World Finds New Way To Do Business

The scramble for position and market share in the expanding global economy rewards new skills and requires unconventional strategies.

One of the most important of these is countertrade. Countertrade is a response to two forces: hard currency shortages and a tendency for governments to use trade to help achieve broader economic development or industrial policy objectives.

The current expansion of countertrade originated with the oil price shocks of 1973 and 1979. Sharp price increases left many Third World countries unable to pay for oil with cash. So they turned to barter and other countertrade arrangements.

Then the liquidity shortage caused by the oil price shocks of the 1970s was made more severe during the 1980s by pressures on the supply of capital in industrialized countries. These included a regulation-induced credit crunch in the U.S., a weakness in the stock and real estate markets in Japan, and German reunification, which diverts European capital to the rebuilding of East Germany.

In addition, some countries began to use their buying power to help achieve their domestic economic or political goals.

Here are some examples:

• Taiwan has required companies wanting to locate assembly facilities there to also include some manufacturing or R & D activities. This allows Taiwan to transfer technology to its economy and build a base for future economic development or to help targeted industries.
• Brazil encourages foreign-owned facilities to locate in its underdeveloped regions.
• Thailand is making human resource development- especially education and training- a condition for foreign companies wanting to sell telecommunications exporters to help establish broad-based training programs for its people.
• Canada has insisted that its purchase of big ticket items such as weapons or civil aircraft be partially offset by the seller locating some manufacturing or assembly activities in Canada. This helps create jobs, reduce Canada’s balance of payments deficit and increase technology transfer to Canada.

Sellers give in to these demands to gain market share, minimize currency risk, avoid taxes, or provide a catalyst for a hard currency deal down the road.

So, countertrade is not just an extension of the cashless society to international commerce. Nor is it limited to cash-short Third World countries or Eastern Europe.

Countertrade has become a powerful instrument of government policy. It is used to shape the flow of capital and technology, not just goods and services. And it is used to serve the broader objectives of industrial policy and regional development.

As countertrade expert Frank Horwitz, a lecturer at the American Graduate School of International Management in Phoenix, has noted, “The growth of countertrade is yet another reason why U.S. managers must transcend the business-as-usual approach if they are to win in world trade.”