Countertrade Ã¯Â¿Â½ PAGE \* MERGEFORMAT Ã¯Â¿Â½5Ã¯Â¿Â½
University of Phoenix
4Switch Trading Ã¯Â¿Â½
5Pros and Cons Ã¯Â¿Â½
The conventional means of conducting international sales may not always be possible. Conventional means of payment might be difficult, costly or even nonexistent. A government might restrict its currency convertibility in order to preserve its foreign exchange reserves. Countertrade is a common solution for these payment problems.
Countertrade is a term used to cover a wide range of reciprocal trade. Barter is the best-known example and others such as offset, buyback and switch trading have been developed to meet the needs of the world economy. These trade methods involve the exchange of goods or services in order to finance purchases rather than using cash.
Reasons for countertrade include the ability to overcome currency inconvertibility, the elimination of excess inventory without value loss and to enhance a buyer's desire to purchase a product or service.
Governments that have a need to make a major purchase of military goods mostly use offset. Two forms of offset exist, direct and indirect. Direct offset is where the supplier agrees to use materials or components from the importing country in the finished product. Indirect offset occurs when the supplier is required to enter into a long-term industrial investment in the importing country not related to the supplied product. "The overall objective of offset, either direct or indirect, in the defense sector is generally to promote import substitution and to minimize the balance of payments deficit for military purchases by developing an indigenous industrial defense capability."
(Richardson, 2005, para 4)
In buyback the supplier provides capital...