“Countertrade” is a generic term developed in the 1980s to identify a range of barter-like transactions under which two sets of obligations on two opposing sides are legally linked to each other. Since the Islamic Republic of Iran has involved in these transactions especially for the development of oil and gas fields and such involvement has recently received a lot of attention in the media, this article tries to provide a better understudying of various mechanisms known as countertrade. This article briefly discuss different mechanisms of countertrade and tries to highlight their distinct feasters. Barter, counter-purchase, advanced- purchase, buy-back, offsets, swap, clearing arrangements, switch arrangements, exchange of debts.
Further discussion on countertrade:
Companies that conduct business internationally face geographic pricing, in other words, how to price their products to different customers in different countries. Firms selling goods in foreign countries face two questions arise, should the company:
charge higher prices to customers in other countries to cover costs such as shipping.
lower the cost for customers in other countries to gain their business, especially for products entering new markets?
Once a company reaches a price decision for international customers, they then need to decide how it will get paid for their products. This is extremely critical for countries where they lack the hard currency to pay for the products. This is where countertrade enters the picture.
Countertrade accounts for up to 20 percent of the world trade. This is because many international companies either cannot pay with hard currency or prefer to pay with other products, forcing U.S. companies to engage in countertrade activities for payment.
As a result, countertrade takes on several forms:
- Barter: This is where the buyer and seller exchanges goods, eliminating a third-party’s need to handle the transaction. Money is not involved, just goods.
- Compensation Deal: In this scenario of countertrade, the seller will receive a percentage of cash as payment and the rest in products. As an example, a British aircraft manufacturer sold planes to a South American company, receiving 70 percent cash and the balance in coffee.
- Buyback Arrangement: The seller, in this situation, will sell to another country items such as plants (often fruit baring), equipment, or technology and in turn, agrees to accept as partial payment the products manufactured with the supplied plants and equipment. As an example, a U.S. petroleum company sold and built a petroleum plant for a middle eastern company; in exchange for payment, the middle eastern company supplied the U.S. company with oil as partial payment.
Offset: The seller receives full cash payment for the product, but agrees to spend a substantial amount of the money received in that country within a specific time period. In this classic example, PepsiCo agreed to sell its cola syrup to Russia for money (rubles) and agreed to buy Russian vodka at a certain rate, to sell in the United States.