In recent years, there has been a growing tendency in some countries to resort to trading practices that constitute a retreat from multilateralism. These practices are correctively known as “counter trade” Counter trade has gained widespread acceptance and respectability as a non-traditional mechanism. The basic point: the exporter agrees to purchase from the importer his goods either in full or partial payments for his exports. In effect counter trade is a form of financing international trade wherein price setting and financing are tied together in one transaction.
Counter trade may take a variety of forms, but basically it is barter or quasi-barter arrangement that more or less explicitly links import and export transactions.
For example, an exchange of 50,000 tons of Brazilian soya beans for 50,000 tons of Mexican black beans in 1977, involved no cash. However, many counter trade transactions are highly complex. They may involve several products moving at different points in time engaging several countries and, may include financial patents as well.
It involves trading arrangements between private firms and/or government entitles, such as foreign organizations, by which the seller is obligated to accept, as a partial or total settlement for his exports of goods (or in some instance services, such as technology or industrial license) specified goods or services from the buyer.
On the basis of the types of goods traded, the financial arrangement involved and the length of time it takes to complete the transactions four types of counterparts may be distinguished. These are barter compensation, buy-back and counter purchase.
1. Under a barter arrangement the exporter sells specified goods to the importer in exchange for specified goods. This type of transaction, involving a limited number of products and without the participation of a third party, is a one-time operation, and the transaction is completed in a relatively short time. Pure barter is relatively rare cause of the difficulties of finding a buyer for the product which is not easily marketable, and of negotiating a mutually acceptable price. An example of how large a barter deal can be is the 20 year agreement whereby Occidental Petroleum Corp. will annually ship one million tons of phosphate rock to Poland in exchange for an annual shipment of one-half million tons of polish molten Sulphur. Barter involve more than two parties, such as the deal where Israel sent potash to Poland, which sent a equal value shipment of sugar to Brazil, which closed the transaction by sending an equal value shipment of coffee to Israelvg. No money changed hands.
2. Under a compensation arrangement the exporter agrees to take full or a partial payment in kind for the goods sold. But the exporter transfers the purchasing commitment to a third party who may be an end user of products or a trading house. Compensation arrangements are also not very common because it takes time to find a suitable third party to whom the exporter can transfer the purchasing commitment.
3. The third type of counter trade which is perhaps the most prevalent and involves a relatively large volume of trade is the buy back arrangement. Under this the exporter (usually an industrial firm) provides plant, equipment, or technology to an importer (also an industrial firm) and agrees to accept as a partial or full payment goods to be produced by the importer with the exporter’s equipment or technology. A variant of this arrangement is trade related performance requirement under which foreign investors are required to export a fixed proportion of the goods produced or to use specified value if locally produced inputs in production. In contrast to barter, compensation and counter purchase arrangement where the value of purchase by the exporters is almost always less than (or at most equal to) the value of exports. The value of buy back commitment may exceed that of the original export transaction. Moreover the contract period of buy back arrangements is, by necessarily, considerably longer than that of counter purchase arrangements.