Source: International Business. Czinkota, Ronkainen, and Moffet. The Dryden Press, Harcourt Brace College Publishers. ISBN: 0-03-022378-4. THE BOOMING BUSINESS OF COUNTERTRADE • Several MNCs are turning to barter or countertrade arrangements to clear their warehouses of everything from corporate jets to boxer shorts and dinner mints. • Barter allows companies to become more flexible and quicker in the face of international business I - A Definition of Countertrade • Countertrade is a sale that encompasses more than an exchange of goods, services, or ideas for money. • Countertrade transactions are those transactions that 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. • Countertrade transactions have therefore always arisen when economic circumstances made it more acceptable to exchange goods directly rather than to use money as an intermediary. • Conditions that favor countertrade: lack of money, lack of value or faith in money, lack of acceptability of money as an exchange medium. • In the 1950s, Eastern Europe • Time Horizon: in 1972, 15 countries were pursuing countertrade, today more than a 100. • 25% of the global trade is countertrade related. • American Countertrade Association II - Pros of Countertrade 1. The world debt crisis has made ordinary trade financing very risky. 2. The use of countertrade permits the covert reduction of prices and therefore allows the circumvention of price and exchange controls. 3. “You scratch my back and I’ll scratch yours” – Bilateralism 4. Excellent mechanism to gain entry into new markets 5. Countertrade can be a good way to attract new buyers. 6. Countertrade also can provide stability for longterm sales. III - Cons of Barter 1. “Instead of there being a double coincidence of wants, there is likely to be a want of coincidence.” 2. The ability of countries and their industries to adjust structurally to more efficient production may be restricted. IV - Types of Countertrade Barter: In barter arrangement goods are exchanged directly for other goods of approximately equal value. Counterpurchase: the participnat parties sign two separate contracts that specify the goods and services to be exchanged. In this way one transaction can go forward even though the second transaction needs time. Buy-Back or Compensation Arrangement: One party agrees to supply technology or equipment that enables the other party to produce goods with which the price of the supplied products or technology is repaid. Offset: offset arrangements are designed to offset the negative effects of large purchases from abroad on the current account of a country. Ex: a country buying an airplace may demand that parts and components be acquired in the local economy. Debt-For-Nature Swap: firms or entities buy what are otherwise considered to be nonperforming loans at substantial discounts and return the debt to the country in exchange for the preservation of natural resources. V - Official Attitudes Toward Countertrade U.S. VIEWS: 1. Transactions are purely bilateral in nature and are not competitive since they squeeze out competition from a third market or specify the export market. 2. Countertrade is a second-best solution 3. Concerns regarding the valuation of countertrade transactions and with ensuring that appropriate tax payments are made. OTHER GOVERNMENTS: 1. Indonesia: over US$ 500,000 countertrade is mandatory 2. Japan and countertrade. European Nations favored VI - The Corporate Situation • In the past U.S. companies viewed and claimed that countertrade was a hindrance to international business. • Increasingly companies are formulating international business strategies and are planning to acquire market share from their competition by seeking out countertrade opportunities. • Companies and countries imposing countertrade requirements believe that there are more merits to the transactions than purely conserving foreign currency. VII - Prepating for Countertrade • Developing an in-house capability for handling countertrade should be done with great caution Steps: 1. Determine the import priorities of its products 2.