Countertrade

Countertrade is a system of trading that was developed to enable governments to minimize the economic imbalance of international transactions. Countertrade is not barter trade, although barter may provide an element of countertrade.

A single major international purchase contract may have a negative effect upon a country's balance of trade, particularly for small nations or those with restricted access to hard currencies. To counter this imbalance, governments seek to moderate any trade bias by insisting upon a reciprocal mechanism that balances it, either immediately or in the future.

There are several scenarios that encourage the application of countertrade. The prime motivation appears to be trade facilitation, in that it enables trade that might otherwise be barred by a lack of convertible currency or foreign exchange, or other problems with international commercial credit.

Countertrade may be categorized into several forms that may be applied either discretely or in combination (the use of the term product in this article includes primary materials and manufactured goods as well as services):

• 1.
  Direct offset: The seller agrees to purchase components or materials used in the manufacture or assembly of the actual products that they will [Page 424]be selling. This effectively reduces the cost to the buyer. This is commonly used in high-value markets such as military or aerospace. A good example of this was when McDonnell Douglas sold helicopters to the British government, but had to equip them with British Rolls-Royce engines.
• 2.
  Indirect offset: This is used in similar market sectors to direct offset, but in this case, the importer requires the exporter to make a long-term investment or other commitment to the benefit of the importer's economic infrastructure.
• 3.
  Switch trading: Switch trading, sometimes known as swap, is when a third country uses its position as a trading partner with two other countries whose reciprocal trade is not in equilibrium. For example, the third country C purchases a product from A and sells another product to B to help balance the trade between A and B.
• 4.
  Counterpurchase: In this form, the exporter contracts to purchase goods, materials, or services that are not required to be incorporated in their products, thus reducing the effective cost of the products to the importer. This is seldom a direct value for value exchange and may also be for a longer period than that required for the execution of the primary contract.
• 5.
  Barter trading: Barter is the straightforward trading of one product against another. The obvious drawback to this is that a product of sufficient commercial value to fulfill a barter contract probably already has a viable export market. Similarly, a product that does not have an export market is unlikely to be of sufficient interest for barter.

It must be remembered that barter trade is seldom in equilibrium, thus a broker will be involved to ensure that there is a terminal market for bartered products. A product that does not have a potential market is of little interest to a broker. The balancing of barter trade usually requires a complex series or “string” of trades. Note two terms that often cause confusion: agio, the broker's premium paid by an exporter; and disagio, the commission paid by the exporter to the broker to recompense the broker for assuming the countertrade transaction risk. (In effect, the same payment from different points of view.)

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