Chapter 12 Countertrade What is Countertrade v A

Chapter 12 Countertrade

What is Countertrade? v. A commercial agreement in which the exporter is required to accept in part/total settlement of its deliveries, a supply of products from the importing country v. It is estimated to account for 15 to 20 percent of world trade.

Benefits of Countertrade Benefits for buyers: Transfer of technology Alleviation of balance of payment difficulties Market access and maintenance of stable prices Benefits for exporters: Increased sales opportunities Access to sources of supply Flexibility in prices

Theories on Countertrade v v Countertrade is positively correlated with a country’s level of exports. Countertrade is partly motivated in order to substitute foreign direct investment. The stricter the level of exchange controls, the higher the level of countertrade activity. Countertrade is positively correlated with a country’s level of indebtedness.

Forms of Countertrade v. Barter v. Switch trading v. Clearing arrangement

Switch Trading Exporter country A Importer country B Switch trader

Clearing Arrangement Bilateral clearing account Country B Country A Goods/services

Parallel Transactions v. Buyback v. Counterpurchase v. Offsets

Buyback Technology Exporter Licensor Country A Transfer of technology/capital goods Cash (hard currency) Purchase of all or partial output over time Cash ( hard currency ) Technology Importer Licensee Country B

Counterpurchase Goods/Services Cash (hard currency) Exporter Goods/Services Country A Cash (hard currency) Importer Country B Importer of third party supplier/ Manufacturer Country B

Offsets Direct offsets: - Coproduction - Subcontractor production - Investments and transfer of technology

Offsets (cont. ) Export of military high-tech products Cash as partial or total payment Exporter Offsets (direct/indirect, partial/total, A–D ) A. Coproduction/licensed production Importer (Government or Private Firm) B. Subcontractor production in country B Country A C. Investment in and technology transfer D. Countertrade (barter, compensation) Country B

Indirect Offsets v. Offset arrangements in which goods and services unrelated to the exports are acquired from or produced in the importing country

Countertrade Concerns of the GATT/WTO v v v Countertrade represents a significant departure from the principles of free trade based on comparative advantage. Countertrade results in higher transaction costs. Countertrade is inconsistent with the national treatment standard that is embodied in most trade agreements.

U. S. Government Policy Toward Countertrade v v U. S. government prohibits federal agencies from promoting countertrade in their business. Adopts a hands-off approach in relation to private transactions.