January 10th, 2018
Countertrade as a Mediator of Global Financing
The value of what one acquires is measured in terms of its opportunity cost. In terms of money, for instance, its value is what can be purchased with it and thus can be thought of as a batter exchange for the items purchased. The difference in value of various countries’ currencies however makes it impossible for monetary trade to be considered as a barter trade method. One of the reasons is that the demand for a country’s currency could be influenced by such aspects as fluctuations in imports and exports levels. For instance when a country’s demand for imports exceeds other countries demand for its exports; then more domestic currency would be required to purchase a unit of the foreign country’s currency. This paper explores the use of Countertrade as an alternative for multinational corporations to finance its cross boarder operations and how such is used in managing risks.
Advances in Countertrade
Agreements similar to the traditional barter trade have continued to characterize international trade though the barter trade in itself is rarely practiced. Though the traditional method where goods and/ services of equivalent values were exchanged on non-monetary transactions still falls under countertrade; cross-boarder trade has explored more modern methods of reciprocal trade. Dassiou, Choi and Maldoom (2004) for instance note that countertrade agreements account for more than 20 % of global trade (p. 1). These include counter-purchase, buyback (compensation), and offsets and may serve as a means of avoiding effects of global exchange rate fluctuations on quantity traded in. In counter-purchase for instance, an exporter, undertakes to procure goods and/or services from the country to which the exports are destined often as a proportion of the export value (Camino & Cardone, 1998). Buyback (compensation) on the other hand involves agreements by the exporter to accept payment fully or partially from worth (goods) derived from or directly produced from the exported technology or equipment (Camino & Cardone, 1998). Further, offsets offer a form of relationship where the seller undertakes to assist in the marketing of products from the importing country or allow subcontracting of assembly or manufacture of the exported product in the importing country (Camino & Cardone, 1998).
The presence of a wide range of alternatives to countertrade options however restricts the extensive use of these options in modern times. Alternative forms of trade financing for instance range from cash transactions, credit letters, and other official modes of acquiring credit (Angelidis, Parsa, & Ibrahim, 2004). The wide range of market conditions that cross boarder operations may be subject to could however necessitate firms to engage in countertrade agreements to reap benefits associated with such engagements.
Use of Countertrade in Global Financing
The need for countertrade has been advanced on different grounds ranging from those brought about by constraints to those that arise out of opportunities. Based on opportunities countertrade has been advanced to help in gaining access to markets with the potential for growth or those that cannot be accessed other wise (Angelidis, Parsa, & Ibrahim, 2004). Further countertrade could serve as a channel to dispose products that have reached their maturity stage in one market but not in others (Angelidis, Parsa, & Ibrahim, 2004). Establishing relations that expand beyond the original need for countertrade agreements is one further beneficial outcome of such agreements (Angelidis, Parsa, & Ibrahim, 2004). With these relations the company can formulate an effective strategy that increases its competitiveness in the foreign market.
In relation to constraints, hard currency shortages, credit inadequacies, and adverse balance of payment, have been advanced to necessitate countertrade agreements (Dassiou, Choi and Maldoom 2004). By its elimination of monetary valuations of exchange rate, counter trade could for instance by-pass restrictions to trade brought about by fluctuations in foreign exchange rates (Angelidis, Parsa, & Ibrahim, 2004). Further countertrade agreements can prevent adverse impacts of protectionist policies to a firm’s exports thus sustaining a favorable performance (Angelidis, Parsa, & Ibrahim, 2004). This would be for instance be the case where governments have placed restrictions to preserve their foreign currency reserves.
Countertrade agreements are however not without their share of disadvantages. For instance setting the price for products becomes problematic because many contributors to cost cannot be reliably estimated (Angelidis, Parsa, & Ibrahim, 2004). Secondly, for countertrade operations to be successful, intensive and mainly time consuming negotiations becomes necessary (Angelidis, Parsa, & Ibrahim, 2004). Such could level off the benefits that are thought to arise from such agreements. The probability of getting lower quality goods which becomes difficult to utilize or sell in the domestic is also a probable drawback for countertrading (Angelidis, Parsa, & Ibrahim, 2004). Further, the conversion of trading partners into competitors could eliminate the competitive advantage that such arrangements might have with regard to new market entry (Angelidis, Parsa, & Ibrahim, 2004).