Annapolis Institute Overview


Countertrade Cuts Cash Needs

by Phil Burgess, Unabridged from the Rocky Mountain News, May 2, 1991

Second of four parts

Countertrade, the fastest growing segment of global commerce, includes barter, counter purchase, buy-backs and offsets.

Barter is the simplest form of countertrade. Barter occurs when an exporter delivers a product or service and the importer pays with a product or service the exporter can use directly.

Example: A U.S. oil company provides oil drilling services to the Soviet Union in return for a Soviet oil tanker. This arrangement gives the oil company a tanker it needs and provides a service to the Soviet Union without requiring it to spend scarce hard currency.

Counter purchase occurs when an exporter sells a product for cash but also agrees to use some of this hard currency earnings to purchase other products or services from the importer. Counter purchase is often required by less developed nations when they import from developed nations.

Example: A municipal government in Indonesia agrees to import buses from Germany if Germany purchases phosphate from Indonesia. Hence, the counter purchase permits the importing nation to recover some of the hard currency it spends while increasing exports of raw materials.

Buy-backs occur when an exporter sells a turn-key plant, a large piece of machinery, or a technology but agrees to purchase a percentage of the products that are made by the machinery or technology supplied.

Example: A U.S. construction company builds a methanol plant in Haiti but agrees to buy back a certain amount of methanol every year. Like counter purchase, the buy-back is often compelled by the government of the importing country. A buy-back agreement is often the only way an exporter can sell a big-ticket item.

Offsets are another vehicle for importers, in both developed countries and less developed countries, to acquire big ticket items such as weapons or civil aircraft.

When these items are purchased from suppliers in the U.S. or elsewhere, importers require exporters to offset all or part of the cost of purchase by transferring technology to the importing country or by locating manufacturing or R&D facilities in the buyer’s country.

Example: In the 1980s McDonnell Douglas sold F-18 fighters to Spain for $1.5 billion. Spain paid cash for the aircraft but required the company to build parts of the aircraft in Spain, help export other products from Spain and do other things to offset the cost of the aircraft.

Variations of each of these approaches to counter trade are limited only by the imaginations of exporters and importers. As demand rises in the face of capital shortages, counter trade grows because it is a way to reduce the cash requirements of doing business.

But by expanding the role of government and introducing a whole new basket of non-tariff barriers, counter trade can also impede the free flow of international commerce. This especially threatens the ability of small- and medium-sized companies to win in world trade.

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