Global Financing and Exchange Rate Mechanisms: Countertrade

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Countertrade is a trade between two countries by which goods are exchanged for other goods rather than for hard currency. It can also be described as an alternative means of structuring an international sale when conventional means of payment are difficult, costly, or nonexistent (Hill, 2006). "The importance of countertrade as a trading tool has increased since early 1970s -especially in markets where there is a shortage of foreign exchange capabilities or currency liquidity. In these situations, countertrade may be the only effective mechanism for doing business with companies in other countries" (GBG, n.d.)Four Countertrade StrategiesDefensivePassiveReactiveProactiveBarter is one example of countertrade. Barter is a type of countertrade that occurs without a cash transaction. Barter is the direct exchange of goods between two parties in a transaction. However, others, such as offset, buyback, tolling and switch-trading, have also evolved to meet the requirements of a more developed economy. (Richardson, 2005) Reasons for countertrade include the ability to overcome the inability to convert currency.

OffsetTwo forms of offset exist, direct and indirect. Direct offset is where the supplier agrees to use materials 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." (London, 2007) Offset is the method frequently used by governments in the sale of military and high-tech goods.

CounterpurchaseCounterpurchase is a very common type of trade and also known as an offset trade. Counterpurchase is when a seller receives payment in cash but also signs a second contract to...