Countertrade is a system of exchange in which goods and services are used as payment rather than money. This type of trade is often used when one country lacks sufficient hard currency (i.e., cash) or when other types of market trade are impossible [1]. Countertrading is common among developing countries, whose currency may be weak or devalued relative to another country’s currency, making it unfavorable to sell their products for hard currency [2].
Key Facts
- Barter: Barter is the direct exchange of goods or services without the use of money as a means of purchase or payment. It involves trading one product for another of equivalent value[3].
- Counterpurchase: Counterpurchase is a type of countertrade where a company sells goods or services to an importer and agrees to make a future purchase of a specific product from the same importer. This arrangement helps maintain a balance of trade between the two parties[3].
- Offset: Offset is an arrangement where the seller assists in marketing products manufactured by the buying country or allows part of the exported product’s assembly to be carried out by manufacturers in the buying country. This practice is common in industries like aerospace, defense, and infrastructure.
- Switch Trading: Switch trading involves one company selling its obligation to make a purchase in a given country to another company. The switch trader then fulfills the obligation by purchasing the goods from the original seller and selling them for money.
- Buyback: Buyback occurs when a company builds a manufacturing facility in a country or supplies technology, equipment, or other services and agrees to take a certain percentage of the plant’s output as partial payment for the contract[3].
- Compensation Trade: Compensation trade is a form of barter where one of the flows is partly in goods and partly in hard currency.
Types of Countertrade
There are many types of countertrading, some of the most common include:
Barter
Barter is the direct exchange of goods or services without the use of money as a means of purchase or payment. For example, one party may trade salt for sugar from another party [1].
Counterpurchase
Counterpurchase is a type of countertrade where a company sells goods or services to an importer and agrees to make a future purchase of a specific product from the same importer. This arrangement helps maintain a balance of trade between the two parties [2].
Offset
Offset is an arrangement where the seller assists in marketing products manufactured by the buying country or allows part of the exported product’s assembly to be carried out by manufacturers in the buying country. This practice is common in industries like aerospace, defense, and infrastructure [2].
Switch Trading
Switch trading involves one company selling its obligation to make a purchase in a given country to another company. The switch trader then fulfills the obligation by purchasing the goods from the original seller and selling them for money [2].
Buyback
Buyback occurs when a company builds a manufacturing facility in a country or supplies technology, equipment, or other services and agrees to take a certain percentage of the plant’s output as partial payment for the contract [2].
Compensation Trade
Compensation trade is a form of barter where one of the flows is partly in goods and partly in hard currency [2].
Benefits and Drawbacks of Countertrade
Countertrade can offer several benefits, including:
- Conservation of foreign currency
- Lower unemployment
- Higher sales
- Better capacity utilization
- Ease of entry into challenging markets
However, countertrade also has some drawbacks, such as:
- Uncertain value proposition
- Complex negotiations
- Potentially higher costs
- Logistical issues
- Potential conflict with trade policies
Conclusion
Countertrade is a complex and multifaceted topic with both benefits and drawbacks. It is important to carefully consider the specific circumstances of a given situation before engaging in countertrade.
References:
[1] Lumen Learning. (n.d.). Reading: Countertrade. Introduction to Business. https://courses.lumenlearning.com/wmintrobusiness/chapter/reading-countertrade/
[2] Investopedia. (2021, October 03). Countertrade: Definition, Types, and Examples. https://www.investopedia.com/terms/c/countertrade.asp
[3] Wall Street Mojo. (n.d.). Countertrade – Definition, Types, Advantages, Disadvantages. https://www.wallstreetmojo.com/countertrade/
FAQs
What is countertrade?
Countertrade is a system of exchange in which goods and services are used as payment rather than money.
What are the most common types of countertrade?
The most common types of countertrade include barter, counterpurchase, offset, switch trading, buyback, and compensation trade.
What is barter?
Barter is the direct exchange of goods or services without the use of money as a means of purchase or payment.
What is counterpurchase?
Counterpurchase is a type of countertrade where a company sells goods or services to an importer and agrees to make a future purchase of a specific product from the same importer.
What is offset?
Offset is an arrangement where the seller assists in marketing products manufactured by the buying country or allows part of the exported product’s assembly to be carried out by manufacturers in the buying country.
What is switch trading?
Switch trading involves one company selling its obligation to make a purchase in a given country to another company. The switch trader then fulfills the obligation by purchasing the goods from the original seller and selling them for money.
What is buyback?
Buyback occurs when a company builds a manufacturing facility in a country or supplies technology, equipment, or other services and agrees to take a certain percentage of the plant’s output as partial payment for the contract.
What is compensation trade?
Compensation trade is a form of barter where one of the flows is partly in goods and partly in hard currency.