Counter Trade

Counter lot Counter Trade Unquestionably, bills is the preferred consecratement medium for any export or import transactionit is easy, fast, and naive to transact. Sometimes, though, companies must adapt to the reality that buyers in many countries cannot do so, whether collect to the fact that their home countrys currency is nonconvertible, the country doesnt move over enough interchange, or it doesnt have sufficient lines of quote. Sometimes companies and countries find it practically impractical to generate enough foreign exchange to pay for imports.In recourse, they devise creative ways to buy products. For example, Indonesia traded 40,000 lots of palm oil, worth about US$15 million, with Russia in exchange for Russian Sukhoi fighter aircraft. This trade, alike early(a)s that fall under the umbrella term countertrade, illustrates that buyers and copeers often find creative ways of tidy sumtling payment for imports and exports. Countertrade refers to any one of sever al different arrangements that parties negotiate so that they can trade goods and serve with limit or no use of currency.Technically, countertrade can be divided into two basic types barter, based on clearing arrangements used to avoid money-based exchange and buybacks, offsets, and counter purchase, which be used to impose reciprocal commitments. Countertrade is an uneffective way of doing crease. By default, companies prefer the straightforward efficiency of cash or credit. In the case of countertrade, quite a than simply consulting current foreign exchange rates, buyers and sellers must enter complex and time-consuming negotiations to reach a fair value on the exchangehow many gallons of palm oil for how many planes, for example.In some situations, the goods that are sent as payment may be poor quality, packaged unattractively, or difficult to sell and service. Also, there is a lot of room for toll and financial distortion in countertrade deals, given that nonmarket forces set the prices of these goods. Ultimately, countertrade and its variations threaten free market forces with protectionism and price fixing that can complicate trade relations with other countries. Still, the harsh reality of international trade means that countertrade is often unavoidable for companies that want to do business in markets that have limited or no entranceway to cash or credit.Complicating matters is the fact that as much as companies may dislike them, many emerging markets prefer forms of countertrade to preserve their limited financial assets, generate foreign exchange, and improve the balance of trade. In addi-tion, these methods help emerging markets reduce their need to sweep up working capital as well as let them access the technology and marketing expertise of MNEs. More significantly, benefits beyond financing the immediate transaction do accrue to companies.Accepting the option to countertrade shows managers good organized religion and flexibility in the face of onerous conditions. These sensitivities can position the firm to gain preferential access to emerging markets. Philosophically, the idea of countertrade fits with many countries basic notions of business. For example, the idea of barter and trade is part of some African traditions that are reluctant to conform to Euro-centric methods of cash payment. It is difficult to gauge the size of the countertrade market. Estimates in the past have ranged from 10 to 40 percent of total global exports.This figure has proven tough to verify due to inconsistent reporting and disclosure. Countertrade generally increases in economies that are experiencing widespread economic problems. In Argentina, countertrade among super C citizens has increase due to a severe shortage of cash. There are several types of countertrade. The three most common ares- (1) Barter Barter, the oldest form of countertrade, is a transaction in which goods or work are traded for goods or services of equal value wit hout any exchange of cash or credit.Each term of the exchange is negotiated in impairment of the immediate trade of goods or services. For instance, Thailand and Indonesia signed a $40 million deal in which Indonesia would confer Thailand with an agricultural aircraft, train carriages, and fertilizer in exchange for Thai riceno monies were or would be exchanged. There are barter firms that act as an intermediary between the exporter and importer, often taking ennoble to the goods received by the exporter for a price or selling the goods for a fee and a ploughshare of the sales value. (2) repurchasesBuybacks are products the exporter receives as payment that are related to or originate from the original export. Buyback arrangements are quite common in the sale of technology, licenses, and even complete turnkey factories. Payment is make in full or in part either by products manufactured in the upstart facility or by production from the new license or technology. Buyback countert rade is specially popular for turnkey infrastructure projects. For example, the customer pays for the project, say a steel mill, with government-backed long-term credit.The exporting affirmer first guarantees that the project will work when completed and then agree to buy back products or services from the completed facility or to serve as a distributor for products exported from the armament country. The host-country buyer uses these exhausting currency payments to liquidate the original long-term credit. Throughout the relationship, no cash changes hands and no credit arrangements are necessary. The buy-back contract merely states that the output from the newly constructed facility is to be applied to the original price of the exports.This sort of arrangement was worked out between PepsiCo and Russia. Pepsi provided syrup to state-owned bottling plants in Russia and received Stolichnaya vodka in return, which it then marketed in the West. (3) Offset Trade An increasingly impor tant form of countertrade is offset trade, a transaction that takes place when an exporter sells products for cash and then helps the importer find opportunities to earn hard currency. Offsets are most often used for big-ticket items, much(prenominal) as military sales.The Czech government made offset the deciding factor, as opposed to skilful and performance criteria and price, in its jet fighter procurement. Offset arrangements are usually one of two types. 1. cipher offsets imply any business that relates directly to the export. Generally, the exporter seeks contractors in the importers country to joint-venture or coproduce certain parts if applicable. For example, an aircraft exporter could furnish with a company in the importers country to manufacture components that would be used in the manufacture of the aircraft. . confirmative offsets include all business unrelated to the export. Generally, the exporter is asked by the importers government to buy a countrys goods or ornament in an unrelated business. Some of the most common direct offset practices in military sales include coproduction, licensed production, subcontractor production, overseas investment, and technology transfer. Examples of indirect offsets might include assisting in the export of unrelated products from the host country or generating tourist revenues for the host country.