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    Counter Trade: Chapter 3 and Chapter 8

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    kirthi nair
    Counter trade involves exchanging goods or services for other goods or services rather than money. There are several types of counter trade including barter, counter purchase, buyback, switch trading, and offset agreements. Counter trade is commonly used when there are foreign exchange shortages or to enter new markets. While it can help establish long term relationships and access new customers, counter trade also has drawbacks like increased costs and risks due to exchanging dissimilar goods. India commonly uses counter trade for major purchases from companies like Boeing and has an agency called STC to facilitate counter trade agreements.

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    Counter Trade: Chapter 3 and Chapter 8

    Uploaded by

    kirthi nair
    56 views23 pages
    Counter trade involves exchanging goods or services for other goods or services rather than money. There are several types of counter trade including barter, counter purchase, buyback, switch trading, and offset agreements. Counter trade is commonly used when there are foreign exchange shortages or to enter new markets. While it can help establish long term relationships and access new customers, counter trade also has drawbacks like increased costs and risks due to exchanging dissimilar goods. India commonly uses counter trade for major purchases from companies like Boeing and has an agency called STC to facilitate counter trade agreements.

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    Counter Trade

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    Counter trade involves exchanging goods or services for other goods or services rather than money. There are several types of counter trade including barter, counter purchase, buyback, switch trading, and offset agreements. Counter trade is commonly used when there are foreign exchange shortages or to enter new markets. While it can help establish long term relationships and access new customers, counter trade also has drawbacks like increased costs and risks due to exchanging dissimilar goods. India commonly uses counter trade for major purchases from companies like Boeing and has an agency called STC to facilitate counter trade agreements.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    56 views23 pages

    Counter Trade: Chapter 3 and Chapter 8

    Uploaded by

    kirthi nair
    Counter trade involves exchanging goods or services for other goods or services rather than money. There are several types of counter trade including barter, counter purchase, buyback, switch trading, and offset agreements. Counter trade is commonly used when there are foreign exchange shortages or to enter new markets. While it can help establish long term relationships and access new customers, counter trade also has drawbacks like increased costs and risks due to exchanging dissimilar goods. India commonly uses counter trade for major purchases from companies like Boeing and has an agency called STC to facilitate counter trade agreements.

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    © All Rights Reserved
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    Download as pptx, pdf, or txt
    of 23

    Counter Trade

    CHAPTER 3 AND CHAPTER 8


    Counter Trade
     Counter trade means exchanging goods or services which are
    paid for, in whole or part, with other goods or services, rather
    than with money.
    A monetary valuation can however be used in counter trade for
    accounting purposes.
    Variants of counter trade 

     Barter : Exchange of goods or services directly for other goods or services


    without the use of money as means of purchase or payment.

     Eg: The Malaysian government purchased 20 diesel electric locomotives from General
    Electric against the supply of about 200,000 metric tons of palm oil over a period of 30
    months. (Source: www.citeman.com)
    Counter purchase

     A foreign supplier undertakes to purchase


    goods and services from the purchasing country
    as a condition of securing the order. Counter
    purchase is generally imposed for two reasons:
    first, to stimulate exports and second, to
    alleviate the balance of payment deficit resulting
    from imported goods.“
     Example: Pepsi Co. sold concentrates in the
    USSR and got paid in Rubles, which according
    to the agreement with Russia, these Rubles
    were spent for purchase of Russian products
    like Vodka and wine (Source:
    www.citeman.com)
    Buyback:
     Occurs when a firm builds a plant in a
    country - or supplies technology,
    equipment, training, or other services to the
    country and agrees to take a certain
    percentage of the plant's output as partial
    payment for the contract.
     Example: National Textiles Corporation of
    India signed a buy back agreement of
    Indian Rupee 200 million with the Soviet
    Union to buy 200 sophisticated looms. The
    buyback ratio was 75% textile produce from
    these looms and the remaining was in
    cash. (Source: www.citeman.com)
    Switch trading:

     Switch Trading involves the role of third party in a


    countertrade transaction. If a seller in the
    countertrade does not want goods offered by the
    buyer as payment, it may bring in third party to
    dispose of the merchandise offered by the buyer.
     Example: Country A has exported the goods
    worth US$ 10 million to Country B and Country B
    has exported the goods worth US$ 8 million to
    Country A. So, Country A has a surplus balance
    of US$ 2 million (10 – 8) with Country B. At the
    end of the agreed period, if country B does not
    have US$ 2 million to pay to the country A, it’s
    another trading partner Country C will pay US$ 2
    million to country A
    Offset:

     Offset is the type of countertrade, which is mostly related to very high value of
    exports and/or medium to high technology capital goods supplied by a multinational
    corporations or a major manufacturer.
     Offset activity can be divided into two main categories
     1)Direct
     2)Indirect
     McDonnell Douglas sold MD 82 mid-size passenger aircraft to China. The contract
    included provisions for the Chinese to manufacture aircraft components such as doors to be
    used for landing gears, passengers, and cargo
    DIRECT OFFSET:

     The offset is said to be direct when


    some components of the item sold are to
    be manufactured within the buyer’s
    country and that the seller agrees to buy
    those components to use them in-house.
     Example: an aircraft manufacturer sells
    a passenger plane to a buyer in another
    country and agrees with the buyer that
    some of the spare parts of the plane will
    be ordered and purchased in buyer’s
    country and attach to the plane
    INDIRECT OFFSET :

     The offset is said to be indirect


    when the buyer requires the seller
    to enter into a long term industrial
    or other co- operation and
    investment, but this co-operation
    or investment is not related to
    goods supplied by the seller.
    Tolling:

     In tolling, the seller supplies raw


    material and receives finished goods
    produced from this raw material as
    payment from the buyer. Here also the
    seller can receive the payment partially
    in finished goods and partially in cash.
    Typically, the tolling is more popular
    among the industries, where the
    finished good is also commodity. For
    example: crude oil converted to
    petroleum products.
    Clearing Agreements:

     This type of trading is between two or


    more than two countries in the shape
    of an agreement, under which agreed
    volume of goods are imported and
    exported over a specific time period
    without the payment of foreign
    currencies. At the end of the agreed
    time period, the balance is settled in
    an agreed foreign currency for
    example US Dollars.
    Why do we need counter trade?

     Establishes long term relationship with international buyers thereby


    increasing profit and market share.
     Importers in low income countries face a scarcity of foreign
    exchange to finance their imports so counter trade can act as an
    effective source.
     Clean up bad debt situations.
     Build customer relationships.
     Gain foreign contracts for future sales.
    Factors to be considered

     The Industrial Factor... It is necessary to integrate the possibility of technology transfer and sub-
    contracting from the very beginning of the product's conception.
     The design engineers must anticipate that some parts of the product will have to be produced
    abroad without affecting the good health of the company.
     All future markets will need to be considered so as to evaluate the possibility of cooperation, the
    capacity to integrate technologies, and the economic interest of the country to do so. This is not
    always an easy task, as the country requiring offset is often asking more than it can really do.
     Offsets should not be considered as an obligation, but as a partnership. The objective is not to do
    a one-off operation, but to establish a long-term cooperation. It is also necessary to establish
    close cooperation with the sub-contractors.
     The Commercial Factor... It is important to continually monitor the practice and development
    of the offset requirements in the targeted customer country and to analyze its economic needs.
     The supplier will need to study these needs through its network of contacts and to identify
    suitable partners, in conjunction with a local lobbying task force in order to penetrate local
    industrial circles which can often influence the decision of the purchaser.

     The Financial Factor... An attractive financial package is also part of a successful deal,
    possibly including investments and joint ventures.
     More and more, the fulfillment of the offset requires financial engineering involving the
    financial department of the supplying company as well as third parties such as banks and
    investment services companies.
    Benefits of counter trade

     When there is a scarcity and restrictive foreign exchange reserves, the countertrade is the
    best option for importing countries.
     Countertrade is also one of the options to find and enter into new, difficult and challenging
    markets.
     By adopting the policy of countertrade, a business has a competitive edge over its
    competitors.
     If it seems that a sale on credit can lead to bad debt situation, a seller can avoid this situation,
    by adopting the policy of countertrade.
     Other benefits of countertrade include better capacity utilization.
    Drawbacks of countertrade

     The goods, which are offered by customers does not have an in- house use. For example
    a manufacturer or supplier of consumer goods will receive medical equipment in
    exchange. Now, the business does not have any experience of handling and marketing of
    medical equipment.  Expertise has to be hired or trained and manufacturing firms have to
    set up subsidiaries to handle countertrade arrangements or employ the services of trading
    companies specializing in medical equipments.  All this cost more and is time consuming
    effort. 
     Lot of time is required to plan and research, what should be taken in exchange of the
    goods supplied.  For every 10 to 20 deals that are talked about perhaps one gets done.
     Countertrade deals are full of risks and uncertainties, especially when the deals are
    spread over number of years. There is a risk of availability and quality of goods to be
    delivered in future years.   
    Countertrade in India

     STC (STATE TRADING COPORATION IN INDIA) has been a nodal agency to monitor counter
    trade commitments arising out of purchases made by various departments of Govt. of India and
    has monitored such offset transactions worth over 1 billion USD in the last two decades.
     The international partners with whom counter trade transactions were handled by STC in the
    past include Bofors, Boeing, British Aerospace, General Electronic, Pratt & Whitney etc.
     Air India and Indian (Erstwhile Indian Airlines ) have entered into purchase agreements with the
    Boeing Company, USA, Airbus, France, General Electric Company, USA & CFM International,
    France for supply of 111 aircrafts/ engines.
     These agreements have commitment from these overseas manufacturers to fulfill offset
    obligations/ counter trade programme to the extent of agreed percentages.
     In line with this STC has entered into agreements with these companies for implementation
    and monitoring of such offset obligations/ counter trade programme.
    Trends and Prospects
     Several global trends are now becoming increasingly apparent which, if they continue unabated,
    will likely shape the international offset landscape in the new millennium. This trends suggest
    that:
     Aerospace weapons-related offsets will continue to account for the bulk of offset practices.
     The drop in reported international military exports is counterbalanced by a rise in the value of
    offset demands.
     The value of offset multipliers (incentive weighting factors) is shrinking while nonperformance
    penalties are becoming more severe.
     Indirect offsets are increasing and outpacing direct offset commitments.
     The accumulation of assumed offset obligation by U.S. and European defense suppliers are
    compelling these firms to bid against each other and each other’s supply chains.
     In emerging markets, offsets are spilling over in the civilian sector driven by budgetary
    constraints and a buyer’s market (e.g., South Africa, Turkey, countries in the Middle East).
    These governments are beginning to require more stringent definitions of what constitutes
    “true” economic value in offset packages and in enforcing the fulfillment of offset
    obligations undertaken by suppliers.

     Western suppliers are encountering heightened difficulties in identifying viable indirect


    offset projects in emerging markets because of a limited universe of lucrative or viable
    indirect offset opportunities for which the suppliers must compete with independent cross-
    border business. In these markets, offset obligations are increasingly difficult and costly to
    meet and are, in fact, seldom fully met.
     Finally, because offset objectives in emerging countries are mainly driven by political
    objectives and these countries’ governments have the option to source similar equipment from
    both Europe and the United States, financing packages and the offset level offered tend
    nowadays to outweigh other procurement criteria in the sale of weapon platforms and other
    high-cost government acquisitions.
     Indeed government-backed export financing, while always a key component of government
    procurements, has emerged as an important factor in winning large military equipment orders
    such as, for example, those related to the enlargement of NATO.
     As a result of the current tightening in offset performance conditions, especially those in force
    in emerging markets, the implementation of offset obligations is becoming costlier for foreign
    suppliers and increasingly difficult to fulfill successfully.
    Example
     BHEL looking at counter-trade deals to secure overseas orders

     India’s largest power generation equipment manufacturer’s latest such deal in the works is a
    joint effort with state-owned mineral trading company MMTC Ltd to import palm oil worth $1
    billion (Rs4,510 crore) from Malaysia, the second largest palm oil producing nation, in return
    for setting up a hydropower project in that nation. –

    -May 2010, live mint


     the Government of the Philippines (GOP) will obtain the products and services of foreign
    suppliers through countertrade and technology transfer and industrial investments through
    offset agreements. The Philippine International Trading Corporation (PITC), an attached
    agency of the Department of Trade and Industry, is responsible for implementing the
    countertrade and offset program of the government. PITC sources needed products, develops
    supplier bases and facilitates all trade documentation, and negotiations and contracts for the
    GOP and its agencies. PITC also is very influential in assisting foreign suppliers to develop
    acceptable industrial offset and technology transfer programs. PITC has worked closely with
    DND in the Augusta I and II and GKN defense contracts for the AFP and it is active in
    formulating the offset requirements for the Defense Modernization Program
    Thank You

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