What Is a Counter Trade Agreement

An official U.S. statement states: “The U.S. government generally views counter-trade, including barter, as contrary to an open and free trading system and not in the long term for the benefit of the U.S. business community. However, for political reasons, the U.S. government will not oppose the participation of U.S. companies in counter-trade agreements, unless such a measure can have a negative impact on national security. [2] Counter-trade also takes place when countries do not have enough hard currency or when other types of trade on the market are impossible. One of the unique challenges of counter-exchange transactions is that companies often deal with products they are not familiar with. In addition, they can receive products whose quality varies from shipment to shipment.

There are three main reasons for counter-trade: (1) counter-trade offers an alternative to trade finance for countries with international debt and liquidity problems, (2) anti-trade relations can give least developed countries and multinationals access to new markets, and (3) counter-trade is conceptually a good fit for the resurgence of bilateral trade agreements between governments. The benefits of counterparty trading are grouped around three themes: market access, currencies and prices. Counter-trading offers several advantages. It moves inventory for both a buyer and a seller. The seller also enjoys other advantages. In addition to the tax benefit, the seller can sell the product at full price and convert the inventory into a customer claim. The low-liquidity buyer, who does not have hard currency, is able to use all the money received for other operational purposes. However, if we measure global trade only in terms of currency-based transactions, we are leaving out a part of the market known as counter-exchange. Counter-trade is a barter system in which goods and services are used as a means of payment and not as money. There are many types of counter-trade. Some of the most common types are described below: When an international sale takes place, it can be difficult to structure the sale using traditional payment methods.

In counter-transactions, where goods and services are exchanged as opposed to money, cash does not change hands. Goods or services are exchanged and not for money. This is often referred to as barter, which is the oldest type of counter-exchange agreement. Clearing Agreement: A clearing agreement is a clearing account exchange transaction that does not require a foreign currency transaction. Since a line of credit is established in the central banks of both countries, trade in this case is continuous and the exchange of products between two governments is aimed at achieving an agreed value or volume of transactions, which is recorded or calculated in tabular form in non-convertible “units of account”. For example, the rationing of hard currency in the former Soviet Union restricted the import and payment of copiers. Rank Xerox decided to circumvent the problem by manufacturing copiers in India to sell to the Soviets as part of the country`s “compensation” deal with India. The contract specified the goods, the ratio of the exchange and the duration of completion. All imbalances after the end of the year were offset by a credit to the following year, acceptance of unwanted goods, payment of penalties or payment in hard currency.

Although they are not convertible in theory, in practice, clearing units can be sold at a discounted price to trading specialists who use them to buy saleable products. One theory on how best to help developing countries is to increase their inflow of foreign direct investment. However, it is difficult to determine the conditions that best attract such a flow of investment, as foreign investment varies greatly from country to country and over time. Knowing what influenced these decisions and what trends are emerging in the results can be useful for governments, non-governmental organizations, businesses and private donors seeking to invest in developing countries. It is a trading system where buyers import machinery, equipment, technology and raw materials from foreign manufacturers on a credit basis and commit to repaying the debt with other products or labor within a set time frame. In addition, counter-trade is an international trading system in which governments reduce trade deficits and an alternative way to structure a sale between two or more countries. Much of the counter-trade involved the sale of military equipment (arms, vehicles and equipment). One of the main advantages of counter-trade is that it facilitates the preservation of foreign currencies, which is a major consideration for countries in financial difficulty and an alternative to traditional financing, which may not be available in developing countries. Other benefits include lower unemployment, increased sales, better capacity utilization, and easy entry into difficult markets. The Party receiving the goods as a means of payment in whole or in part for the exported goods or services can contribute significantly to the opening of new international marketing channels and, ultimately, to the expansion of the market for the mutual benefit of the exporter and the importer. Nevertheless, counter-trade remains essentially a reactionary business practice for many companies. A counter-purchase exists when there are two or a series of parallel cash purchase contracts, each of which is paid in cash.

Unlike barter, which is a one-time transaction that involves only an exchange rate. A counter-purchase involves two separate transactions, each with its own current value. A supplier sells an asset or product at a fixed price and orders unrelated or non-resulting products to offset the cost to the original buyer. Thus, the buyer pays with hard currency, while the supplier agrees to buy certain products within a certain period of time. Therefore, money does not have to change hands. In fact, the practice allows the original buyer to recover the currency. GE won a $300 million contract to build aircraft engines for Swedish JAS fighter jets in exchange for money after agreeing to buy the same amount of Swedish industrial products over a period of time through a counter-purchase agreement. Brazil exports vehicles, steel and agricultural products to oil-producing countries, from which it buys oil in return. Counter-purchase is the most commonly used form of counter-trading, followed by clearings, redemptions/clearings, exchanges/swaps, and switching transactions.

A study by researchers at Duke University and Princeton University, published in the American Journal of Political Science, entitled “The Politics of Foreign Direct Investment into Developing Countries: Increasing FDI through International Trade Agreements,” examines foreign direct investment trends from 1970 to 2000 in 122 developing countries to assess the best conditions for attracting investment. The study found that the main factor contributing to the increase in FDI flows was the reform of domestic policies in terms of trade openness and participation in international trade agreements and institutions. The researchers conclude that while “democracy can be conducive to international cooperation, the strongest indicator of a higher inflow of foreign direct investment to developing countries was the number of trade agreements and institutions to which they had acceded. Traders who accept goods in counter-trade also face many of the following problems: A form of counter-purchase is an international trade agreement in which an exporter agrees to buy a number of goods from a country in exchange for the country buying the exporter`s product. The goods sold by each party are generally independent of each other, but may have an equivalent value. The main reason U.S. companies engage in countertrade is to meet requirements set by foreign governments or customers. .