Counter Purchase Agreement and others in Export Marketing

The counter purchase arrangement is also common and complicated. Under this arrangement, the exporter sells goods, technology or services to an importer and agrees to purchase from the latter, within a specified period, a specific total value of goods selected from a list that excludes those produced by the technology being exported. Unlike barter and compensation arrangements, exporters entering into buy back and counter purchase arrangements must use a trading firm to market the goods they purchase. The exporters do not use these goods themselves although under certain buy back arrangements they may agree to purchase raw materials or parts that could be used in their production processes.

For example, Fred Krupp Huttenwerke AG of Germany won a$ 9 million order for big capacity hydraulic cranes from Machinoimport in the USSR by agreeing to buy back 15 percent of the contract value in Soviet machine tools and equipment. Krupp was prepared for the counter trade demand and ether used the machines and equipment in its Germany plants or resold them. Krupp’s competitors in the deal, which included Grove Manufacturing Co. and Harnisachfeger Corpn of the United States and Coles Crane of England were not prepared to accept the counter trade requirements. These competing companies would have had to sell the counter purchased goods in the open market at a discount of up to 40 per cent which made the entire deal unattractive.

Counter purchase can be a useful tool for companies seeking to enter new markets and get an edge over competitors. An example is McDonnell Douglas Corp’s success in Yugoslavia to get a major Yugoslav purchase of DC9 passenger etc. McDonnell Douglas agreed to buy canned hams, tools and other products from that country. McDonnell Douglas’ counter purchase agreements or offset programs as company officials called it developed into a large ongoing business arrangement. The Corporation’s counter trade in Yugoslavia now includes the company encouraging its employees to fly on JAT-Yugoslav airlines and to vacation on that Adriatic country’s seashore.

Some other varieties of counter trade transaction are described below:

Swap: Swap is a simple enough concept. Products from different locations are traded to save transportation costs. This is ideally sited for commodities such as sugar, chemicals ore and oil. An example is the swap of Soviet oil bound for Cuba and Mexican oil heading to Europe and Asia Minor. In the 1978 agreement, the Soviet Union supplied oil to Mexico’s customers in Greece Eastern European and Turkey and Mexico supplied oil to Cuba, thus both countries saved considerable transportation cost. In swap transactions differences in the quality of the goods being substituted are worked out in the swap contract.

Clearing: This is a bilateral agreement between two countries to purchase specific amounts of each other’s products over a specified period of time. The countries also agree to use a designated clearing currency in the transaction such as the US dollar, the French Franc or another freely convertible currency. Clearing agreements help countries maintain better trade balances and assure export markets for some of their goods. While Americans may be unfamiliar with clearing agreements, they are common in the developing world and in countries with state controlled economies. Clearing agreements were common in Europe after World War II because of the lack of cash or the low trade value of the currencies of many of the nations. Although the number of clearing agreements has declined in recent years they are still common in some countries. A recent survey found that the USSR had 30 clearing agreements. Mexico had 19 and Brazil had 17. Many clearing agreements have clauses that allow the switch of all of the bilateral trade balance to a third party.

Switch: This method of counter trade is useful when international currency flow is sluggish or uneven. One country that is a party to bilateral trade agreements will transfer its imbalance to a third party or nation.