Growth & Reasons of Counter trade

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.

A significant volume of international trade is covered by counter trade. Counter trade of course, is not a new phenomenon but the nineteen seventies and eighties witnessed a remarkable growth in this type of international trade, encouraged by many governments and actively involved by many trading houses, both private and public, although organizations like GATT (WTO) and IMF do not favor it.

According to one report, the number of countries practicing counter trade increased from 27 in 1973 to more than 90 by mid 1980s. A study by the US Departments of Commerce found that counter trade covered 38% of East-West trade in 1981 compared to 28% in 1976. According to the estimates made by the Economist quite sometime ago, counter trade accounted for one-fourth of all world trade. However, the GATT in a report had noted that in 1983 counter trade accounted for about 8% of the global trade. A source in the US Department of Commerce expected some time ago that counter trade would be reflected in one way or the other, in 50% of the world trade by the end of the 20th current century. The political and economic changes in the former USSR and Eastern Europe do not appear to adversely affect the growth of counter trade.

Counter trade had been growing with government patronage. According to one report more than 81 countries across the world had actual pro-counter trade government policies. Counter trade has been made mandatory by a number of countries including Indonesia, South Korea, Malaysia and Australia in case of government / public sector purchases of above certain specified value. Even though a number of other countries like Bangladesh, Burma, China, Pakistan, Philippines, Singapore, Thailand and Taiwan have no mandatory provisions all encourage their importers to settle transactions on counter trade basis. Indian public sector agencies like STC and MMTC are active in counter trade. Government of India set up a special cell in the Ministry of Commerce to monitor international developments in counter trade and to develop appropriate policy to enable Indian canalizing agencies to make best use of opportunities available to boost India’s exports through counter trade.

It may be noted that the South Commission has advocated counter trade as a useful mechanism for overcoming difficulties of payments, export credit, and foreign exchange which otherwise be serious obstacles to the expansion of trade between developing countries. As the commission points out, so far the bulk of counter trade between developing countries has been conducted mostly through intermediaries in the industrial countries. It is the developed countries who have benefited most from this type of trade, and they obviously have no interest in helping the indirect trading partners in the LCDs to establish direct contacts and develop durables trading relationships. Therefore, the developing countries need to organize themselves of counter trade as this can also pave the way for the growth of more conventional trading relations.

There have been several reasons for the counter trade to become popular. Obviously the countries or companies concerned have encouraged or involved in counter trade due to certain specific advantages although some of the benefits may be purely temporary.

1. Counter trade was very common between the communist countries. It also became popular in respect of trade between the Communist Block and many developing countries because many developing countries were eagerly looking towards this block for increasing their exports, among other things, and this naturally led to the acceptance of the trade practice preferred by these centrally planned economies.
2. Counter trade became popular in the East-West trade mainly due to the foreign exchange problems faced by the East Block. Pepsi Cola is just one example of a multinational corporation which made considerable international business with the USSR by counter trade.
3. When the foreign exchange problem became more severe for the developing countries following the oil prices hikes, they began to actively pursue counter trade in a frantic bid to increase their exports by all means.
4. Many companies in the advanced countries have resorted to counter trade for various reasons like selling obsolete products, increasing the sale of capital goods, increasing the aggregate business etc. Counter trade has also been resorted to by several companies to mitigate the effects of recession. Such recessionary situations in the capital goods industries in the advanced countries gave the developing countries an opportunity to push their exports by tying the imports of capital goods with exports by counter trade.

The results of survey of 35 British companies involved in international counter trade by Shipley and Neale accorded with the descriptive literature in so far as the Eastern Bloc countries were the main group of counter trade customers, reflecting their acute currency and international debt problems. Nevertheless, substantial portions of the firms conducted counter trade in the world’s less developed regions while there was some limited support for the claims that developed nations counter trade among themselves.

5. The results of the above survey also suggest that counter trade enables firms to penetrate difficult markets, to increase sales volume and to achieve fuller capacity utilization. It has also been revealed that counter trade enables firms to dispose of declining products, which is particularly important given the very rapid pace of technological advance. 37% of the companies surveyed reported this benefit.
6. Some countries have also made the counter trade a means to increase sales through disguised under cutting of the cartel process (for examples the oil price fixed by the OPEC)
7. Having realized the potential of increasing the business by engaging in counter trade, many international trading corporations became active in the counter trade. Their trading with many countries enabled them even to take up such complex transactions as the case of Daimler Benz cited earlier.

It may be noted here that, after the de-integration of the erstwhile Soviet Union when the Government of India has been finding if difficult to establish two way trade flows, the Pepsi Foods Private Ltd, made an attractive offer to the Government to enter into counter trade deals with individual enterprises in the Commonwealth of independent States to import the much needed oil, non-ferrous metals, fertilizers and news print.