Countertrade
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Lecture outline
Reasons for countertrade
Overview of the forms of countertrade
Discussion
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Countertrade- definition

Transactions where goods or services are paid for,
in whole or part with other goods or services

The transactions can be evaluated in monetary
units for accounting purposes

Countertrade accounts for 20% of world trade
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Reasons for countertade (1)
 Countertrade enables supplying goods to
particular markets which do not have
convertible currencies or did not
liberalize capital flows
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Reasons for countertade (2)
Countertrade is the only possible way of
participation in foreign trade for some
countries
Some contracts (especially military) are
confidential and require involving
specialized operators
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Reasons for countertade (3)
Difficulties to dispose commodities on
some markets due to competition, and
political embargoes
Developing countries can not afford some
types of goods countertrade is
alternative to price cutting
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Forms of countertrade
 Barter
 Switch trading
 Counter purchase
 Buyback
 Offset
 Compensation deals
 Clearing accounts
 Tolling
 Co-operation agreements
 Build – operate – transfer
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Barter
In barter transactions goods or services are traded
for other goods or services
This form of countertrade is the most primitive and
therefore rarely used
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Offset (1)
 Compensatory trade agreements between governments
and international companies in different countries
 Agreement by one country to buy a product from another
while the components, raw materials are bought from the
importers country
 Usually the products are assembled in the importers
country
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Offset (2)
 Offset transactions are one of the most
popular forms of countertrade
 Offset transactions are used for military
equipment purchase
Offset transactions can be direct or
indirect
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Offset (3)
 Direct offset transactions- if a country
imports technology to produce
infrastructure or machinery
Indirect offset transactions- if the exporter
buys materials or products with the aim of
trade balances improvement
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Offset (4)
 Offset enables the increase of the quality
of goods
Due to the obligation of imports enquiries
about the quality of the production in the
partner country are needed
The import obligation can be sometimes
transferred to a third party
 Some countries impose restrictions on
offset transactions
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Compensation (1)
Compensation transactions take place
when countries settle contracts partially in
foreign exchange and partially in goods or
services
Sometimes the exported goods are
produced by means of the imported goods
It is possible to transfer the obligation of
purchase to a third party
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Compensation (2)
 Compensation transactions can be with
or without assignment
In transactions with assignment the goods
are delivered on credit
 After the compensation of the goods the
assignment is cancelled
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Buy-back transactions (1)
 Buy back transactions take place when
an exporter provides the production
infrastructure and buys back the goods
produced with his resources
 The payment can be settled partially in
money
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Buy- back transactions (2)
 An advantage for the exporter is the investment abroad
and the production of goods at a lower cost than in his
home country
 The advantage for the importer is to receive goods of
high quality
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Counterpurchase (1)
Counterpurchase is a transaction where
one company sells goods or services to its
trade partner abroad on the condition that
the seller will buy a specified product from
the importer in the future
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Counterpurchase (2)
The transaction is settled in money
The transfer of the import obligation is
possible
Counterpurchase is more advantageous for
the exporter than a buy-back
Since the transaction is settled in money he
is not obliged to buy the goods immediately
but at a convenient moment
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Counterpurchase (3)
The construction of the contract is based on
two documents:
The contract for selling the goods of the
exporter
A separate contract concerning the obligation
to purchase the products from the importer
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Counterpurchase (4)
The construction of the contract gives the
exporter more flexibility in terms of the
choice of the goods counterpurchased
Is it always beneficial?
Substantial risks for the supplier emerge in
the case of changing market conditions
e.g. price changes
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Counterpurchase-risk
Two basic ways to deal with conterpurchase
transactions risk:
 Irrevocable credit
 Guarantees
Counterpurchase transactions are commonly
serviced by trading houses
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Bilateral agreements
 Bilateral agreements serve to develop
countertrade relations between two
countries
Bilateral agreements are usually agreed at
government level
Aimed at improving the trade balance and
foreign reserves
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Switch trading
 Switch trading is usually a result of a sequence of
countertrade transactions
 It is based on transactions with payment in a clearing
currency
 Takes place if the importer is unable to pay in foreign
currency
 As the clearing currency is not convertible the exporter
requires a premium for the transaction
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Switch transaction
Source: Bishop op. Cit.
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Tolling
 Tolling is a transaction where an exporter
delivers raw materials to a plant in a foreign
country and to buy the end product
Aimed at ensuring the control over the
producing factory- this helps to mitigate the
risk of non-delivery
Close supervision via guarantees
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Co-operation agreements
 Co-operation agreements take place on government
level
 Concern usually military, industrial and commercial
arrangements
 Countertrade is a secondary issue in those agreements
 E.g. If countries want to exchange technical know-how
they can include additionally a permission from a
manufacturer of machines to produce his products
abroad according to the manufacturers specification
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Build – operate – transfer
 Aimed at providing countries unable to pay in foreign
exchange with technical infrastructure
 The buyer lets a foreign contractor to build the
infrastructure and declares to operate it after
construction
 The payment is possible after earning profits from the
functioning of the infrastructure eg. Pipes, roads, phone
lines
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Summing up
 Countertarde refers to transactions where
goods or services are paid for, in whole or part,
with other goods or services
The variety of the forms of countertrade allows
to adjust the transaction to industrialized and
developing countries needs as well
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Discussion
 What kind of benefits and risks can
countertrade involve for
 Companies from emerging countries
 Companies from industrialized countries
 Companies from developing countries?
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Literature
 E. Bishop, Finance of international trade,
Chapter 10. Publication available via
Science Direct Database
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