gaining
importance within the U.S. domestic market as a
result of current economic conditions. The epidemic of shortages that struck the U.S. economy
in late 1973 caught businesses off guard. Almost
overnight, companies found themselves scrambling for a wide variety of basic commodities.
Consequently, marketing attention is being forced
to shift from the "seller" side to the "buyer"
In this new environment, the role of the purchcising department is becoming more crucial to
the whole organization.^* For example, during the
early 1970s the purchasing department paid
much attention to methods of restraining vendor
price increases. In late 1973, however, a new
problem became paramount: assuring a guaranteed supply of vital materials that if not acquired
could result in the shutdown of a plant. Consequently, the purchasing manager is faced with a
dual problem: restraining price increases, while
still obtaining scarce materials that are vital for
plant operation. To resolve these problems, many
purchasing and marketing managers are resorting
to barter trade.
A great deal of barter trade, especially for
chemicals and steel products, is now being conducted within the U.S. domestic market.-' At least
26. John P. Hardt. George D. Holliday, and Young C.
Kim, Western Investment in Communist Economies, A Selective Sun'ey on Economic Interdependence, released by Senate
Foreign Relations Committee on Multinational Corporations (Washington. DC: U.S. Government Printing Office,
July 1974).
27. Philip Kotler and Sidney Levy, "Buying is Marketing
Too!" JOURNAL OF MARKETING, Vol. 37 (January 1973), pp.
54-59.
28. "Marketing When the Growth Slows, Business Week,
April 14, 1975, p. 48.
29. "Bartering to Beat the Chemicals Shortage." Business
Week, October 27, 1973, pp. 90-91+; "Swapping: Widespread, Detested and Necessary." Chemical Week, May 1,
1974, pp. 10-11; "Many Companies Tum to Bartering as a
Way to Get Vital Materials," Wall Street Joumal. February
13. 1974, pp. 1, 25, and "The Sultans of Swap," Tiwe, March
ll! 1974, p. 87.
three types of barter deals are regularly negotiated: (1) straight barter, (2) reverse reciprocity,
and (3) advertising-media barter.
Straight Barter
Many purchasing departments have grown to
include a position for barter agent, sometimes referred to as "scrounger," because more and more
suppliers are refusing to sell for money.'" Instead,
they present the buyer with a "shopping list"
(rather than a price list) of products they need
and for which they are willing to barter their
products.
This kind of buying and selling is not done only
in exceptional instances; the growing importance
of barter trade is confirmed by the findings of a
research study conducted by Purchasing World.^^
The findings reveal that close to half of the 3(X)
corporate purchasing managers responding to the
study admitted that they were bartering to secure
scarce products and materials. Another 10% said
that they expected to be forced into the barter
situation at anv time.
Reverse Reciprocity
A slightly more complex version of the straight
barter system is the two-party reverse reciprocity
system, which involves "I'll sell to you if you'll
sell to me." Then, too, reverse reciprocity sometimes includes a third party: "I'll sell to you if
you'll sell to my supplier." Like straight barter,
reverse reciprocity is also used by a company during a period of shortages in order to obtain scarce
materials vital for plant operation.
To discover the degree to which "reverse reciprocity " is being practiced, Monroe Bird conducted a regional survey of industrial purchasing
managers.^- He reports that 21% of the respondents admitted that their firms were actually
practicing reverse reciprocity, while 77% agreed
that they would use it if, through its use, they
would meet their firms' basic purchasing needs.
However, only 44% of the respondents thought
reverse reciprocity was legal, while 56% felt that
the practice was ethical.
30. "New Hires, Transfers Beef Up Buying Staffs," Purchasing. May 21, 1974, pp. 37, 45; and G. Tavemier, "The
Rising Importance of the Purchasing Manager," Intemattonal Management, Vol. 29 (September 1974), pp. 42-52.
31. "Many Companies Turn to Bartering," same reference
as footnote 29.
32. Monroe M. Bird, "Reverse Reciprocity: A New Twist
in Industrial Buying Behavior" (Paper presented at the
Southwestern Marketing Association meeting in Houston,
Texas, March 5-8, 1975).
Journal of Marketing, April 1976
24
Advertising-Media Barter
While straight barter and reverse reciprocity
are flourishing because of chronic shortages, the
advertising-media barter is developing because
manufacturers are short on cash and overloaded
with inventory. Under this system, a manufacturer hires a barter broker who arranges deals
whereby the manufacturer and the advertising
medium (usually television or radio) agree to swap
excess inventory for free commercial time.''
The most publicized media barter deal involved
Schick, Inc., which tound itself overstocked with a
product called "Warm'n Creamy," a hot facial
cream appliance. To get rid of it, Schick hired a
barter company which set up a deal whereby
Schick swapped its unsalable inventory for free
commercial time with a television station. Other
large manufacturers who occasionally rely on
barter trade include Chrysler, Clairol, Gillette,
General Electric, Norelco, and Oster.'"
Problems of Domestic Barter Deals
Even though a great deal of barter business
goes on within the U.S. domestic market, the legality of such deals may be open to question,
which raises the following issue: From a legal
viewpoint, what is the difference between straight
barter, reverse reciprocity, and advertising-media
barter? Currently, there are two schools of
thought on this issue. The first claims that
straight barter and advertising-media barter are
legal swapping, but that reverse reciprocity violates antitrust laws. The second says that the three
are synonymous and that sticking to hard cash
is the best way to avoid running afoul of the law.
But legal or not, there is no question that barter
is on the upswing. In 1974 the Federal Trade
Commission claimed that barter was becoming a
standcird way for many of the country's largest
corporations to obtain vital scarce materials. The
FTC is particularly worried because such deals
skirt the federal laws of competition, and smaller
firms have been complaining that the barter market is divided among the big companies, which
swap their stockpiles of raw materials among
themselves as required to fill any shortages.''
James T. Halverson, director of the FTC's Bureau of Competition, recently discussed the FTC's
general policy on allegedly discriminatory tie-in
deals, especially with regard to the situation during periods of shortages:
33. "A Barter Boom in Advertising," Business Week, April
7, 1975, pp. 52-54.
34. Same reference as footnote 33, p. 52.
35. A. N. Wecksler, "Bartering Is Going on . . . But Is It
Legal?" Purchasing, Vol. 76 (May 21, 1974), p. 11.
We are particularly concerned about the survival
of small non-integrated firms whose sources of
supply have been cut off or are likely to be cut
off. In some industries we anticipate that formerly independent producers may attempt to integrate backward to form new integrated firms to
guarantee sources of supply. Equally important,
large vertically integrated firms may attempt to
buy out the independents. Such a trend toward
increased concentration and vertical integration
would further decrease supplies available in the
open market and could have a permanent effect
on the competitive situation in specific industries.'*
Mr. Halverson's comment indicates that the legality of such barter agreements may be open to
question; but until some legal precedent is established, marketers are considering them as methods of coping with the prevailing economic crisis.
However, a further complication exists in that
the Intemal Revenue Service is scrutinizing the
tax implications of barter deals." Since part of
the value of merchandise received through barter
deals constitutes taxable income, the IRS expects
corporations to report their barter agreements.
Yet, even if barter deals are reported to the IRS, it
is difficult to assign monetary value to them.
Conclusions
The revival of the barter system in response to
current economic conditions has produced an important tool in international marketing. In response to the unique complications inherent in
trading with the Communist nations, the author
suggests the establishment of a financial institution designed to stimulate and facilitate EastWest trade either by accepting Eastern trade
debts or by acting as an agent or clearing house
for international barter agreements.
Current economic conditions have also created
an upsurge in barter trade in the U.S. domestic
market. No longer an activity solely of the Communist bloc or developing nations, the system has
been adopted by the sophisticated marketers of
the West as well. While international barter deals
are recognized as legal marketing techniques, the
legal and tax implications of domestic barter
deals may be open to question. Until some legal
precedent is established, however, marketers are
considering barter business as one means of coping with the prevailing economic crisis.
36. Same reference as footnote 35.
37. "The Sultans of Swap," same reference as footnote 29.
The author wishes to thank Professor Warren B. Nation of
Florida State University for his helpful suggestions and valuable comments on an earlier draft of this article.