Question

What do you understand by counter trade and when countertrade can be beneficial for the country?

Answer 1

Countertrade = Countertrade is an alternative means of structuring an international sale whenconventional means of payment are difficult, costly, or nonexistent. Trading goods/services forgoods/services.5 types:-Barter  direct exchange of goods without cash transaction.-Counter purchase  Reciprocal buying agreement. Firm agrees to purchase certainamount of materials back from a country to which a sale is made.-Offset  Same as counter purchase in that 1 party agrees to purchase goods with a %of proceeds from sale. However, party can fulfill obligation with any firm in countrywhere sale is being made.-Switch trading  uses specialized 3rdparty trading house in a countertrade agreement.-Buyback  Firm builds plant in country, or supplies something and agrees to takecertain % of output for payment.Pros of countertrade:-Gives firm way to finance export deal when other means aren’t available.-May be required by government of country exporting to.Drawbacks of countertrade:-May involve exchange of unusable or poor quality goods.-Firm may not be able to dispose of goods profitably.Beneficial – when currency is nonconvertible, in developing nations it is encouraged bygovernment, it would be beneficial when you don’t have the cash to give, but you have that valuein some asset you own. Willingness to enter into a counterpurchase agreement is a way ofwinning orders in the face of intense competition.Drawbacks – firms would normally prefer tobe paid in hard currency, countertrade contracts may involve the exchange of unusable or poor-quality goods that the firm cannot dispose of profitably.Countertrade is most attractive to large, diverse, multinational enterprises that can usetheir worldwide network of contacts to dispose of goods acquired in countertrading.