Offset Trades more Prevalent in Economically Weak Countries

Offset trades are becoming more prevalent among economically weak countries. Several variations of a counter purchase or offset have developed to make it more economical for the selling company. For example the Lockheed Martin Corporation entered into an offset trade with the United Arab Emirates (UAE) in a $6.4 billion deal for 80 F 16 fighter planes called Desert Falcons. Lockheed agreed to make a $160 million cash investment in a gas pipeline running from Qatar to UAE industrial projects and then on to Pakistan. The UAE requires that some of the proceeds from weapon sales be reinvented in the UAE. Such offsets are a common feature of arms deals in which sellers build facilities ranging from hotels to sugar mills at the request of the buyer.

Product buyback agreement is the fourth type of counter trade transaction. This type of agreement is made when the sales involves goods or service, the produce of other goods and services, that is production plant, production equipment or technology. The buyback agreement usually involves one of the two situations. The seller agrees to accept as partial payment a certain portion of the output, or the seller receives full price initially but agrees to buy back a certain portion of the output. One US farm equipment manufacturer sold a tractor plant to Poland and was paid part in hard currency and the balance in Polish built tractors. In another situation, General Motors built an auto manufacturing plant in Brazil and was paid under normal terms but agreed to the purchase the resulting output when the new facilities came online. Levi Strauss took Hungarian blue jeans which it sells abroad, in exchange for selling up a jeans factory near Budapest.

An interesting buyback arrangement has been agreed on between the Rice Growers Association of California (RGAC) and the Philippine government. The RGAC will invest in Philippine farmlands and bring new technologies to enhance local rice production. In return the RGAC will import rice and other food products in payment. A major drawback to product buyback agreements comes when the seller finds that the products bought back are in competition with its own similarly produced goods. On the other hand, some have found that a product buyback agreement provides them with a supplemental source in areas of the world where there is demand but where they have no available supply.

Problems of Counter trading:

The crucial problem confronting a seller in a counter trade negotiation is determining the value of and potential demand for the goods offered. Frequently there is inadequate time to conduct a market analysis in fact, it is not unusual to have sales negotiations almost completed before counter trade is introduced as a requirement in the transaction.

Although such problems are difficult to deal with, they can be minimized with proper preparation. In most cases where losses have occurred in counter trades the seller has been unprepared to negotiate in anything other than cash. Some preliminary research should be done in anticipation of being confronted with a counter trade proposal. Countries with a history of counter trading are identified easily and the products most likely to be offered in a counter trade often can be ascertained. For a company trading with developing countries, these facts and some background on handing counter trades should be a part of every pricing tool kit. Once the goods are acquired they can be passed along to institutions that assist the companies in selling bartered goods.

Barter houses specialized in trading goods acquired through barter arrangements and are the primary outside source of aid for companies beset by the uncertainty of a counter trade. Although barter houses most of which are found in Europe can find a market or bartered goods, this requires time, which puts a financial strain on a company because capital is tied up longer than normal transactions.

Source: International Maeketing