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close this book CERES No. 99 - May-June 1984
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The temptations - and troubles - of barter

Three kinds of counter-trade.

Broadly speaking, there are three kinds of counter-trade. The first, or classical. is the nearest to traditional barter. It consists of a single transaction in which two parties. either companies or governments, agree to exchange goods of equal value. The best known example is the "milk for bauxite" agreement negotiated in 1982 by the United States and Jamaica. These agreements are rather rare largely because, despite their appeal in certain situations, it is difficult to find appropriate partners whose needs correspond exactly.

The second kind is the "counter purchase arrangement". It is more common but also more complex. The exporter, generally an exporter of manufactured goods or services, agrees that a certain percentage of the payments will be made in the form of goods produced by the importer. In 1982 nearly 25 per cent of the automobiles exported to developing countries by the French company Renault were sent under agreements of this kind. 2 Beyond the negotiations themselves, which are much longer and more complex than negotiations for conventional trade agreements, counter-purchase arrangements are often spread over a number of years (average three to five). The guarantees, currency regulations, and choice of products are some of the factors that vary according to the arrangements.

As long as it is not a question of a multinational company with extremely diversified activities or of a government. exporters most often resell the merchandise reserved as part of a counter-purchase arrangement through either one of their affiliates or with one of the many companies specializing in this sort of operation acting as intermediary. This explains exporters' preference for raw materials or semifinished products, since their resale is assured.

The third form of modern barter, the "buy-back" transaction, allows the importer to resell goods produced thanks to equipment or technology furnished by the exporter. The classic example is the sale of Soviet gas to the European countries that supplied the technology needed to construct the trans-Siberian pipeline. Here, the value of the buy-back, which is normally spread over 10 to 15 years (that is. a longer period than in the case of the counter-purchase arrangement), is generally greater than that of the original export, while that of a counter-purchase is more often lower or the same.

Finally, the last variant of barter. practiced especially in countries whose currency is weak it allows them to avoid using hard currencies is the clearing arrangement. Two partners can exchange products within the limits of an amount fixed in advance. This formula for a bank guarantee takes many shapes and generally allows a re-balancing of accounts after a period of a month. six months. a year, etc. Here again, the terms of the arrangement (amounts, formulas for security, etc.) are numerous, and not much is usually said publicly about the agreements themselves.

Better than nothing.

"It is better." says the sales director of a large firm, -'to exchange merchandise than to sell nothing at all." For him. as for his counterparts in developed countries, all of whom prefer classical trade agreements, counter-trade is only a last resort, albeit a profitable one that allows them to circumvent two major obstacles: one, a chronic shortage of hard currency. and the other, the closing of markets of newly industrializing countries (NICs) such as Brazil, Mexico, India, and Algeria, whose foreign debt takes all their resources to offset their imports. The counter-trade agreement represents equally a short-term solution for a Western country which withholds costly stocks of surplus products subsidized by the domestic market. That is essentially the reason why the US made the agreement with Jamaica (mentioned earlier) that assured it of an increase in supply of a strategically important raw material.

No more than exporters do importers lack arguments to justify their making more and more agreements of this kind. "The counter-trade of the past with one or more developed countries," they are saying in the NICs, "allows us to obtain products or technology essential to our growth that we could not get by the other means available to us." In exchanges with less developed partners, on the other hand, it a]lows export of an intermediate technology or manufactured or semi finished products at lower cost than on the Western market. and to obtain essential supplies in return.

Brazil has many such agreements with African countries. ideal partners in the context of South-South cooperation Brazilian Volkswagens for Nigerian oil. coffee. and sugar. iron and steel products for Algerian oil; help with road building. hydroelectric dams, etc. In July. 1983. Brazil signed a bilateral agreement with Iran to the amount of $600 million. In return, Iran undertook to acquire during the same period Brazilian agricultural and manufactured products worth $400 million.

Not everyone will go as far as to assert, as did the Prime Minister of Malaysia. that counter-trade is "a weapon against the protectionist policies of developed importing countries". On the other hand, man importers from developing countries maintain that these arrangements are a good way to promote their export and to break into new markets in the absence of an effective marketing service.

Are they right? After the first wave of enthusiasm, the most discerning observers tend today to take the side of the early opponents in a growing wave of criticism which, if it doe not condemn counter-trade outright should persuade its defenders developing countries to adopt a more cautious approach.

Liberal credo.

The International Monetary Fund (IMF) has always condemned the practice of counter-trade. It should be noted especially that if certain governments are prevented from recourse to counter-trade. it is because they are not competitive and that agreements of this kind tend to keep them that way. Certainly, this liberal credo is an indirect manoeuvre against the use of resources which ought, according to the Fund, to he used to paw off heavy foreign debts rather than to alloy. new imports. But. warns an economist. to believe what one reads nearly everywhere, one might think that counter-trade is the new panacea that will relieve the ills of the international economy. Whereas, close examination reveals that it has nowhere near all the advantages one might like to believe.

According to Gary Banks, "The counter-trade system is bad for world trade. Without actually threatening it. these agreements far from reinforce multilateral trade and generally make transactions less clear."

The argument used most frequently by the importing firms or countries to justify such practices access to new markets is exactly what opponents are unanimous in refuting and not only the opponents. Often direct experience leads the designer of these arrangements to change their positions. " When you impose counterpart purchases on a supplier," explains R.J. Cummings, commercial counsellor of the New Zealand embassy in Paris. 'he begins by asking you for a list of products. Then he tells you that he can sell this or that. and he chooses some of your best products. Is he not finally going to resell them on the markets that you would have been able to cover yourselves?" 5

Competing with itself.

One of the risks of' this kind of' operation." says an UNCTAD expert, "is that the country does not generally control the destination of its products. It believes it is breaking into a new market. but it has no assurance that, let's say. the livestock bought by a Western firm under a counter-trade agreement will not in the end be resole at a lower price in a third country where the first country was actually already beginning to get a foothold on its own. In other words, the first country is competing with itself without knowing it.

On the other hand. in disposing of its merchandise like this the importer, whether private company or government. deprives himself of direct contact with the market, which is the basic source of information about requirements for a product. Besides favouring production of second-class merchandise. indirect marketing keeps the manufacturer dependent on the middle-man who will circulate his product, sometimes after changing its appearance. Finally, the most harmful aspect of counter-trade. the countries or firms that invoke such motives to justify it deprive themselves of direct marketing experience. and they recognize this as one of the principal reasons for the difficulties they have finding new outlets for their goods. Their inexperience is all the more detrimental since the few efforts made in this direction are generally centred on Western markets, while very often developing countries could be more appropriate partners for the trade relationships they wish to establish."

The difficulties that could be encountered by a government or company called to negotiate a counter-trade agreement with a partner more economically powerful than itself are clear. Pressed by needs, having neither strategic advantages nor the shelter of the multilateral agreements found on the world market, the importing country can be tempted to lower selectively the prices of the products it wants to trade or, with the same effect, to devalue its currency indirectly in order to satisfy the requirements of a particular bilateral agreement; this is made all the easier since the terms of these arrangements are rarely known.

Certainly, in a world where competition in quality is diminishing because of the strict standards to which big international contracts conform, only prices make a difference, and. beside prices, the capacities to respond to demands for compensation. the gap between counter-purchase and promotion of sales, it is said at the French ACECO. is becoming smaller and smaller. It only remains, say some orthodox economists, that any seller who wants to impose a counterpart buy-back tends to integrate into the prices the costs that result therefrom: the intermediary's commission, marketing expenses for products whose market it does not necessarily control, etc. The importer may well, in the end, be paying more for its imports.


Finally, will an importer of raw materials really lessen the risks of fluctuation of the value of his imports because of a counter-trade agreement? In this case. as in that of a classic long-term trading agreement, the "rigidity" factor, on an unstable market, remains; and also, as I.M. Sturgess, of the Department of Agricultural Economics at Cambridge University, points out, if the loss can seem psychologically or politically smaller, it is nevertheless economically identical. 7 On the other hand, it is a fallacy that counter-trade agreements allow firms or countries dependent on weak currencies to organize a parallel commercial network separated from the clamour of the global market. Far from reinforcing the respective currencies concerned. this will only confirm their weakness.

Taking account of the rigidity and opacity of the market, of the absence of control over the final destination of products, of the lack of direct relations with the market. of lost opportunities to acquire marketing experience, of risks of direct or indirect devaluation of products or national currency, of the monetary weakness thus maintained. and the risks associated with politicization of economic relationships, particularly harmful to small countries should counter-trade be eliminated?

The judgement of Gary Banks is severe: "Any attraction which counter-trade (and other forms of barter) may have for developing countries is largely based on a misapprehension concerning its ability to ameliorate their difficult trade and balance of payments situation in the context of a world recession. In practice, counter-trade will almost certainly make matters worse."

Desperate cases.

But, according to an UNCTAD official, counter-trade can be useful in desperate cases, such as the absolute necessity of getting hard currency or unloading a production surplus when the national market is too restricted. But if it often happens that the developing countries have no choice, they should always have two possibilities in mind - one a traditional and the other a counter-trade agreement to be able to decide which course to follow. As far as possible, they should be sure that their normal markets will not be touched by the products of counter. trade, especially if it is a question of a traditional production or a limited market.

Is counter-trade a necessary evil which limits multilateral trade without actually destroying it, by multiplying the short-term solutions and the longer-term inconveniences? Is it an illusion? Even at the level of South South trade, it is preferable for two countries to establish trade relations without recourse to counter-trade arrangements: so that trade exchanges are created along with the chance to gain experience of the world market Small developing countries do not have, moreover, a production capacity sufficient to justify systematic barter and raw materials, which constitute the basis of their production, are generally easier to sell on the world market than manufactured or semi finished products.

In spite of everything it is foresee able that the tendency toward counter-trade will last as long as there are no other solutions to the NIC's serious, problems of balance of payments in years to come the problem will come up most frequently for them Certainly, the 1930s and the near destruction of the multilateral system of trade are only a memory, but the new problems can seem unbearable to those who have them.