{"id":106,"date":"2015-07-29T21:40:35","date_gmt":"2015-07-29T21:40:35","guid":{"rendered":"https:\/\/courses.candelalearning.com\/intlbusx1xmaster\/?post_type=chapter&p=106"},"modified":"2017-01-09T19:17:54","modified_gmt":"2017-01-09T19:17:54","slug":"countertrade","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/cerritos-internationalbusiness\/chapter\/countertrade\/","title":{"raw":"Reading: Countertrade","rendered":"Reading: Countertrade"},"content":{"raw":"
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Learning Objectives<\/h3>\r\n
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  1. Understand what countertrade is.<\/li>\r\n\t
  2. Recognize why companies engage in countertrade.<\/li>\r\n\t
  3. Know two structures of countertrade.<\/li>\r\n<\/ol>\r\n<\/div>\r\n
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    What Is Countertrade?<\/h2>\r\nSome countries limit the profits (currency) a company can take out of a country. As a result, many companies resort to countertrade<\/span><\/span>,<\/strong> where companies trade goods and services for other goods and services; actual monies are involved only to a lesser degree, if at all. You can imagine that limitations on transferring profits would make the world less flat; so too would the absence of countertrade opportunities in situations where currency transfer limitations are in place. Countertrade is also a resourceful way for exporters to sell their products and services to foreign companies or countries that would be unable to pay for them using hard currency alone.\r\n\r\nAll kinds of companies, from food and beverage company PepsiCo to power and automation technologies giant the ABB Group, engage in countertrade. When PepsiCo wanted to enter the Indian market, the government stipulated that part of PepsiCo\u2019s local profits had to be used to purchase tomatoes. This requirement worked for PepsiCo, which also owned Pizza Hut and could export the tomatoes for overseas consumption.\r\n\r\nThis is one example of countertrade, specifically counterpurchase. By establishing this requirement, the Indian government was able to help a local agricultural industry, thereby mitigating criticism of letting a foreign beverage company into the country.\r\n\r\nAnother example in which companies exchanged goods and services rather than paying hard currency is Bharat Heavy Electricals Limited (BHEL), the largest power generation equipment manufacturer in India. BHEL wanted to secure additional overseas orders. To accomplish this, BHEL looked for countertrade opportunities with other state-owned firms. The company entered into a joint effort with an Indian, state-owned mineral-trading company, MMTC Ltd., to import palm oil worth $1 billion from Malaysia, in return for setting up a hydropower project in that nation. Malaysia is the second-largest producer of palm oil in the world. Because India imports an average of 8 million tons of edible oil every year but consumes 15 million tons, importing edible oil is valuable.[footnote]Utpal Bhaskar and Asit Ranjan, \u201cBhel Looking at Counter-Trade Deals to Secure Overseas Orders,\u201d Live Mint<\/em>, May 11, 2010, accessed November 18, 2010, http:\/\/www.livemint.com\/2010\/05\/11224356\/Bhel-looking-at-countertrade.html<\/a>.[\/footnote]<\/span>\r\n\r\n<\/div>\r\n
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    Why Do Companies Engage in Countertrade?<\/h2>\r\nOne reason that companies engage in this practice is that some governments mandate countertrade on very large-scale (over $1 million) deals or if the deal is in a certain industry. For example, South Korea mandates countertrade for government telecommunications procurement over $1 million. When governments impose counterpurchase obligations, firms have no choice but to engage in countertrade if they wish to sell goods into that country.\r\n\r\nCountertrade also can mitigate the risk of price movements or currency-exchange-rate fluctuations. Because both sides of a countertrade deal in real goods, not financial instruments, countertrade can solve the inflation risk involved in foreign currency procurement. In effect, countertrade can be a better mechanism than financial instruments as a way to hedge against inflation or currency fluctuations.[footnote]Sang-Rim Choi and Adrian E. Tschoegl, \u201cCurrency Risks, Government Procurement and Counter-Trade: A Note,\u201d Applied Financial Economics<\/em> 13, no. 12 (December 2003): 885\u201389.[\/footnote]<\/span>\r\n\r\nFinally, countertrade offers a way for companies to repatriate profits. As you\u2019ll see in Chapter 15 \"Understanding the Roles of Finance and Accounting in Global Competitive Advantage,\" some governments restrict how much currency can flow out of their country. (Governments do this to preserve foreign exchange reserves.) Countertrade offers a way for companies to get profits back to the home country via goods rather than money.\r\n\r\n<\/div>\r\n
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    Structures in Countertrade<\/h2>\r\nThe very first trading\u2014thousands of years ago\u2014was based on barter. Barter<\/span><\/span> is simply the direct exchange of one good for another, with no money involved. Thus, barter predates even the invention of money.\r\n\r\nDoes barter still take place today? Yes\u2014and not just among two local businesses exchanging something like a haircut for a therapeutic massage. Thanks to new innovations and the Internet, barter is taking place across international borders. For example, consider the Bartercard. Established in 1991, Bartercard functions like a credit card, but instead of funding the card through cash in a bank account, a company funds the card with its own goods and services. No cash is needed. Over 75,000 trading members in thirteen countries are using the Bartercard, doing $1.3 billion in cashless transactions annually.[footnote]Bartercard website, accessed November 23, 2010, http:\/\/bci.bartercard.com<\/a>.[\/footnote]<\/span>\r\n\r\nIn a counterpurchase<\/span><\/span> structure, the seller receives cash contingent on the seller buying local products or services in the amount of (or a percentage of) the cash. Simply put, counterpurchase occurs when the seller receives cash but contractually agrees to buy local products or services with that cash.\r\n\r\n<\/div>\r\n
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    Disadvantages of Countertrade<\/h2>\r\nCountertrade has a tarnished image due to its associations with command economies during the Cold War, when the goods received were often useless or of poor quality but were forced upon companies by command-economy government regulations. New research is showing that countertrade transactions have legitimate economic rationales, but the risk of receiving inferior goods continues.[footnote]Peter W. Liesch and Dawn Birch, \u201cResearch on Business-to-Business Barter in Australia,\u201d in Getting Better at Sensemaking<\/em>, ed. Arch G. Woodside, Advances in Business Marketing and Purchasing, vol. 9 (Bingley, UK: Emerald Group Publishing, 2001), 353\u201384.[\/footnote]<\/span> Most countertrade structures, except for barter, make sense only for very large firms that can take a product like palm oil and\u2014in turn\u2014trade it in a useful way. That\u2019s why BHEL partnered with MMTC on the Malaysia countertrade deal\u2014because MMTC specializes in bulk commodities. Similarly, PepsiCo was able to make use of the tomatoes it was required to counterpurchase because it also operates a pizza business.\r\n
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    Key Takeaways<\/h3>\r\n