Fact Sheet
WHAT IS COUNTER TRADE?
Author: Neha Gupta, Writer for Ormita Australia Limited
Trading between nations has been happening since time began. In ancient time nations
traded silk, spices, cloth and animals of all kinds. Today nation trade food items, defense
equipment, metals, electronics etc. The products might have changed but the basic
concept is still the same as the underlining need which brings together two nations in a
trade relationship still exists.
One such method of trading between nations is called counter trade. Counter trade is
an import / export relationship between nations or large companies in which good
and/or services are exchanged for goods and services instead of money. In some cases
monetary evaluations are made for accounting purposes.
Types of counter trade
•
Barter: It is the exchange of goods and services for goods and services without
any use of money. Like the trade relationship between China and Thailand where
fruit has been traded by Thailand for buses made by China.
•
Switch Trading: In this method one company trades products and services or, in
some cases, builds infrastructure like roads, railway lines, hospitals with another
nation and, in turn, are obligated to make a purchase from that nation. One such
example is a deal proposed by the Philippine Government where they offer to
trade Philippine coffee for essential products.
•
Counter Purchase: In this, a foreign company, or country, trades with a nation
with the promise that in the future they will make purchase of a specific product
from the nation. A recent example of this is the ongoing trade between Congo
and China where infrastructure is being traded for a supply of metals.
•
Buyback: In this type of counter trade, a company builds a plant, supplies
technology, training, etc. In exchange they take a part of output of the plant. For
example, a company based in the USA sets up a lets say an automobile factory
in X country. They take a part of the total produce as their own but they have
setup the industry, provided the technology and the training to X country.
•
Offset: This is an agreement by one nation to buy a product from a company in
another. The terms of contract are subject to the purchase of some or all of the
components and raw materials from the buyer of the finished product, or the
assembly of such product in the buyer nation. This is more common in terms of
defense equipments or space crafts etc.
Need for counter trade
So why do nations need counter trade? Why they can they just trade in cash instead?
There can be several reasons for a nation to choose counter trade over cash import and
exports.
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Fact Sheet
Some of them are:
•
Money: sometime the shortage of cash resources leads nation towards counter
trade. Developing nations, particularly, have very limited cash resources but they
generally are abundant in natural resources. By engaging in counter trade these
nations ensure that the resources available to them are fully utilized and they are
also able to fulfill their requirements without spending cash.
•
Protect local industries: by engaging in counter trade, nations ensure that as they
give business to a foreign nation they also create business and job opportunities
for their own people by promoting the traded commodity.
•
Balance of trade: Maintaining a positive balance of trade is very important for
every nation. Counter trade is a great way for nations to ensure that the import
and exports in the nation are balanced as every commodity that is being bought
is equaled with some commodity being sold.
•
Competitive advantage: when it comes to trading there is also competition
between various nations. By providing the opportunity of counter trade to other
country you gain a competitive edge over the other nations selling or trading the
same product.
Best described by Fisher College of Business, Ohio State University "Counter trade consists
of transactions which have as a basic characteristic a linkage, legal or otherwise,
between exports and imports of goods or services in addition to, or in place of, financial
settlements. Counter trade can be used as an effective international business tool.
Counter trade plays a part in 20-25 percent of world trade."
Copying and distributing this article
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You may freely copy and distribute this article provided that you attribute the author
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About Ormita
The Ormita Commerce Network spans 5 continents, with direct representation in more
than 17 countries plus additional partnerships in a further 59 countries. The business allows
companies to exchange goods and services on a reciprocal trade arrangement in order
to expand their reach, access new customers, improve their buying power, monetise
excess or unsold capacity and improve profitability. The company was co-founded by
Daniel Evans & Jim Gielarowski.
Some of our Websites
Ormita Commerce Network Australia – www.ormita.com.au
Ormita Commerce Network Canada – www.ormita.ca
Ormita Commerce Network India – www.ormita.co.in
Ormita Commerce Network Mexico – www.ormita.com.mx
Ormita Commerce Network New Zealand – www.ormita.co.nz
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Fact Sheet
Ormita Commerce Network United Kingdom – www.ormita.co.uk
Ormita Commerce Network United States of America (USA) – www.ormita.com
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