COUNTERTRADE

A
PRESENTATION

BY
DR. P. K. CHUGAN

Former Professor Institute of Management

Nirma University
Ahmedabad

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Counter Trade is an International Trade

Transaction in which the proceeds of
exports will be realized in kind fully, or
partially in cash or/and kind and may
involve two or more countries in one
transaction.
In other words it is trade arrangement that
contains a requirement to purchase
products as condition of sale.
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Example: (of pure and simple transaction in
countertrade)
IRCON International of India – June 1999
• A fully owned Government Company which
specializes in railway feasibility and
construction projects.
• To carry out the work in connection with a new
railway line to be undertaken by IRCON in
Malaysia.
• Payment of the project to be made by means of
Palm oil from Malaysia to India at mutually
agreed Prices.
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Forms of Countertrade
Barter:
• It is the simplest form of countertrade.
• It refers to direct exchange of goods or services of
equivalent value between the seller in one country
and the buyer in another.
• Even though the intention is to exchange goods of
agreed value simultaneously between countries, it
seldom happens.
• In such cases, suitable payment guarantees are
obtained so as to complete these transactions over
an agreed period. 4
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• Barter system, can be described as the oldest
form of international trade and as the origin
of present day countertrade.
• An example: A deal between MMTC and
Yugoslavian company – import of 50,000
tonnes of rail (transport equipment) of the
value of $38 millions by MMTC and the
purchase by the Yugoslavian company of iron
from India.
• In India private organizations are not allowed
to enter in barter trade with other countries
without the permission of the authorities.
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Buy Back:
• Supplier of plant, equipment or
technology agrees to purchase goods
manufactured with that equipment or
technology.
• Here, an exporter ( supplier of
equipment / technology) establishes a
factory / manufacturing unit in the
country of import for a specified amount.
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• Generally, he also provides necessary
assistance and ensures that the
production comes up to the agreed
quality and output norms.
• He agrees to buy back the products
produced out of this arrangement – it can
be a proportion or entire output.
• This helps the importing country to
export the resultant output of technology
imported.
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Switch Trade:
• A third party is brought into the
countertrade arrangement to accept the
goods that the original foreign company
is unable to use or market itself.
• It is also known as three-way counter
purchase deal.
• This generally happens when the
countries in bilateral trade agreement
have to take goods which they cannot
consume in their own country.
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• Thus, a third party is searched from
another country, who purchases such a
goods at discount of 20 to 50 per cent
either for its own country’s consumption
or for selling to some other country to
settling the trading account.
• It may, thus at a time involve more than
three parties and a complex and intricate
process.
• (Trucks – Geeps – Banana Example)
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Daimler Benz agreed to sell 30 trucks to Romania

In exchange of 150 Romanian made Jeeps

These Jeeps were sold in Ecuador in exchange of

bananas

Bananas are brought back to West Germany and

sold to West German super market chain in
exchange for Deutschmarks.
(Thus, through this circuitous transaction, the
final payment was received in DM)
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Compensation Trading (Deal):
• This is the kind of sale in which part
payment is in cash and the balance paid
through a list of goods offered by the
buyer.
• Generally the goods available in many
cases are those which cannot be sold for
convertible currency in the western
markets.
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Counter purchase:
• This is also referred sometimes as parallel
trading.
• Here, the seller receives the full payment in
cash but agrees to spend an equivalent amount
of money in that country within a specified
time.
An example: Pepsi Cola got paid in Rubles as
per deal with USSR for the sake of its
concentrates in USSR but spent this amount for
purchase of Russian products like Vodka and
Wine.
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Growth of Countertrade: The Reasons
Even though countertrade has been
prevalent in different forms, it was not
significant earlier. But of late it is has
become an established feature of
international trade and majority of
countries in one form or of other have
come to realize its importance. It is
estimated that countertrade comprise 20
per cent of East-West trade and 40 per
cent of the trade of developed countries.
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• Its origin can be traced to the conflict
between developed and developing
countries, which is usually referred to as
“North South Conflicts”.
The genesis of this goes back to the early
colonial era, when western powers
supplied manufactured goods to their
colonies and took back primary goods
from them on trade terms beneficial to
them.
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• Countertrade was also very common
between communist countries.
• It also became common in respect of trade
between many developing countries and
communist block because the former were
looking towards this block for increasing
their exports.
• It became popular between East-West
trade mainly due to the foreign exchange
problems faced by East block.
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• The first escalation of petroleum prices in
1973, which hit many developing
countries hard also compelled them to
actively pursue countertrade in a frantic
bid to increase their exports by all means.
• Many advanced countries resorted to
countertrade for various reasons like
selling obsolete products, increasing the
sale of capital goods, increasing the
aggregate business etc.
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• Many companies in advanced countries
have resorted to countertrade to mitigate
the effects of the recession. This,
however, gave developing countries an
opportunity to push their exports by
tying the imports of capital goods by
countertrade.

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Mechanism
The mechanism or the financial structure is
extremely important in the case of
countertrade, since the transactions are
not in line with the established norms of
internal finance such as Letter of Credit,
Guaranteed Deferred Payment, Official
Lines of Credit, etc.

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Further, the flow of goods from one
country to other will not be simultaneous
and hence, the need for flexibility in the
financial structure to ensure that the
parties in the countertrade do not face
any shortfall in realizations. Some of
these mechanisms are:

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Escrow Account
• This is a bank account used specifically
for the countertrade transaction.
• The bank account is opened in an
international bank jointly by the
exporter and the importer.
• As and when transactions take place, the
purchaser pays the amount to this joint
account.
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• However, such amount paid by either of
the parties will be kept in the escrow
account, until the transactions are
completed by both the parties in the agreed
period.
• Therefore, the debiting and crediting in the
account is confirmed to the satisfaction of
the parties, the account neutralized, and
the interest which might have accumulated
in the meanwhile, is shared by the parties
as agreed to originally.
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Bank Guarantee
The goods are delivered under bank
guarantees of both parties.
If either of parties fails to fulfill the
delivery commitment, the bank
guarantee is encashed.

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The criticism against countertrade:
• It lays more emphasis on the modalities
of the countertrade itself, rather than
price, quality and financing.
• It is felt that the countertrade prices are
always high in view of a complicated
financial structure which delays
payment.

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• As countertrade is not tied to supply and
demand of the market place, it is not as
efficient as the free market system.
• As many countries do not choose to
participate in countertrade, the
competition is reduced and the prices
may reign high.

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