What is Counter Trade?

1. Counter trade is a term that covers a whole range of barter like agreements. It is primarily used when the firm is exporting to countries whose currency is not freely convertible, and who may lack the foreign exchange reserves required to purchase the imports.

2. By some estimates, CT accounted for 20% of world trade by volume in 1998

3. There are five distinct types of CT – barter, counter purchase, offset, switch trading, and buy back.

4. Barter is the direct exchange of goods and services, or both, between two parties without a cash transaction. Although in theory barter is the simplest arrangement, in practice it is not that common.

5. Counter purchase is a reciprocal buying agreement. It occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made.

6. Offset is similar to counter purchase because the exporter is required to purchase goods and services with an agreed percentage of the proceeds from the original sale. The difference is that the exporter can fulfill this obligation with any firm in the country to which the sale is being made.

7. The term “switch trading” refers to the use of a specialized third-party trading house in a counter trade arrangement. When a firm enters into a counter purchase or offset agreement with a country it often ends up with what are called “counter purchase credits”. These should be used to purchase goods from that country. Switch trading occurs when a third party trading house buys the firm’s counter purchase credits and sells them to another firm that can make better use of them.

8. A buyback occurs when a firm builds a plant in a country, or supplies technology, equipment, training, or other services to the country, and agrees to take a certain percentage of the plant’s output as partial payment for the contract.

9. The main attraction of counter trade is that it gives a firm a way to finance an export deal when other means are not available. A firm that insists on being paid in hard currency may be at a competitive disadvantage vis-à-vis one that is willing to engage in counter trade.

10. The main disadvantage of counter trade is that it may involve the exchange of unusable or poor quality goods that cannot be disposed of profitably.

11. As an option, counter trade is most attractive to large, diverse, multinational enterprises that can use their worldwide network of contacts to profitably dispose of goods acquired in a counter trade agreement. It is less attractive to small and medium sized exporters who lack a similar network.