World Trade Follows New Rules
by Phil Burgess, Unabridged from the Life section of the Annapolis Capital, Sunday April 25, 1991
First of four parts
Unconventional trade — including barter, counter trade, offsets and buy-backs — is the most rapidly growing segment of international commerce.
Countertrade, one of the most widely used techniques of unconventional trade, is a business transaction where an exporter agrees to accept goods or services produced by the importing country as partial payment for the goods or services he delivers.
A good example of counter trade is Pepsi Cola’s deal with the Soviet Union. Pepsi sells its technology and know-how to produce Pepsi in Moscow and other Soviet population centers. In return, Pepsi takes is earnings not in rubles (which are next to worthless except to pay wages, rent and other costs incurred inside the Soviet Union) or in dollars (which are in short supply there) but in Stolichnaya vodka. Pepsi then sells the popular “Stoly” in the U.S. or in other hard currency markets where it can receive dollars.
International agencies such as the General Agreement on Trade and Tariffs, called GATT, estimate that counter trade accounts for somewhere around 10% of the total volume of world trade. World trade now amounts to more than $3 trillion annually.
According to Frank Horwitz, a leading U.S. expert in unconventional trade and a lecturer at the American Graduate School of International Management in Phoenix, only 15 countries in 1972 routinely requested countertrade agreements. Most were Communist command economies, short on convertible currencies. By 1983, the number had grown to 88. Today, according to Horwitz, countries requesting countertrade number more than 100.
Among the 24 biggest industrialized countries- those who are members of the Organization of Economic Cooperation and Development, called OECD- unconventional trade accounts for a relatively small percentage of total trade volume, probably around 3%.
By contrast, countertrade accounts for about 15% of trade between OECD countries and the Third World. Nearly 30% of OECD trade with former Communist bloc countries is unconventional trade. Close to 40% of the trade among Third World countries is counter trade.
So, U.S. companies increasingly need to learn to conduct unconventional trade transactions — especially in the world’s newly opened and, in some cases, most rapidly growing markets.
Companies adept at unconventional trade will win early footholds and will be in the strongest position to grow market share as these developing economies expand and their purchasing power increases.
Countertrade places particularly heavy burdens on small and medium-sized companies which typically lack unconventional trade expertise. Thus, U.S. managers with international experience must work in cooperation with state trade offices and world trade centers to make sure that U.S. business enterprises learn to use unconventional trade strategies to expand America’s international business and create more jobs at home.