Pitfalls abound in Countertrade
by Phil Burgess, Unabridged from the Life section of the Annapolis Capital, Sunday May 16, 1991
Countertrade — barter, counterpurchase, buy-backs and offsets — is the fastest growing segment of international trade. But the rise of unconventional trade has many downsides, especially for small, and medium sized companies. Unconventional trade is often accompanied by an increasing role for government transactions. In fact, buy-backs New Economy and offsets are commonly imposed by the governments of importing countries as a method to achieve other governmental objectives, such as regional economic development or balance of payments objectives.
However increased government involvement in a business transaction greatly increases a company’s overhead costs, requires larger and more specialized staffs, longer time horizons and deeper pockets. But mast small and medium-sized entrepreneurial companies do not have the resources to play in this game and are disadvantaged in this kind of international business.
In fact, the rapidly growing countertrade environment is very different from conventional trade.
Trade witnesses many traders, quick response time, specific product knowledge and private firms. But countertrade requires few traders, a slower decision process, broad product knowledge and involves governments. Countertrade also requires few transactions and involves very complex deals.
The characteristics of doing business in a countertrade environment offer a special challenge to the U.S. The reason: 50% of the value of U.S. exports is accounted for by smaller companies with fewer than 500 employees.
In the western U.S., more than four out of five companies involved in exports are small businesses with fewer than 100 employees.
Thus, the U.S. needs to take special steps to make sure the expansion of unconventional trade practices does not work to the disadvantage of small and medium-sized companies.
This can be achieved by establishing what countertrade expert Frank Horwitz calls the “hybrid team organization” including:
- An investment bank to identify partners and assist in financing joint ventures, mergers, acquisitions or technology transfer opportunities.
- A commercial bank experienced in trade finance and countertrade to provide letters of credit and escrow accounts along with traditional banking services.
- A trading company, which can find markets to dispose of products acquired in counterpurchase and buy-back arrangements.
- A legal, accounting or management consulting firm with an extensive international client base to provide overall management assistance by designing and packaging innovative solutions to complex arrangements and engineering transactions in this unconventional environment.
Leadership in mobilizing these resources could come from many sources: an entrepreneurial law firm, an experienced hand in countertrade, a state trade office or a World Trade Center.
This talent and experience can be mobilized and organized in many ways. The important thing is to make it happen.