Counter Trade

2.  Counter trade means exchanging goods or
services which are paid for, in whole or part, with
other goods or services, rather than with money.
 A monetary valuation can however be used in
counter trade for accounting purposes.

3. Barter :Exchange of goods or services directly for other goods or
services without the use of money as means of purchase or payment
Eg:The Malaysian government purchased 20 diesel electric locomotives
from General Electric against the supply of about 200,000 metric tons of
palm oil over a period of 30 months. (Source: www.citeman.com)

4.  Counter purchase: A foreign supplier undertakes to purchase
goods and services from the purchasing country as a condition of
securing the order. Counter purchase is generally imposed for two
reasons: first, to stimulate exports and second, to alleviate the balance of
payment deficit resulting from imported goods.“
Example:
Pepsi Cola sold concentrates in the USSR and got paid in Rubles, which according
to the agreement with Russia, these Rubles were spent for purchase of Russian
products like Vodka and wine (Source: www.citeman.com)

5. Buyback: occurs when a firm builds a plant in a country - or supplies
technology, equipment, training, or other services to the country and
agrees to take a certain percentage of the plant's output as partial
payment for the contract.
Example: National Textiles Corporation of India signed a buy back agreement
of Indian Rupee 200 million with the Soviet Union to buy 200 sophisticated
looms. The buyback ratio was 75% textile produce from these looms and the
remaining was in cash. (Source: www.citeman.com)

6.  Switch trading: Switch Trading involves the role of third party in a
countertrade transaction. If a seller in the countertrade does not want goods
offered by the buyer as payment, it may bring in third party to dispose of
the merchandise offered by the buyer.
 Example: Country A has exported the goods worth US$ 10 million to Country B
and Country B has exported the goods worth US$ 8 million to Country A. So,
Country A has a surplus balance of US$ 2 million (10 – 8) with Country B. At the
end of the agreed period, if country B does not have US$ 2 million to pay to the
country A, it’s another trading partner Country C will pay US$ 2 million to country
A.

7. Offset:
Offset is the type of countertrade, which is mostly
related to very high value of exports and/or medium
to high technology capital goods supplied by a
multinational corporations or a major manufacturer.
 Offset activity can be divided into two main
categories
1)Direct
2)Indirect

8. DIRECT OFFSET: The offset is said to be direct when some components
of the item sold are to be manufactured within the buyer’s country and
that the seller agrees to buy those components to use them in-house.
Example: an aircraft manufacturer sells a passenger plane to a buyer in another
country and agrees with the buyer that some of the spare parts of the plane will be
ordered and purchased in buyer’s country and attach to the plane.

9. INDIRECT OFFSET : The offset is said to be indirect when the buyer
requires the seller to enter into a long term industrial or other co-
operation and investment, but this co-operation or investment is not
related to goods supplied by the seller.

10. Tolling:In tolling, the seller supplies raw material and receives finished
goods produced from this raw material as payment from the buyer. Here
also the seller can receive the payment partially in finished goods and
partially in cash.
Typically, the tolling is more popular among the industries, where the
finished good is also commodity. For example: crude oil converted to
petroleum products.

11. Clearing Arrangements:This type of trading is between two or more than
two countries in the shape of an agreement, under which agreed volume of
goods are imported and exported over a specific time period without the
payment of foreign currencies. At the end of the agreed time period, the
balance is settled in an agreed foreign currency for example US Dollars.

12.  Establishes long term relationship with
international buyers thereby increasing profit and
market share.
 Importers in low income countries face a scarcity of
foreign exchange to finance their imports so
counter trade can act as an effective source.
 Clean up bad debt situations.
 Build customer relationships
 Gain foreign contracts for future sales

13.  When there is a scarcity and restrictive foreign exchange reserves, the
countertrade is the best option for importing countries.
 Countertrade is also one of the options to find and enter into new,
difficult and challenging markets.
 By adopting the policy of countertrade, a business has a competitive
edge over its competitors.
 If it seems that a sale on credit can lead to bad debt situation, a seller
can avoid this situation, by adopting the policy of countertrade.
 Other benefits of countertrade include better capacity utilization.

14.  The goods, which are offered by customers does not have an in-
house use. For example a manufacturer or supplier of consumer
goods will receive medical equipment in exchange. Now, the
business does not have any experience of handling and
marketing of medical equipment. Expertise has to be hired or
trained and manufacturing firms have to set up subsidiaries to
handle countertrade arrangements or employ the services of
trading companies specializing in medical equipments. All this
cost more and is time consuming effort.
 Lot of time is required to plan and research, what should be
taken in exchange of the goods supplied. For every 10 to 20
deals that are talked about perhaps one gets done.
 Countertrade deals are full of risks and uncertainties, especially
when the deals are spread over number of years. There is a risk
of availability and quality of goods to be delivered in future
years.

15.  STC (STATE TRADING COPPORATION IN INDIA) has been a nodal agency
to monitor counter trade commitments arising out of purchases made
by various departments of Govt. of India and has monitored such
offset transactions worth over 1 billion USD in the last two decades.
 The international partners with whom counter trade transactions
were handled by STC in the past include Bofors, Boeing, British
Aerospace, General Electronic, Pratt & Whitney etc.
 Air India and Indian (Erstwhile Indian Airlines ) have entered into
purchase agreements with the Boeing Company, USA, Airbus, France,
General Electric Company, USA & CFM International, France for
supply of 111 aircrafts/ engines.
 These agreements have commitment from these overseas
manufacturers to fulfill offset obligations/ counter trade programme
to the extent of agreed percentages.
 In line with this STC has entered into agreements with these
companies for implementation and monitoring of such offset
obligations/ counter trade programme.