Counter trade includes for distinct transactions: barter, compensation deals, counter purchase and buyback. Barter is the direct exchange of goods between two parties in a transaction. For example, the Malaysian government bought 20 diesel electric locomotive from General Electric. Officials of the government said that GE will be paid with palm oil supplied by a plantation company. The company will supply about 200,000 metric tons of palm oil over a period of 30 months. This was GE’s first barter deal for palm oil and palm products although its division GE trading has several other counter trade agreements worldwide. No money changed hands, and no third parties were involved. Obviously in a barter transaction the seller must be able to dispose off the goods at a net price equal to the expected selling price, regular for cash transaction. Further during the negotiation stage of a barter deal, the seller must know the market and the price for its items offered in trade. In the General Electrical example, palm oil has an established price and a global market for palm oil and palm products. But not all bartered goods have an organized market and products can range from hams to iron pellets, mineral water, furniture or Olive oil – also some what more difficult to price and to find customers.
Barter may also reduce a country’s foreign debt. To save foreign exchange reserves the Philippine government offered some creditors tinned tuna to repay part of a state $4 billion debt. If tuna is not enough, coconut oil and seaweed extract carrageenan used as an additive in foods, toothpaste, cosmetic and ice cream were offered. The seaweed and tuna exporters will be paid with pesos so no currency leaves the country.
Compensation deals involve payment in goods and in cash. A seller delivers lathes to a buyer in Venezuela and receives 70 percent of the payment in convertible currency and 300 per cent in tanned hides and wool. In an actual deal, General Motors Corporation sold $ 12 million worth of locomotive and diesel engines to Yugoslavia and took cash and $4 million in Yugoslavian cutting tools as payment. McDonnell Douglas agreed to a compensation deal with Thailand for eight top of the range F /A – 18 strike aircraft. Thailand agreed to pay $578 million of the total cost in cash, and McDonnell Douglas agreed to accept $93 million in a mixed bag of goods including Thai rubber, ceramics, furniture, frozen chicken and canned fruit. In a move to reduce its current account deficit, the Thai government requires that 20 to 50 percent of the value of large contracts be paid for in raw and processed agricultural goods.
An advantage of a compensation deal over barter is the immediate cash settlement of a portion of the bill; the remainder of the cash is generated after successful sale of goods received. The company has a use for the goods received, the process is relatively simple and uncomplicated. On the other hand if the seller has to rely on third party to find buyers the cost involved must be anticipated in the original compensation negotiation if the net proceeds to the seller are equal to the market price.
Counter purchase or offset trade, is probably the most frequently used type of counter trade. For this trade the seller agrees to sell a product at a set price to a buyer and receives the payment in cash. However two contracts are negotiated. The first contract is contingent on a second contract that is an agreement by the original seller to buy good from the buyer for the total monetary amount involved in the first contract or for a set percentage of that amount. This arrangement provides the sellers with more flexibility than the compensation deal because there is generally a time period of– 6 to 12 months or longer -for completion of the second contract. During the time that markets are sought for the goods in the second contract the seller has received full payment for the original sale. Further, the goods to be purchased in the second contract are generally of greater variety than those offered in a compensation deal. Even greater flexibility is offered when the second contract is nonspecific that is the books on sale and purchase to keep the books balanced or clear between purchases and sales.
Source: International Marketing