An introduction to countertrade

by Teresa Acklin
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   This article, the first in a series of three on the subject of countertrade, was prepared specially for World Grain by John M. Reams, a partner in the Kansas City, Missouri, U.S., office of an international law firm, Bryan Cave. Mr. Reams is a specialist in international trade in commodities.

   Countertrade can create opportunities in economies such as those in Eastern Europe, Central Europe and the former Soviet Union, where the banking sector has limited capacity and there is a shortage of hard currency. Countertrade transactions are, however, more complicated than sales transactions. They involve greater risk for the participants and require detailed knowledge of import/export and tax regulations. The purpose of this article, the first of three on countertrade, is to give an introduction to the subject by:

   1 — analyzing some of the various forms that countertrade transactions may take and the roles the various participants in such transactions may play;

   2 — looking at problems that can arise from such transactions, and;

   3 — assessing the importance such transactions play in world trade.

   The most common forms of countertrade are barter, counter-purchase and buy-back. Barter transactions involve the exchange of goods for goods. In a counter-purchase transaction, the exporter sells goods to the importer and is required, as a condition of the sale, to purchase other goods from the importer or its designee. In a buy-back transaction, the exporter supplies equipment or technology to the importer, receives cash as payment and, in return, is required to purchase products resulting from the equipment or technology. If the exporter does not receive cash as payment, he will have the right to purchase the products of the equipment or technology on favorable terms. Buy-back and counter-purchase are the most common forms of countertrade. Barter is relatively rare.


   There is no uniform terminology to describe the various forms of countertrade. When one reads that a transaction was a specific type of countertrade, one can only be certain, without details of the transaction, that the transaction was not a sale of goods for cash with no reciprocal obligations. The United Nations Commission on International Trade and Law (U.N.C.I.T.R.A.L.) is attempting to promote a common terminology in international countertrade transactions.


   Barter is the simplest form of countertrade, but its very simplicity makes it ill-suited to complicated countertrade transactions. Barter deals, unlike most other countertrade transactions, are contained in a single agreement. Because there is no monetary valuation and no provision for monetary adjustment in the event of default, it is essential that the goods be defined precisely both as to quantity and quality.

   Much attention is given in barter deals to the issue of who must deliver first, since the party who delivers first is especially vulnerable to non-performance by the other party. Because of the nature of a barter deal, documentary letters of credit cannot be used to assure the performing party of the other party's performance. Performance guarantees in the form of bank guarantees or, in the U.S., standby letters of credit, are often used for that purpose. If both parties insist on performance guarantees, however, the result may be stalemate, since the non-performing party could effectively thwart the performing party by threatening a claim under the performing party's guarantee.


   Counter-purchase involves an export contract and a counter-purchase contract. Often the parties do not agree to specific counter-purchase goods, but to a list of products from which the counter-purchaser can select to fulfill his commitment. Obviously, the longer the list, the better for the counter-purchaser. Generally, the list will not contain products for which the counter-seller already has export markets. The value of the products to be counter-purchased will often be expressed as a percentage of the value of the goods originally imported. The percentage will depend on the need the importer has for the products. For example, imported soft drinks may require a counter-purchase obligation of 100% of the value of the imported soft drinks, whereas imported technology may require a lower percentage for the counter-purchase obligation.


   Under buy-back transactions, the exporter supplies equipment or technology and in exchange receives as payment cash or the products that are the result of the use of the equipment or technology, i.e. the supply of a flour mill in exchange for flour, the supply of a lumber mill in exchange for lumber, the supply of livestock embryos in exchange for livestock. If the exporter receives cash as payment, he will, in return, be required to purchase the products of the equipment or technology.

   Substantial periods of time elapse from the delivery of the equipment or technology until there is counter-delivery of the products in payment. The delays in counter-deliveries and the risks posed by such delays, such as changes in governments or government policies, argue for enforceable performance guarantees from the importer, i.e. guarantees by Western banks. Such guarantees may be difficult to obtain, however, because a lack of hard currency or credit may be a primary reason for the importer entering into a buy-back transaction.

   The next article in the series will provide examples of countertrade and explain counter-purchase and buy-back terminology.