INTERNATIONAL

UNIT 3 SECTION 5 COUNTERTRADE

BUSINESS Unit 3, section 5: Countertrade

Countertrade is an alternative means of structuring an international sale

when conventional means of payment is difficult, costly, or non-existent. It
is also used when a trading partner’s currency is not freely convertible into
other currencies. To all intents and purposes, countertrade is the Christian
name, whilst barter remains the surname. Alternatively, countertrade is the
modern jargon, whilst barter becomes the archaic and old-fashioned
terminology.

By the end of the Section, you should be able to:

 know the meaning of countertrade;
 identify the conditions that encourage countertrade
 explain the arguments for countertrade.
 identify the disadvantages of countertrade

Definition of Countertrade
Countertrade is an international business sale that encompasses more than
the ordinary or normal exchange of goods, services, or ideas for money.
Countertrade are those transactions that have as a basic characteristic a
linkage, whether legal or otherwise, between exports and imports of goods
or services in addition to, or in place of, financial or money settlements.

Historically, countertrade was mainly conducted in the form of barter which

is a direct exchange of goods or services of approximately equal value
between two parties, with no money involved. Such transactions were the
very essence of business in time past during which there was no use of
money. That is to say, no common medium of exchange-existed or were
available.

This was the beginning of the barter system of trade. Over time, money
emerged as a convenient medium that unlinked transactions from individual
parties and their joint timing and permitted greater flexibility in trading
activities.

Conditions that Encourage Countertrade

Countertrade transactions have always arisen when economic circumstances
made it more acceptable to exchange goods directly rather than to use
money as an intermediary or the medium of exchange. Conditions that
encourage such business transactions or activities are:
 Lack of money.
 Lack of value of or faith in money.
 Lack of acceptability of money as a medium of exchange
 Greater ease of transaction by using goods.

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Arguments for Countertrade

Increasingly, countries and companies are deciding that countertrade
transactions are more beneficial to them than the normal transactions based
on financial exchange alone.
The reasons given are among the following:
 The world debt crisis has made ordinary trade financing very risky and
difficult. Most countries, particularly those in the developing world,
simply cannot obtain the trade credit or financial assistance they require
to pay for their desired imports. Faced with the threat of not being able
to afford imports at all, the heavily-indebted poor countries hasten to use
countertrade to maintain at least some essential product inflows.
However, it should be recognized that countertrade does not reduce
commercial risk. Countertrade transactions will, therefore, be
encouraged by the stability and economic progress of both countries
involved. Research has shown that countertrade appears to increase with
a country’s creditworthiness, since good credit encourages traders to
participate in unconventional trading practices.

 The use of countertrade permits the circumvention of price and

exchange controls. Particularly in commodity markets with cartel
arrangements, such as trade in oil or agriculture, this benefit may be very
useful to a producer. For example, by using oil as a countertrade product
for industrial equipment, fake discounts (by using a higher price for the
acquired products) may disappear

 Many countries are responding favourably to the notion of bilateralism.

Thinking along the lines of “you scratch my back and I’ll scratch yours”
they prefer to exchange goods with countries that are their major trading
partners.

 Firms and nations also view countertrade as an excellent mechanism to

gain entry into new foreign markets. When a producer believes that
marketing is not one of its strong competencies, the producer often
hopes that the party receiving the goods will serve as a new distributor,
opening up new international marketing channels and ultimately
expanding the original market for the product. For example,
countertrade transactions agreed to between the Japanese firm NEC and
the government of Egypt have resulted in a major increase of Japanese
tourism to Egypt.

 Because countertrade is highly sought-after in many large markets such

as China, India, and South America, engaging in such transaction can
provide major growth opportunities for firms. In the ever increasing
competitive world market, countertrade can be a good way to attract new
buyers. By providing countertrade services, the seller is in effect
differentiating its product from those of its competitors.

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 Countertrade can also provide stability for long-term sales. For example,
if a firm is tied to a countertrade agreement, it will need to source the
product from a particular supplier, without a choice. This gives the
producer the stability of demand for his products. This stability is often
valued very high because it eliminates, or at least reduces, vast swings in
demand and allows for better planning. Countertrade, therefore, can
serve as a major mechanism to shift risk from the producer to another
party. In that sense, one can argue that countertrade offers a substitute
for missing forward markets.

 Countertrade can ensure the quality of international business

transactions in technology transfer. For instance, where the seller of
technology from the home country is paid by the manufacturer in the
host country based upon the output of the transferred technology, the
revenue of the technology’s seller will depend on the success of the
technology transferred, and the level of maintenance services provided
to the manufacturer in the host country. Therefore, the seller of the
technology is more likely to be concerned about providing better
technology transfer and after-sales or maintenance services.

Arguments against Countertrade

In spite of all the apparent benefits of countertrade, there are strong
economic arguments against the activity or practice. The arguments are
based mainly on grounds of efficiency in production.

As Samuelson stated, “instead of there being a double coincidence of wants,

there is likely to be a double want of coincidence; so that, unless a hungry
tailor happens to find an undraped farmer, who has both food and the desire
for a pair of pants, neither can make a trade’. Clearly, countertrade ensures
that instead of trade balances being settled on a multilateral basis, accounts
must now be settled on a country-by-country or even transaction-by –
transaction basis.

Trade then becomes only bilateral, and can result only from one another,
rather than from global competition. As a result, uncompetitive goods may
be traded between nations. As a consequence, the ability of countries and
their industries to adjust structurally to more efficient production of goods
and services may be restricted. Countertrade can therefore be seen as
eroding the quality and efficiency of total world production and,
consequently, as lowering total world consumption.

Summary
We have explained countertrade to denote all types of foreign trade
transactions in which the sale of goods and services is done through the
barter system. There is no exchange of currency. Countertrade has several

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advantages, and some disadvantages. The bottom line, however, is that

countertrade limits efficiency in the production of goods and services

Please, refer to other texts in the references provided for further information
on the meaning and importance of this topic. Put down any important notes
you come across in the blank sheet provided below for face-to-face
discussions with your course lecturer.

Now assess your understanding of this Section by answering the following

Self-Assessment Questions (SAQs). Good luck!

Activity 5.5
 What is countertrade?
 What is the difference between countertrade and barter?
 What conditions encourage countertrade?
 Give two arguments, each for and against countertrade?
 Did you score all? That’s great! Keep it up.

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