Problems and Opportunities of CounterTrade
Although counter trade is a common and growing practice, it has been criticized on several fronts. First, countertrade is considered by some as a form of protectionism that poses a new threat to world trade. Such countries as Sweden, Australia, Spain, Brazil, Indonesia, and much of Eastern Europe demand reciprocity in order to impose a discipline on their balance of payments. In other words, imports must be offset by exports. Indonesia links government import requirements in contracts worth more than Rp. 500 million to the export of Indonesian products, other than oil and natural gas, in an equivalent amount to the foreign-exchange value of the contract. Mexico took a hard line in 1981 against foreign automakers by ordering them to earn back hard currency if they wanted to stay in business with Mexico. As a result, VW de Mexico had to purchase and export Mexican coffee. Nissan Mexicana agreed to accept coffee, horsemeat, chickpeas, and honey. Brazil enacted a similar requirement and was able to extract agreements from foreign-owned automobile and truck makers to export nearly $21 billion worth of vehicles and other products in return for the right to import duty-free parts for their Brazilian plants. Despite this charge, there is evidence that countertrade does not necessarily restrict the overall trade volume.
Second, countertrade is alleged to be nothing but “covert dumping.” To compensate any supplying partners for the nuisance of taking another-product as payment, a counter trading country frequently trades its products away at a discount. If the counter trading country discounts directly by selling its goods itself in another market instead of through a foreign firm, dumping would clearly occur. But according to an International Trade Commission study, the practice does not seem to be harmful to the United States. Counter trade activity actually results in U.S. exports always greatly exceeding the value of imports. Thus, it would appear that many products that U.S. firms agree to take from their customers for overseas marketing are not dumped back in the U.S. market.
Third, countertrade is alleged to increase overhead costs and ultimately the price of a product. Countertrade involves time, personnel, and expenses in selling a customer’s product-often at a discount. If another middleman is used to dispose of the product a commission must also be paid. Because of these expenses, a selling company has to raise- the price of the original order to compensate for such expenses as well as for the risk of taking another product in return as payment. The fact that the goods are saleable–either for other goods or, in the end, for cash somewhere else means that additional and probably unnecessary costs must be incurred. As explained by Fitzgerald, “Countertrade requirements, like any trade restrictions, increase the cost of doing business. These cost cannot be passed into the international market but must be borne within the country imposing the requirements.” It is believed that barter transactions are responsible for reducing Russia’s revenues by 500 billion rubles. Related to this charge of increasing costs is the problem of marketing unwanted merchandise that may remain unsold? A company may have to take on the added job of marketing its customer’s goods if it does not want to lose business to rivals who are willing to do so. GE lost a major sale of CAT scanners to Austrian hospitals after Siemens agreed to preserve 4,000 jobs by stepping up production of unrelated electronic goods within its Austrian plants. McDonnell Douglas was able to secure a contract to sell 250 planes to former Yugoslavia only after agreeing to market such Yugoslav goods as hams and other foods, textiles, leather goods, wine, beer, mineral water, and tours. The company had a difficult time selling the $5 million worth of hams and finally did so to its own employees and suppliers. With Regard to the Yugoslavian tours, the best the company could do was to offer the trips as incentives to employees.
Financing, essential in virtually all types of conventional transactions, becomes more complicated in the case of counter trade this is especially true when the sale of one product is contingent on the purchase of an unrelated product in return. Understandably, banks may hesitate to provide credit for such a deal because of their concern that the exporter may not be able to profitably dispose of the product given to the exporter as payment.
When a company is unable or does not want to be concerned with disposing of the product taken from its customer, it can turn to companies that act as intermediaries. The intermediaries may agree to dispose of the merchandise for a commission or they may agree to buy the goods outright. The mediators is one such middleman organization that operates a $500 million a year business globally.