Counter Trade

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Counter Trade

Counter Trade:
Unquestionably, currency is the preferred payment medium for any export or import transaction—it is easy, fast, and straightforward to transact. Sometimes, though, compa¬nies must adapt to the reality that buyers in many countries cannot do so, whether due to the fact that their home country's currency is nonconvertible, the country doesn't have enough cash, or it doesn't have sufficient lines of credit. Sometimes companies and coun¬tries find it practically impossible to generate enough foreign exchange to pay for imports. In recourse, they devise creative ways to buy products. For example, Indonesia traded 40,000 tons of palm oil, worth about US$15 million, with Russia in exchange for Russian Sukhoi fighter aircraft. This trade, like others that fall under the umbrella term countertrade, illustrates that buyers and sellers often find creative ways of settling pay¬ment for imports and exports.

Countertrade refers to any one of several different arrangements that parties negoti¬ate so that they can trade goods and services with limited or no use of currency. Technically, countertrade can be divided into two basic types: barter, based on clearing arrangements used to avoid money-based exchange; and buybacks, offsets, and counter purchase, which are used to impose reciprocal commitments.

Countertrade is an inefficient way of doing business. By default, companies prefer the straightforward efficiency of cash or credit. In the case of countertrade, rather than sim¬ply consulting current foreign exchange rates, buyers and sellers must enter complex and time-consuming negotiations to reach a fair value on the exchange—how many gallons of palm oil for how many planes, for example. In some situations, the goods that are sent as payment may be poor quality, packaged unattractively, or difficult to sell and service. Also, there is a lot of room for price and financial distortion in countertrade deals, given that nonmarket forces set...
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