for students of Prof. W.T.G. Richardson

permission to quote , and link,  given to Prof. Richardson by Robert Scallon robert.scallon@uk.thalesgroup.com in an email 2004 Dec 02. Copy of the email is on file in Richardson's permissions binder

from  www.cob.ohio-state.edu/citm/expa/countertrade.html
from Fisher College of Business, Ohio State University

1. The world debt crisis has made ordinary trade financing very risky.
- large banks and financial institutions are "risk adverse" in many of the hostile regions of the world opening to trade

2. Many countries cannot obtain the trade credit or financial assistance to pay for desired imports.
- the IMF and World Bank are increasingly restrictive in the way they allow governments to operate

3. Countries are increasingly returning to the notion of bilateralism as a way to reduce trade imbalances.
- some multilateral blocks have developed - but politics is easier on a one2one basis - so many nations find it easier to cur deals directly with another single country

4. Countertrade is often viewed as an excellent mechanism to gain entry into new markets. The party receiving the goods may become a new distributor, opening up new international marketing channels and ultimately expanding the market.
- especially where 4X problems are challenging to solve

5. Providing countertrade services helps sellers differentiate its products from those of competitors.
- flexibility is key to winning business in a global market that is more and more competitive to vendors

from Fisher College of Business, Ohio State University - with notes added by witiger

Elderkin & Norquist, in their book "Creative Countertrade," say that companies countertrade in order to:

• Expand or maintain foreign markets
• Increase sales
• Sidestep liquidity problems
• Repatriate blocked funds
• Clean up bad debt situations
• Build customer relationships
• Keep from losing markets to competitors
• Gain foreign contracts for future sales
• Find lower-cost purchasing sources

• Money - some people cannot pay in the currency you want

"to enable trade to take place in markets which are unable to pay for imports. This can occur as a result of a non-convertible currency, a lack of commercial credit or a shortage of foreign exchange"
• The Political Environment - local jobs and industry

"to protect or stimulate the output of domestic industries (including agriculture and mineral extraction) and to help find new export markets"
• The Political Environment - rules and regulations to protect the host country

"as a reflection of political and economic policies which seek to plan and balance overseas trade"
• "to gain a competitive advantage over competing suppliers."

Defensive. "Companies with a defensive countertrade strategy ostensibly do not countertrade at all; however, they make many countertrade-type arrangements with buyer countries. These companies will avoid any contractual countertrade obligations, but they make it clear to the country that they will reciprocate in some way for the sale. Some companies will sell their products at rock-bottom prices and promise to help the country with export development."

Passive. "Companies with passive countertrade strategies regard countertrade as a necessary evil. They participate in countertrade at minimal level, on an ad hoc basis. Some companies operate this way because they have product leverage (i.e., little or no competition), while others follow the passive strategy because of disinterest in countertrade."

Reactive. "This is the most common strategy among American companies. Companies with reacting strategies will cooperate with the buyer country in offset/countertrade requirements, they use countertrade strictly as a competitive tool, on the theory that they cannot make the sale unless they agree to countertrade."

Proactive. "Companies with proactive strategies have made a commitment to countertrade. They use countertrade aggressively as a marketing tool, and are interested in making trading an active and profitable part of their business. They regard offset and counterpurchase as an opportunity to make money through trading, rather than as an inconvenience."

from  http://www.barternews.com/american_way.htm
By: C.G. Alex and Barbara Bowers

  1. Offset
  2. Counterpurchase
  3. Tolling
  4. Barter
  5. Buyback
  6. Switch Trading

1. Offset

"Offset has traditionally been used by governments around the world when they have made major purchases of military goods but is becoming increasingly common in other sectors. There are two distinct types:

   A. direct offset: "the supplier agrees to incorporate materials, components or sub-assemblies which are procured from the importing country. In some large contracts, successful bidders may be required to establish local production. Direct offset has been particularly common for trade in defence systems and aircraft."
   B. indirect offset: "the purchaser requires suppliers to enter into long term industrial (and other) co-operation and investment but these are unconnnected to the supply contract and may be either defence related or in the civil sector."

"The overall objective of offset either, direct or indirect, in the defence sector generally to promote import substitution and to minimise the balance of payments deficit for military purchases by developiing an indigenous industrial defence capability."

"A foreign supplier undertakes to purchase goods and services from the purchasing country as a condition of securing the order. Counterpurchase is generally imposed for two reasons: first, to stimulate exports and second, to alleviate the balance of payment deficit resulting from imported goods."

Manufacturers, in regions such as the Former Soviet Union, may sometimes be unable to service customers because they lack the foreign exchange to buy raw materials. In a tolling deal, a supplier himself provides the raw material (steel ingots, say) and hires capacity of the factory to turn it into finished goods (e.g. steel tubes). These are then bought by a final customer who pays the supplier in cash - throughout the process the supplier retains ownership of the material as it is procecessed by the factory." - this is similar to Contract Manufacturing where the Contractor provides much of the materials.

Barter is one of the most common methods of Countertrade. "In a barter deal, goods are exchanged for goods - the principal export is paid for with goods (or services) from the importing market.  A single contract covers both flows and in the simpler case, no cash is involved. In practice, however, the supply of the principal export is often released only when the sale of the bartered goods has generated sufficient cash."
This means if Country A sells mining equipment to Country B in return for cigars - they will probably hold some of the mining equipment back until they have made some good profit from the cigars.

"Here, suppliers of capital plant or equipment agree to be paid by the future output of the investment concerned. For example exporters of equipment for a chemical plant may be repaid with part of the resulting output from the factory. This practice is most common with exports of process plant, mining equipment and similar orders. Buyback arrangements tend to be much longer term and for larger ammounts than counterpurchase or barter deals."

"Imbalances in long term bilateral trading agreements sometimes lead to the accumulation of uncleared credit surpluses in one or other country, For example, Brazil at one time had a large credit surplus with Poland. These surpluses can sometimes be tapped by third countries so that, for example UK exports to Brazil could be financed from the sale of Polish goods to the UK or elsewhere. Such transactions are known as ‘switch' or ‘swap' deals because they typically involve switching the documentation (and destination) of goods on the high seas."

Pepsi & Vodka
The countertrade arrangement where the rights to sell Russian vodka in the U.S. in exchange for Pepsi (to be sold in Russia) was a huge story years ago

John G. Swanhaus, Jr., vice president, Pepsi Cola Company
As president of PepsiCo Wines & Spirits International, a major part of his responsibility was PepsiCo's supply to the U.S. market of Stolichnaya Russian Vodka as part of a countertrade agreement to sell Pepsi products in the Soviet Union.

Pepsi & Vodka -how did it work, 
Pepsi-Cola delivers syrup that is paid for with Stolichnaya Vodka. Pepsi has the marketing rights of all Stolichnaya Vodka in the U.S.