Countertrade

Countertrade originates from barter (direct exchange of goods for goods),the oldest form of trade,and is characterized by the combination of export and import in international trade.It is a kind of reciprocal activity.Countertrade is an umbrella term that includes all of the variations of the exchange of goods for goods. Considered in its most fundamental and simple terms,it means,"If I buy from you, you must buy form me."With more and more countries active in this field in the past few decades,contertrade becomes more complex.
One thing that makes countertrade rather difficult to understand in the lack of agreement on a common terminology.Some of the terms may mean different things to different pepole,and some of the different terms may mean the same thing.Therefore,it is absolutely vital that the trader looks beyond the terminology to assess exactly what the proposal means by the term used.
The common reasons for countertrade are:

1.To create new export markets or promote export products
2.To acquire new technology or attract foreign investment
3.To balance trade for economic or political reason

In the following we will elaborate on four types of countertrade that are often used in our country's international trade.

1.Compensation Trade
There are full compensation and partial comsensation trade.

1).Full compensation
This is a barter-like arrangement where the goods exported are "paid for" by a countersupply of goods. The valud of the countertrade goods should be equal to that of the export goods,since the sale of the countertrade goods provides the hard currency to pay for the export.And for this same reason,the shipment dates should be closely linked.The exporter does not want to risk by dispatching his goods to the buyer,just against a mere promise by the buyer to provide countertrade goods at some time in the future.So the full compensation transactions are always framed in one single contract.
2)Partial Compensation
The same basic principals of full compensation apply for partial compensation,with an exception that part of the export is paid by cash.

2.Counterpurchase
In signing a counterpurchase contract,the exporter is required to undertake the purchase of goods from the importer's side. Although this undertaking may be negotiated and signed with the principal export contract,it is discharged separately.
In counterpurchase,the value of countertrade goods does not have to equal that of the export. The countertrade demand is often expressed as a percentage of the export contract.Separate contracts are signed for each side of the transaction. Usually the counterpurchase is only represented in the first instance by some sort of framework agreement.This merely sets out the conditions of the counterpurchase and may not make detailed reference to the purchase of specific countertrade goods.
Technically,separate stand-alone contracts for delivery and counterdelivery are signed.Each side of the transaction is settled separately in foreign exchange.Therefore,the timing for discharge of each transaction could differ within the agreed time limit.This is why counterpurchase is also called " parallel trade".

3.Switch Trade
Switch involves at least three parties,or even four or five parties.It is closely linked with the bilateral clearing agreement, a kind of basis for barter transactions between governments.
The clearing arrangements establish two-way flows of goods of agreed types between two countries."Clearing units" rather than foreign exchanges are used in the accounting of this kind of trade.In this way,the two countries can exchange their products without using their limited reserve of foreign exchanges.An overall limit is place on the value of trade in a period.As it is quite difficult to exchange goods for exactly same value,at the end of the period covered by the agreement,one country will be a creditor and the other will be debtor.Generally,a limit is placed on the imbalance on accounts.Each limit is often refered to as "the swing".If trade ceases because the swing limit is reached,the countries may look for other ways to balance the book.One such way to balance the books would be through a mechanism called "switch",i.e. "selling" the imbalance to a third part for hard currency.This is the role of a switch dealer.
The switch dealer will buy the imbalance "clearing units" at a discount.These clearing units are available only for the purchase of goods from debtor country.So,the switch dealer will arrange for the subsequent sale of these goods in a third country,where payment will be made in hard currency.The profit in these transaction will cover the dealer's commission.
A successful switch deal requires expertise and a lot of work,and therefore,the fees are quite high.Exporter must allow sufficient discount in the price to cover the switch dealer's fees.

4.Offset
Offset is a practice in which the seller has to undertake some sort of activity favorable to the importer in addition to the supply of the capital goods.Usually,the principal export goods are of a very high value,such as aircraft,power-station equipment,or an air defense system.To alleviate the heavy foreign exchange expenditure involved in purchase of this nature,the buyer usually insists that offset be applied.But recently,there is a growing trend for offset to be used to transactions of lower-level technologies,such as coal-mining machinery,railway engines and buses etc.
The buyer's requirements may be:
*Licensed production: The seller grants the buyer the authority to manufacture certain equipment,which according to possible parallel agreements may be:
incorporated in the capital goods being sold
bought by the license
sold to a third part
*Co-production:The seller may cooperate in industrial production under certain agreement.This may vary from a simple agreement to a joint venture.Output of the venture may be used in the same ways as listed under Licensed Production.
*Subcontractor production:The seller subcontracts the manafacture or assembly of certain goods,which could be used in the same way as mentioned above.
*Local infrastructure:The seller may be required to set up local establishments in the buyer's country,such as railway,a training school etc.

This is in no way a complete list of the various types of offset practices.Usually an offset package is a mixture of many types.With offset booming in more and more countries,new types of cooperation are coming into being.