Counter Trade

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COUNTER TRADE

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COUNTER TRADE

At the end of this module, the learning outcomes are

1.What are the concepts of counter trade

2.Benefits of counter trade

3.Types of counter trade

4.How is counter trade seen in many countries

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COUNTER TRADE

Suggested readings

1.International Business by Czinkota & Ron Kainen Chapter 18

2.International Marketing by Onkvisit & Shaw chapter 7

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COUNTER TRADE

What is counter trade • Those transactions which have as a basic

characteristics a linkage legal or otherwise, between exports and imports of goods or services in addition to or in place of financial settlements.

•Historically barter•Money was not used•Barter still used

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Why counter trade

•Lack of money

•Lack of value

•Lack of faith in money

•Ease of transactions

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COUNTER TRADE

•Quite prevalent in East European countries

•Poor financial conditions

•Increasing counter trade•1972 – 15 nations

•1983 – 88 nations

•1995- 105 nations

•15 – 20% of world trade (estimate)

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COUNTER TRADE

Benefits of counter trade

• Heavy debt of developing countries

• No further credit

• How to trade

• Exchange goods

• Permits covert reduction of prices

• Avoid price and exchange controls

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COUNTER TRADE

OPEC

•Oil Cartel

•Agreed prices

•How to get discount

•Counter trade

•Increasing bilateralism

•“You scratch my back and I’ll scratch your’s”

Example of Turkmenistan

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Entry into new markets

• Counter trade

• NEC Japan and Egypt

• Increasing Japanese tourists to Egypt

• New opportunities for developing countries

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Organizations

• Stability for long term sales

• Long term contracts

• Avoids problem of fluctuating prices

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Criticism of Counter trade

• Need for surplus at both ends

• Leads to trading of inefficient goods

• Uncompetitive goods traded in

• Discourage efficient production

• Lowers quality

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Types of Counter trade

1.Barter

• Simplest

• Exchange

• Assessment of value

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2. Counter purchase (parallel barter)

• Barter is single transactions

• Counter purchases involves two separate transactions

• Each with its own cash value

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Example - Counter purchase

•Iraq buying New Zealand meat

•Deal for 200 million $

•New Zealand buys Iraqi oil

•Supplied at future date

•No cash outflow

•Future date

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Compensation trade • Counter purchase• Two unrelated products• Related • Japanese Co supplies textile machinery to

Chinese Co• Chinese uses machines to make garments • Supplies garments back to Japan

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4. Switch Trading • Problems of non requirement of full consignment• Bilateral • What to do• Involve third party • New Zealand sell milk to Kuwait • Full requirement not consumed by Kuwait • Involve a party from Switzerland

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Switch Trading

• Switzerland supplies other material to Kuwait

• Switzerland buys from New Zealand the shortfall at discount.

• Switzerland sells these to fourth party in England

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5. Offset • Foreign supplier required to produce locally• Defence deals• Purchaser insists to manufacture locally• Could be

– Licensing – Subcontracting– Joint venture

• Major way of doing business

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COUNTER TRADE

6. Debt Swap• Less developing countries • Huge debt• Unable to pay• Exchange debt for something else• Five types of Swaps

– Debt for debt swap– Debt for equity swap– Debt for product swap– Debt for nature swap– Debt for education swap

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ATTITUDES TOWARDS COUNTERTRADE• Many condemn • Encourages inefficiency • Some are neutral• Still many are constrained to do this• Bad economic situation of developing

countries • Refusal may mean loss of business

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• More companies in counter trade

• Improve market position

Mercedes Benz

• Established subsidiary

• Sells trucks

• Buys hand tools

• Some sale better than no sale

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Pepsi Cola• Pioneers in counter trade• Russia and East European countries • Expand operations • How?• Accepted Vodka from Russia • Accepted Wines from Romania • To finance Pepsi – Cola bottling plants in these

countries • Profitable arrangement for all

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Benefits to developed nations

• Counter trade

• Creation of new markets

Pepsi in USSR

• Maintain market share

• Barriers for entry of competitors

• Pepsi exclusive arrangements in USSR

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COUNTER TRADE

Pepsi in USSR • Build good relationship with governments • gives access to market other products• Socialist countries in particular• State owned organizations• Expand bottling operations • Pepsi in Ukraine • Pepsi marketing Ukrainian made commercial

ships for 8 year period

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Pepsi in USSR • 1 billion $ order. • Pepsi dominates Cola market in former

USSR Republics • Exclusive arrangements • No arrangements with Coke • Coke could not enter for 12 yearsClear advantage for Pepsi

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Risks with counter trade

• There are risks

• Counter trade partner

• Goods specification

• Delivery time

• Reliability

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Impact of counter trade on future prices

• Contracts period longer

• Goods obtained at future date

• Looks profitable at the time of agreement

• May not be six years down the line

• Supply demand equation

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Barter Houses

• Specialist in counter trade

• Counter trade requires time

• Find partner

• Puts financial strain

• Capital tied up for longer time than normal transactions

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Citi Bank• Created counter trade department • Consultant and financing of bartered

goodsUniversal Trading Exchange• New York company• Clearing house for bartered goods• 500 barter exchange houses in US

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Motors Trading co• A subsidiary of General Motors• Develops market for General Motors products • Cash deals are not possible• Counter trade with 20 countries • More than 50% business in former USSR

republics• A well developed strategy for counter trade can

be successful.