Trading between nations has been happening since time began. In ancient time nations traded silk, spices, cloth and animals of all kinds. Today nation trade food items, defense equipment, metals, electronics etc. The products might have changed but the basic concept is still the same as the underlining need which brings together two nations in a trade relationship still exists.
One such method of trading between nations is called counter trade. Counter trade is an import / export relationship between nations or large companies in which good and/or services are exchanged for goods and services instead of money. In some cases monetary evaluations are made for accounting purposes.
Types of counter trade
Barter: It is the exchange of goods and services for goods and services without any use of money. Like the trade relationship between China and Thailand where fruit has been traded by Thailand for buses made by China.
Switch Trading: In this method one company trades products and services or, in some cases, builds infrastructure like roads, railway lines, hospitals with another nation and, in turn, are obligated to make a purchase from that nation. One such example is a deal proposed by the Philippine Government where they offer to trade Philippine coffee for essential products.
Counter Purchase: In this, a foreign company, or country, trades with a nation with the promise that in the future they will make purchase of a specific product from the nation. A recent example of this is the ongoing trade between Congo and China where infrastructure is being traded for a supply of metals.
Buyback: In this type of counter trade, a company builds a plant, supplies technology, training, etc. In exchange they take a part of output of the plant. For example, a company based in the USA sets up a lets say an automobile factory in X country. They take a part of the total produce as their own but they have setup the industry, provided the technology and the training to X country.
Offset: This is an agreement by one nation to buy a product from a company in another. The terms of contract are subject to the purchase of some or all of the components and raw materials from the buyer of the finished product, or the assembly of such product in the buyer nation. This is more common in terms of defense equipments or space crafts etc.
Need for counter trade
So why do nations need counter trade? Why they can they just trade in cash instead?
There can be several reasons for a nation to choose counter trade over cash import and exports.
Some of them are:
Money: sometime the shortage of cash resources leads nation towards counter trade. Developing nations, particularly, have very limited cash resources but they generally are abundant in natural resources. By engaging in counter trade these nations ensure that the resources available to them are fully utilized and they are also able to fulfill their requirements without spending cash.
Protect local industries: by engaging in counter trade, nations ensure that as they give business to a foreign nation they also create business and job opportunities for their own people by promoting the traded commodity.
Balance of trade: Maintaining a positive balance of trade is very important for every nation. Counter trade is a great way for nations to ensure that the import and exports in the nation are balanced as every commodity that is being bought is equaled with some commodity being sold.
Competitive advantage: when it comes to trading there is also competition between various nations. By providing the opportunity of counter trade to other country you gain a competitive edge over the other nations selling or trading the same product.
Best described by Fisher College of Business, Ohio State University “Counter trade consists of transactions which have as a basic characteristic a linkage, legal or otherwise, between exports and imports of goods or services in addition to, or in place of, financial settlements. Counter trade can be used as an effective international business tool. Counter trade plays a part in 20-25 percent of world trade.”