THE INCIDENCE OF COUNTERTRADE

In the modern era, countertrade arose in the 1960s as a way for the Soviet Union and the communist states of eastern Europe, whose currencies were generally nonconvertible, to purchase imports. During the 1980s, the technique grew in popularity among many developing nations that lacked the foreign exchange reserves required to purchase necessary imports. Today, reflecting their own shortages of foreign exchange reserves, some successor states to the former Soviet Union and the eastern European communist nations periodically engage in countertrade to purchase their imports. Estimates of the percentage of world trade covered by some sort of countertrade agreement range from highs of 8 and 10 percent by value to lows of around 2 percent.23 The precise figure is unknown, but it is probably at the low end of these estimates, given the increasing liquidity of international financial markets and wider currency convertibility. However, a short-term spike in the volume of countertrade can follow periodic financial crisis. For example, countertrade activity increased notably after the Asian financial crisis of 1997. That crisis left many Asian nations with little hard currency to finance international trade. In the tight monetary regime that followed the crisis in 1997, many Asian firms found it very difficult to get access to export credit to finance their own international trade. Thus, they turned to the only option available to them—countertrade.

ANOTHER PERSPECTIVE Types of Countertrade

Countertrades can take many forms, and there are several examples of how it works internationally. For instance recently the Malaysian government bought 20 diesel electric locomotives from General Electric. Officials of the government said that GE will be paid with palm oil supplied by a plantation company. The company will supply about 200,000 metric tons of palm oil over a period of 30 months. This was GE’s first barter deal for palm oil and palm products although its division GE trading has several other countertrade agreements worldwide. No money changed hands, and no third parties were involved. As another example, in order to save foreign exchange reserves the Philippine government offered some creditors tinned tuna to repay part of a state $4 billion debt. In other examples General Motors Corporation sold $12 million worth of locomotive and diesel engines to Yugoslavia and took cash and $4 million in Yugoslavian cutting tools as payment. McDonnell Douglas agreed to a compensation deal with Thailand for eight top of the range F/A–18 strike aircraft. Thailand agreed to pay $578 million of the total cost in cash, and McDonnell Douglas agreed to accept $93 million in a mixed bag of goods including Thai rubber, ceramics, furniture, frozen chicken and canned fruit.

Source: www.citeman.com/13236-types-of-counter-trade.html.

Given that countertrade is a means of financing international trade, albeit a relatively minor one, prospective exporters may have to engage in this technique from time to time to gain access to certain international markets. The governments of developing nations sometimes insist on a certain amount of countertrade.24 For example, all foreign companies contracted by Thai state agencies for work costing more than 500 million baht ($12.3 million) are required to accept at least 30 percent of their payment in Thai agricultural products. Between 1994 and mid-1998, foreign firms purchased 21 billion baht ($517 million) in Thai goods under countertrade deals.25