Extent of Counter trade

The magnitude of trade conducted under counter trade arrangements is difficult to estimate. There are several reasons for this. Where governments engage in such arrangements strategic goods may be involved is that detailed trade data are not likely to be published. When trade returns are compiled on a commodity basis, they do not usually differentiate between trade conducted under normal trading arrangements and counter trade. Counter trade in the form of buy back arrangements often extends over several years, making it difficult to estimate the annual volume of trade.

Indications of the rising demand for counter trade are reflected in US Commerce Department estimates made in 1976 that 28 per cent if all East-West trade was in fact some form of counter trade. In 1981 the figure was as high as 38 per cent. According to James Walsh a senior economist with the US Department of commerce, counter trade accounted in 1983 for one-third of all world trade and he predicted that it would account for no less than one half of world trade by the year 2000. Counter trade is popular in the Chinese, East European and Third World markets. For instance, the Government of Indonesia now insists that any company selling there also purchase Indonesian goods for sale abroad. Malaysians having been affected by this policy have begun negotiating their own counter trade deals.

Even in the USA about one-half of the Fortune 500 companies are involved in counter trade. Of GE’s exports one year, over 40 percent depended on counter trade. Not only large firms are involved, however, half of the counter trading firms in Florida had fewer than 100 employees. The United States relied to some extent on counter trade arrangements to expand its trade with East European countries. Many big American corporations have established departments to deal with counter trade. General Motors, for example has formed a counter trade subsidiary Motors Trading Corporation.

Banks have set up new departments to provide services for counter trade transactions. Barclays, for example has established a social unit that can help and advise on all aspects of counter trade from explaining terminology to helping in the disposal of counter purchased goods.

Factors in Counter trade:

The reasons to engage in counter trade include those basic to business: to enter new markets sell products and gain an edge over competition. However several factors have contributed the growth of counter trade. In the case of centrally planned East European countries domestic production can be planned, but exports are not as amenable to central planning, largely because of the difficulty of forecasting foreign demand. Counter trade foreign demand. Counter trade is, therefore considered a way of overcoming uncertainly of domestic production and at the same time, of achieving bilateral balancing of trade – an important objective of foreign trade policy in these countries. Shortages of convertible design exchange and the desire to stimulate foreign technology inflows also motivated East European countries to enter into counter trade arrangements.

In many developing countries, certain industrial and foreign trade activities are nationalized and some of the institutional characteristics that apply to counter trade in East European countries area also present in these countries. In addition developing countries particularly those maintaining overvalued exchange rates, have resorted to counter trade for the following reasons (1) balance pf payments difficulties arising from sluggish export growth and a rising external debt services burden have prompted some to seek new ways of economizing on scarce foreign exchange resources: (2) emphasis in the growth of manufacturing sectors, originally aimed at promoting import substitution has created over capacity and has produced pressures it find markets for surplus goods; (3) given the difficulties of gaining access to the markets of the industrial countries for certain primarily and manufactured products, counter trade arrangements that commit industrial country exporters to purchasing a given quantity of products over a specified period are seen as a means of penetrating existing markets or establishing new ones(4) counter trade in the form of buyback arrangements is seen by both industrial and the more developed developing countries as means of securing reliable sources of essential raw materials while exporting equipments and technology that have become outdated at home, and (5) for exporters (including some in industrial countries) counter trade may have become the only way to overcome the protective trade policies of some countries.