Although the major reason for the substantial growth of counter trade is its use as a strategy to increase exports, particularly by the developing countries, counter trade has been successfully used by a number of companies as an entry strategy. For example, Pepsico gained entry to the USSR be employing this strategy.
Counter trade is a form of international trade in which certain export and import transactions are directly linked with each other and in which import of goods are paid for by export of goods, instead of money payments.
In the modern economies, most transactions involve monetary payments and receipts, either immediate or deferred. As against this, counter trade refers to a variety of unconventional international trade practices which link exchange of goods directly or indirectly in an attempt to dispense with currency transactions.
Forms of Counter Trade:
Counter trade takes several forms. The following are the most common among them.
Barter refers to direct exchange of goods of equal value, with no money and no third party involved in it. For example a counter trade deal between the Minerals and Metals Trading Corporation of India(MMTC) and a Yugoslavian company involved import of 50,000 tons of rail of the value of about $38 million by the MMTC and the purchase by the Yugoslavian company of iron ore concentrates and pellets of the same value.
Under the buy back agreement, the supplier of plant, equipment or technology agrees to purchase goods manufactured wit that equipment, or technology. Under the buy back scheme, the full payment may be made in kind or a part may be made in kind and the balance in cash. Thus, a Rs. 20 crore buy back agreement with the Soviet Union provided for the import of 200 sophisticated looms by the National Textiles Corporation. The buy back ratio was 75%.
Under this arrangement, the seller receives a part of the payment in cash and the rest in products.
Under the counter purchase agreement the seller receives the full payment in cash but agrees to spend an equivalent amount of money in that country within a specified period. A classic example of this kind of an agreement was Pepsi Colaâ€™s trade with the USSR. Pepsi Cola got paid in Rubles for the sale of its concentrates in the USSR but spent this amount for purchase of Russian products like Vodka and wine.
The array of counter trade transaction reported in the trade press is intriguing. Coca Cola has traded its syrup for cheese from a factory it built in the Soviet Union, for oranges from an orchard in planted in Egypt, for tomato paste from a plant it installed in Turkey, for Polish beer, and for soft drink bottles from Hungary. A Swedish band was paid in coal for its concerts in Poland. Boeing exchanged ten 747s for 34 million barrels of Saudi Arabian oil. Argentina awarded a fertilizer factory to Czechoslovakian firms with the stipulation that suppliers buy vegetables and other agricultural goods produced with fertilizer.
Many counter trade deals involve more than two parties and the process becomes complex and intricate. If the seller can get in exchange from the buyer the products which he wants or for which he has a ready, market the counter trade deal would be very smooth. However, in several cases the buyer will not be in a position to offer in exchange goods which the seller really needs. In such cases, it may become necessary, for the deal to be struck, for the seller to accept the products the buyer can offer and hunt for buyers for such products.
Daimler Benz agreed to sell thirty trucks to Romania and accept in exchange 150 Romanian made jeeps, which it sold in Ecuador in exchange for bananas which it brought back to West Germany and sold to a West German super market chain in exchange for Deutsch marks. Through this circuitous transaction, it finally achieved payment in Germany currency.