2. Key Discussion Points/Key Learning Objectives
• To discuss the Forms of Countertrade.
• To understand the Pros and Cons of
Countertrade.
• To discuss the challenges of International
Market
3.
4. Why Export?
• Exporting is a way to increase market size and
profits (LPG)
– lower trade barriers under the WTO and regional
economic agreements such as the EU and NAFTA
make it easier than ever (ISLFTA, SAARC,SAFTA)
• Large firms often proactively seek new export
opportunities, but many smaller firms export
reactively
4
5. Why Export?
• Exporting firms need to
– identify market opportunities
– deal with foreign exchange risk
– understand the challenges of doing business in a
foreign market
5
6. What Are the Challenges of
Exporting?
• Common Problems include
– poor market analysis
– poor understanding of competitive conditions
– a lack of customization for local markets
– poorly executed promotional campaigns
– problems securing financing
– an underestimation of the export documentation and
procedures
– a general underestimation of the differences and
expertise required for foreign market penetration
6
7. How Can Firms Improve Export
Performance?
• Many firms are unaware of export
opportunities available
• Firms need to collect information
• Firms can get direct assistance from some
countries and/or use an export management
companies
– both Germany and Japan have developed extensive
institutional structures for promoting exports
7
8. What Is Countertrade?
• Countertrade - a range of barter-like agreements
that facilitate the trade of goods and services for
other goods and services when they cannot be
traded for money
– emerged as a means purchasing imports during the1960s
when the USSR and the Communist states of Eastern
Europe had nonconvertible currencies
– grew in popularity in the 1980s among many developing
nations that lacked the foreign exchange reserves required
to purchase necessary imports
– notable increase after the 1997 Asian financial crisis
8
9. EG-S
• Countertrade also occurs when countries lack
sufficient hard currency, or when other types of market
trade are impossible.
• In 2000, India and Iraq agreed on an "oil for wheat and
rice" barter deal, subject to United Nations approval
under Article 50 of the UN Persian Gulf War sanctions,
that would facilitate 300,000 barrels of oil delivered
daily to India at a price of $6.85 a barrel while Iraq oil
sales into Asia were valued at about $22 a barrel. In
2001, India agreed to swap 1.5 million tonnes of Iraqi
crude under the oil-for-food program.
9
10. What Are the Forms of
Countertrade?
• There are five distinct versions of countertrade
1. Barter - a direct exchange of goods and/or services
between two parties without a cash transaction
– the most restrictive countertrade arrangement
– used primarily for one-time-only deals in transactions
with trading partners who are not creditworthy or
trustworthy
10
11. BARTER SYSTEM
• 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)
• Minerals and Metals Trading Corporation of India
(MMTC) imported 50,000 tons of rails value of
about $38 million from a Yugoslavian company
against iron ore concentrates and pellets of the
same value.(Source: www.citeman.com)
11
12. Counterpurchase
2. - a reciprocal buying agreement
– occurs when a firm agrees to purchase a certain amount
of materials back from a country to which a sale is made
12
13. • In counter purchase agreement seller receives the full amount in
cash, but agrees to spend an equal amount of money in that
country within a given time. In contrast to bartering, both parties
pay for their purchases in cash but agree to fulfill their counter
commitments.
• At the same time, transactions do not become part of a single
contract, but are entered into two different contracts. Counter
purchase is also called “Parallel Trading” or “Parallel Barter”.
Example:
• Pepsi Cola 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)
•
13
14. What Are the Forms of
Countertrade?
3. Offset - similar to counterpurchase - one party
agrees to purchase goods and services with a
specified percentage of the proceeds from the
original sale
– difference is that this party can fulfill the obligation
with any firm in the country to which the sale is
being made
14
15. 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. It may be in many
forms such as coproduction, license production,
subcontractor production, technology transfer, overseas
investment, research and development, technical assistance
and training, or patent agreements etc.,
•
• Offset activity can be divided into two main categories
direct and indirect:
15
16. 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.
•
• .
16
17. • Let us take an example
that 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. The
below diagram will
make the example
easier
17
18. • 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.
18
19. • Let us take the same
example of
direct offset in which an
aircraft manufacturer
sells a passenger plane
to a buyer in another
country but here instead
of buying the spare
parts of passenger plane
from the buyer’s
country, the seller
agrees to invest in a
chipboard factory in
buyer’s country. Now
the chipboard is not
related to passenger
plane. This is
called Indirect Offset. 19
20. OFFSET
• The benefits of offset agreement is that the importing country
can save the foreign exchange on high value imports, avoid an
increase in foreign debt, increase local employment, introduce
state of the art technology in local industries, reduce
dependence on foreign suppliers, and increase the level of
foreign investment.
• Offset has been popular among the governments all over the
world, as they have been purchasing heavy military
equipments, but now it is gaining momentum in other sectors
also.
• Typically, offsets deals are common in defense, aerospace and
telecommunications sectors and also the local content “offset”
is usually not more than 20% to 30% of the deal value.
20
21. BUYBACK
4. A buyback occurs when a firm builds a plant in a
country or supplies technology, equipment,
training, or other services to the country
– agrees to take a certain percentage of the plant’s
output as a partial payment for the contract
21
22. BUYBACK
• 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)
22
23. What Are the Forms of
Countertrade?
5. Switch trading - the use of a specialized third-party
trading house in a countertrade arrangement
– when a firm enters a counterpurchase or offset agreement
with a country, it often ends up with counterpurchase
credits which can be used to purchase goods from that
country
– switch trading occurs when a third-party trading house
buys the firm’s counterpurchase credits and sells them to
another firm that can better use them
23
24. • 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.
24
25. For example: An exporter in Poland exports transport
equipments to Greece and in return does not want
processed food from the importer of Greece as payment.
It can sell the processed food to a German company,
which will pay in Euros to the Polish exporter, which is
hard and convertible currency.
25
26. In a typical switch trade transaction a switch dealer or trader is
involved. If we again take the above example, the switch dealer
will pay the Polish exporter in hard currency less the switch
dealer’s fee (disagio). The switch trader will find a German
company, which will buy processed food from Greece importer
and pay the switch trader in Euros.
26
27. What Are the Pros of
Countertrade?
• Countertrade is attractive because
– it gives a firm a way to finance an export deal
when other means are not available
– it give a firm a competitive edge over a firm that is
unwilling to enter a countertrade agreement
• Countertrade arrangements may be required
by the government of a country to which a
firm is exporting goods or services
27
28. What Are the Cons of
Countertrade?
• Countertrade is unattractive because
– it may involve the exchange of unusable or poor-
quality goods that the firm cannot dispose of profitably
– it requires the firm to establish an in-house trading
department to handle countertrade deals
• Countertrade is most attractive to large, diverse
multinational enterprises that can use their worldwide
network of contacts to dispose of goods acquired in
countertrade deals
28
29. Benefits of Countertrade
• Allows entry into difficult markets
• Increases company sales
• Overcomes currency controls & exchange
Problems
• Increases sales volume
• Overcomes credit difficulties
• Allows fuller use of capacity
• Allows disposal of declining products
• Provides sources of attractive inputs
• Gain competitive edge over competition
29
30. 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.
30
31. DRAWBACKS
• 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.
31
34. Major Imports items of India
• Fertilizers, Edible Oil, Sugar, Pulp and waste paper, metal
scrap, Iron and Steel, and petroleum products, Pearls,
Precious and Semi-Precious stones, Machinery, Project
Goods, Pulses, Coal and its derivatives, etc….!
35.
36. Major Importing Partners of India
• China which stands at 11.1%.
• Saudi Arabia i.e. 7.5%,
• USA 6.6%,
• UAE 5.1%,
• Iran 4.2%,
• Singapore 4.2%
• Germany 4.2%.
38. IMPORTANCE OF IMPORTs AND EXPORTs
• Indian economy has seen a paradigm shift in the
past decades as the focus has shifted from
agricultural sector to Export-Import. Now a days,
there are many companies that are engaged in
an exchange of varied goods ranging from heavy
machinery, precious metals, agro-products,
garments to electronic goods and so on. .
