What is 'Countertrade'
Countertrade is a reciprocal form of international trade in which goods or services are exchanged for other goods or services, rather than for hard currency. International trade conducted in this matter is more common in lesser-developed countries with limited foreign exchange or credit facilities. Countertrade can be classified into three broad categories: barter, counterpurchase and offset.
BREAKING DOWN 'Countertrade'In any form, countertrade provides a mechanism for countries with limited access to liquid funds to exchange goods and services with other nations. Countertrade is part of an overall import and export strategy that ensures a country with limited domestic resources has access to needed items. Additionally, it provides the exporting nation with an opportunity to offer goods and services in a larger international market, promoting growth within the industry.
Barter forms the oldest countertrade arrangement, and essentially involves the direct exchange of goods and services having an equivalent value but with no cash settlement. Often, the act involved in bartering is referred to as a trade.
In a counter purchase, the overseas seller agrees to buy goods or services sourced from the buyer's country up to a defined amount. The value of the goods or services being supplied to the buyer is generally considered equal to the amount the seller agrees to purchase.
In an offset arrangement, the seller assists in marketing products manufactured by the buying country or allows part of the assembly of the exported product to be carried out by manufacturers in the buying country; this practice is often found in the aerospace, defense and certain infrastructure industries, and is more common for big ticket items. An offset arrangement may also be referred to as industrial participation or industrial cooperation.
Benefits and Drawbacks
A major benefit of countertrade is it facilitates conservation of foreign currency, which is a prime consideration for cash-strapped nations, and provides an alternative to traditional financing that may not be available in developing nations. Other benefits include increased employment, higher sales, better capacity utilization and ease of entry into challenging markets.
A major drawback of countertrade is the value proposition may be uncertain, especially in cases where the goods being exchanged have significant price volatility. Other disadvantages of countertrade include complex negotiations, potentially higher costs and logistical issues. Additionally, concerns about how the activities interact with various trade policies can also be a point of concern in regards to open market operations, opportunities for trade advancement, and the shifting terms and conditions instituted by the developing nations that could lead to discrimination in the marketplace.