1. Countertrade - a transaction which links exports to
imports in place of a financial settlement
2. Reasons
(A) Trade financing risky (debt crisis)
(B) Tight import credits (because of low exports)
(C) Entry into new markets (both the exporter and the importer)
(D) Products differentiation and creating competitive advantages
(E) Convertibility or political - financial problems
3. Transaction phases
(A) Identify target country arrangements / regulations
(B) Evaluate their attractiveness and
(C) Find the most favored one from the buyer's perspective
(D) Match your strengths with current / potential countertrade
(internal / external uses for the goods, distribution network)
(E) Consider the accounting / taxation aspects
(F) Choose between in - house expertise and outside specialists
(G) Beware of risks:
(1) Quality and consistency of goods
(2) Delivery times
(3) Supplier reliability
(4) Changes in the value of goods over time
(5) Negative attitude of Governments and IFIs (e.g., EXIM bank in USA)
4. Countertrade is a marketing tool:
(A) Generating hard currency for clients
(B) Helping them to market their products
(C) Sharing (information, marketing, technology, production)
5. Countertrade components
(A) Piecing together sources of finance, services and supplies in different
countries to minimize hard currency net outlays of the importer.
(B) Creating FOREX income for the importer through unrelated protects / new
investments.
(C) Partial payment in soft currencies through reinvestment of the proceeds in
the importer's country.
(D) Escrow accounts in foreign banks funded by the importer through export
revenues (hedge until counterdelivered goods are sold).
6. Arguments in favour of countertrade
(A) International commerce - an extension of national (economic) policies.
(B) (Leads to) a preference to deal with trade competition through bilateral
accommodations favoring domestic exporters.
(C) Uneven recovery rates and protective import policies.
(D) A hedge against declining trade levels.
(E) The growing third world debts.
(F) Constraints on credits and debt rescheduling.
(G) Dependence of developing countries on import - led growth and export
expansion for debt servicing and unemployment.
(H) Tool of long term industrial policy and economic planning.
7. Factors affecting the future of countertrade
(A) Ability of world markets to accommodate counterdeliveries.
(B) Nature of assets offered (raw materials, components, finished goods).
(C) Streamlining of bureaucratic bottlenecks.
(D) Willingness of western exporters to engage in higher risk trade.
COUNTERTRADE - (B) FORMS
1. Countertrade and offset are reciprocal
arrangements.
Countertrade is the exchange of goods and services intended mainly to alleviate
FOREX shortages of importers. Offset is intended to advance industrial development objectives.
2. Assets exchanged include physical goods, services (e.g., tourism,
engineering or transportation), rights (licenses, leases, etc.), lien
instruments (e.g., sovereign promissory notes), or temporary ownership (BOT -
built, operate, transfer arrangements).
3. Developed industrialized countries emphasize technology and production
processes while developing countries emphasize additional exports.
4. The contractual arrangements include cashless exchange of goods of
comparable value, parallel import / export transactions with their own separate
finances, production sharing / equity position.
5. Countertrade ratio - percent of the value of export offset by
counterdeliveries DISAGGIO - subsidy paid as a commission / discount by the exporter to a
broker responsible for marketing counterdeliveries (in the hands of the broker
it is AGGIO). SWITCH - transfer of rights to countertrade goods to third parties Protocol / link or framework contracts - side agreement linking the
primary and secondary contracts in a countertrade
6. Bilateral Government - To - Government trade agreements -
Reciprocal market access privileges (preferential terms)
(A) To integrate the economies using clearing units - exporters and
domestic currency by their Central bank.
(B) Special political / regional trade relations.
(C) Trading interests for raw materials sources.
7. SWING - margin of credit allowed on a bilateral clearing account
(beyond which all trading stops ) - usually 30%. Clearing SWITCH - DISAGGIO driven financial operations. Bilateral
imbalances are monetarised by brokerage networks through final sale products
sourced from the country with the clearing arrears (or rights to products).
8. Forms of compensatory trade arrangements
OFFSET - in cases of purchases of military / (high cost) civilian
equipment,
counter - purchases are demanded as compensation.
Usually in the form of expansion of industrial capacity:
coproduction, licensed production, subcontracting, overseas
investment, technology transfer, countertrade.
(IN) DIRECT OFFSET - articles (not) related to the sale.
BARTER - one time exchange of goods / services of equivalent value.
[examples: US - Jamaica, the dissolution of COMECON, Brokers' swaps]
BUYBACK (Compensation) - exporter receives products derived from the
export.
Each leg is regulated by a separate contract.
COUNTERPURCHASE - exporter receives products unrelated to the export.
Exporter not allowed to transfer his credits and some advance purchases by
exporters qualify.
UMBRELLA (Countertrade agreement) - includes multiple trading partners.
Between Western exporters and Government entity (Evidence account)
Between Governments concerning specific products (Bilateral clearing)
Countertrade used to release blocked currencies / funds
(Expatriation of profits against compensation)
OFFSHORE ESCROW ACCOUNTS - insulation from local banks ensure timely
payments to exporters
Allowance for insufficient cash flows (production / marketing slippage)
2. COSTS (mainly tangible) (A) General and administrative (handling, documentation)
(B) Subsidy (DISAGGIO)
(C) Financing and insurance (including holding & escrow accounts)
(D) Performance / completion guarantees
3. RISKS (A) Expensive and partial insurance
(B) Political risks and bureaucratic delays
(C) Liability claims (personnel, product)
(D) Property risks (direct damage or time dependent)
(E) Lack of standardization
(F) Shortfalls in delivery and marketing of the products
(G) Losses due to delays: changes in production / export priorities
sudden unavailability of raw materials
crop failures
inadequate transportation
quality problems
non-competitive pricing
(arbitrary) marketing restrictions
protectionist shifts
contract failures of brokers / end users
4. COUNTERMEASURES (A) Analysis and viable pricing (maybe inflation of export prices)
(B) The right contract
(C) An insurance policy
(D) Information about the importer, the markets and potential competitors
brokers / end users
(E) Recognizing anticipatory purchases and additionality
requirements (transferable)
(F) Separate the contracts to insulate performance and to facilitate financing,
guarantees and insurance
5. The CONTRACTS
(A) Primary sale - standard export contract + countertrade clause
(B) Link contract - the countertrade contract includes:
(1) amount and period of obligation
(2) type, standards, pricing criteria of counterdeliveries
(3)names of companies providing counterdeliveries
or: free choice clause.
(4) transferability clause
(5) currency of payments
(6) notification and remittance procedures
(7) rights or restrictions affecting the marketing of goods
(8) non-performance penalties and damages
(9) disputes, termination, unavailability of goods
(C) Counterpurchase (buyback) contract includes:
(1) reference to primary contract
(2) standards, specifications, pricing, handling
(3) disputes, force majeure, arbitration, law, indemnities
COUNTERTRADE - (D) SUPPORT SERVICES
1. TRADING HOUSES have: (A) Specialists and experience
(B) Financial resources
(C) Positions in markets and / or marketing networks
Can help with: (A) Marketing and representation
(B) Transportation, warehousing, insurance
(C) Finance: credits and investment management
(D) Manufacturing, upgrading
2. BANKS - advisory services and matchmaking
switch trading of clearing currencies and debt conversions
3. INSURANCE - state and private (LLOYDS, CHUBB, AIG)
4. OTHERS - law firms, trade consultants and information firms, export
management companies, government agencies, industrial giants.
Sometimes MAK is asked to deposit (4) directly in ESCROW
