Counter Trading Arrangements

Graduate School of
Management
Methods of
International
Operations [ IIO ]:
COUNTERTRADING
ARRANGEMENTS
October 25,2010
Vitally I. Cherenkov
Countertrade
 A generic term that describes various techniques
for the conditional exchange of goods and/or
services between seller and buyer.
 Countertrade provides a means of trade with
countries using a blocked currency---currency
that is not readily convertible into other
currencies---or lacking the foreign exchange, thus
removing the difficulties and risks in a trade
financing and paving the way for a successful deal
that otherwise would fail.
 Countertrade also provides a means to preserve
foreign exchange reserves by eliminating the
use of hard currency.
Countertrade
 Countertrade is an alternative means of
structuring an international sale when
conventional means of payment are
difficult, costly, or nonexistent.
 Countertrade denotes a whole range of
barterlike agreements; its principle is
to trade goods and services for other
goods and services when they cannot be
traded for money
Countertrade
 Countertrade is thriving in modern
international trade. In early 1970's,
countertrade was used by about 20 countries
and after the Soviel blok crush, more than
110 countries are using it.
 A wide range of goods and services are
transacted on countertrade, for example, oil,
airplanes, automobiles, mineral, machinery,
agricultural products, shoes, wine, and
advertising time.
Countertrade
Classification
of
Forms
of
Countertrade
Does the transaction reciprocal involve
commitments ? (other than cash
payments)
 YES  NO
 STRAIGHT SALES
 COUNTERTRADE (CASH OR CREDIT)
Does the transaction involve the
use of money?
 YES  NO
 BARTER-TYPE
 COUNTERPURCHAS
E, BUYBACK OR
OFFSET
BARTER-TYPE
 Does the transaction extend over
long time periods and involve a
basket of goods?
YES NO
CLEARING
ARRANGEMENT SIMPLE BARTER
X*A = Y*B
SIMPLE BARTER
 Barter is the direct exchange of goods and/or services, of
approximately equivalent value, between parties without the
use of money or credit.
“Non-Pure” Barter
Barter – Some
Problems
 First, if goods are not exchanged

simultaneously, one party ends up
financing the other for a period
 Second, firms engaged in barter run the
risk of having to accept goods they do not
want, cannot use, or have difficulty
reselling at a reasonable price.
CLEARING
ARRANGEMENT
 Are third parties involved?
YES NO
SWITCH TRADING, CLEARING

Or TRIANGLE DEALS ARRANGEMENT
CLEARING
ARRANGEMENT
{Xi} ↔ {Yj}
($)
(€)
i≠j
CLEARING
ARRANGEMENT
Reciprocal Balancing
Non-Convertible
Balance
(NCB)
Delivery at the expense of NCB
Ст
Clearing
Agreement

Two countries (companies) agree to buy
particular types and quantities of each other's
goods within a period of time, using a
designated clearing currency.
 At the end of the period, the country (company)
that buys more may settle the shortfall
either in hard currency and/or goods, or
issue a credit to the other country (company)
in the subsequent clearing agreement, if any.
Clearinghouses
 Balancing export sales and
counterpurchase obligations on a deal-by-
deal basis is often cumbersome.
 To facilitate countertrade, firms may
agree to establish clearinghouse
accounts.
 Using this approach, as a firm exports
goods and services to another, it incurs a
counterpurchase obligation of an
equivalent value, which is recorded in its
clearinghouse account.
Clearinghouses
 When the firm buys goods from its
partner, its clearinghouse
obligation is reduced.
 Thus a firm does not need to balance
any single countertrade transaction,
although it must honor its cumulative
set of obligations by the time its
clearinghouse account expires.
Switch Trading
 Switch trading refers to the use of a specialized
thirdparty trading house in a countertrade
arrangement.
 When a firm enters a counterpurchase or offset
agreement with a country, it often ends up with
what are called counterpurchase credits, which
can be used to purchase goods from that country.
 Switch trading occurs when a third-party trading
house buys the firm's counterpurchase credits
and sells them to another firm that can better
use them.
PRODUCT
SWITCH
Hard
Currency
UK EXPORTER
₤
TEA PACKAGING
RUSSIAN
EQUIPMENT
IMPORTER
EDAET
IL
YREV
SRI LANKA
IMPORTER Hard Liquid
Product
Triangle Trade
Procedure
Triangle Trade
Procedure
1 - Buyer and seller concludes a sales contract.
 Buyer applies to his issuing bank for a
transferable letter of credit in favor of the seller

(first beneficiary).
 The letter of credit (L/C) provides for shipment
FROM named port of shipment (i.e., Hong Kong,

China) TO named port of destination (i.e., New
York, U.S.A.) and the third party's bill of lading
is acceptable.
 The letter of credit does not stipulate the
consignor of goods.
Triangle Trade
Procedure

2 - Seller transfers the letter of credit to the third

party (second beneficiary) in a transferred credit.
 The credit stipulates the consignor of goods.
 Other credit terms being same as the original
transferable L/C, with the exception of the L/C
amount, any unit price of goods, time of
shipment, last date for presentation of documents,
and expiry date.
Triangle Trade
Procedure
3 - Third party ships the goods directly
to the buyer.
4 - Third party presents the

draft (bill of exchange) and documents
to the negotiating bank for L/C
negotiation.
Documents reach the seller through the
seller's transferring bank.
Triangle Trade
Procedure
5 - Seller substitutes his draft and
documents for those presented by the third
party, but uses the same bill of lading.
 Seller presents the draft and documents to
the negotiating bank for L/C negotiation.

 Documents reach the buyer through the
buyer's issuing bank.
FINANCIAL
SWITCH
$$$$$$$$$$$$$$$$$$$$$$$$$$
U.S.
EXPORTER
EQUIPMENT
$$$$$$$$$$
SWITH TRADER
MINING
Or $$$ UKRANIAN
CLEARING BROKER IMPORTER
GRIVNA
CHILI
EXPORTER LOW LIQUIDITY PRODUCT (Cu Ore)
COUNTERPURCHASE,
BUYBACK OR OFFSET
 Reciprocal commitment limited to
purchase of goods?
•YES •NO
BUY BACK AND

COUNTERPURCHASE OFFSET
OFFSET
 Offset is found most often in the large-scale
capital goods, such as commercial aircrafts and
military hardwares.
 In a direct offset, part of the cost of the export
product is offset by buying the agreed amount
of goods---components or materials---from the
importing country, which the exporter
incorporates in the export product.
 Other direct offsets include coproduction,
licensing, subcontracting, and joint ventures.
 In an indirect offset, the import goods are not
used in the export product.
OFFSET
MAIN CONTRACT:
EXPORT DELIVERY A→B
Non-Contractual Agreement
OFFSET RESULT:
Diminishing
Стра
Payments in
accordance with Offset Investments
the main contract
A→B
Relevant Services
Offset with Triangular
Full Compensation
Assessment of
Products to be
Exchanged
Export Contract A→B Delivery
Страна
Compensation
Final Settlement Duty
disagio
Offset with Triangular
Partial Compensation
Assessment of
Products to be
Exchanged
$$
Страна А
Final Settlement
Compensation
Duty
BUY BACK AND
COUNTERPURCHA
SE
 Are the goods taken back by the
exporter the resultant output of
the equipment sold?
•YES •NO
BUY BACK COUNTERPURCHASE
COUNTERPURCHA
SE
 The seller is obliged to buy from the

buyer goods and/or services that are
usually unrelated to the goods and/or
services sold by the seller.
 The counterpurchase involves two
separate contracts and the deliveries
can take place within a period of one to
five years.
Paralleled Deal
Counterpurchasing Contract
Main Export Contract A→B
Agreement on Counterpurchasing Страна

Duty Transfer
to the
Third Party
Advanced
Purchasing
Exporter from Country A
3rd PARTY
Option
Goods from B to A as compensation

Bank Transfer to Pay
Export Delivery (Equipment)
Threshhold – up to
100% Revenue as
Export Delivery
a result of
Goods selling
from A to B
ESCROW ACCOUNT
BANK
(acceptable for the both Parties)
Importer from Country B

Buyback or
Production
Compensation
 Compensation or buyback is normally
found in the exports of plants,
machinery or technology, where the
exporter is compensated by, or
obliged to buy from the importer,
the goods produced by such plants,
machinery or technology.
Buyback
Production
Turnkey Project to be paid by
Buyback Arrangement И
НВ
Consumption of
Goods Produced on GOODS/SERVICES DELIVERIES
the Constructed Plant
Markets where the product produced on the Constructed Plant

is to be marketed
[2
]
Seller’s
Objectives
 Increase profits
 Help countertrade partner conceal a price cut
 Signal a high quality product
 Increase sales volume and market share
 Establish long-term relationships with new
trading partners
 Secure government contracts
 Gain entry into new or difficult markets
 Fuller use of production capacity
 Generate customer goodwill
 Gain access to new marketing networks
and expertise
Buyer’s
Objectives
 Generate goodwill
 Acquire badly needed products and technology
 Help conceal price cut
 Secure access to critical sources of supply
 Free blocked funds
 Make purchases without deteriorating the balance of trade
 Conserve hard currencies
 Reduce heavy debt burdens
 Bypass trade restrictions
 Establish long-term relationships with new trading partners
 Secure low cost sources of production or raw materials
 Collection of existing debts
Shortcomings of
Countertrade
 No "in-house" use for goods offered by
customers. Exporters often face the problem of
what to do with the goods they are offered.
 Goods that cannot be used in-house need to be resold.
 Some firms will rely on specialist brokers to sell their
goods.
 Timely and costly negotiations. Arranging a
countertrade deal requires a time-consuming and
complex bargaining process. A prospective customer
with a long track record usually has a tremendous
edge over an exporter with little negotiation skills.
Shortcomings of
Countertrade
 Uncertainty and lack of information on future prices.
When part of the traded goods involve commodities, firms
run the risk that the price sinks before the goods can be
sold. Apart from price uncertainty, there is uncertainty
about the quality of the goods.
 Transaction costs. Costs flowing from countertrade quickly
add up:
 cost of finding buyers for the goods (if there is no in-
house use),
 commissions to middlemen (if any),
 insurance costs to cover risk of faulty or nondelivery,
 hedging costs to protect against sinking commodity
prices.
a few words of
advice
 Always evaluate the pros and cons of
countertrade against other options.
 Minimize the ratio of compensation goods to
cash.
 Strive for goods that can be used in-house.
 Assess the relative merits of relying on
middlemen versus an in-house staff.
 Check whether the goods are subject to any
import restrictions.
 Assess the quality of the goods.
QUESTIONS FOR
DISCUSSION
 Explain why countertrade is often viewed as
a necessary evil.
 Compare and contrast the alternative
techniques for countertrade. Is there one
best form for a seller and one best form for
a buyer? Explain.
 To what extent are the objectives of sellers
and buyers in countertrade transactions in
conflict with each other and to what extent
are they in harmony with each other?
OTHER
QUESTIONS??
?
THANKS FOR YOUR
PARTICIPATION TODAY!

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Graduate School of

 First, if goods are not exchanged

SWITCH TRADING, CLEARING

transferable letter of credit in favor of the seller

FROM named port of shipment (i.e., Hong Kong,

2 - Seller transfers the letter of credit to the third

4 - Third party presents the

the negotiating bank for L/C negotiation.

buyer's issuing bank.

BUY BACK AND

Export Contract A→B Delivery

Final Settlement Duty

Export Contract A→B Delivery

BUY BACK COUNTERPURCHASE

 The seller is obliged to buy from the

Main Export Contract A→B

Agreement on Counterpurchasing Страна

Export Contract A→B Delivery

Goods from B to A as compensation

Importer from Country B

Markets where the product produced on the Constructed Plant

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