FLASH SALE! - "FINANCIAL MODELING COURSE BUNDLE AT 60% OFF" Enroll Now

Countertrade

Updated on January 25, 2024
Article byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

Countertrade Definition

Countertrade refers to the trade involving the exchange of goods or services for other goods or services. It may or may not involve partial payment in cash for goods or services bought but will not make complete payment in cash.

It benefits a nation in many ways. It can help countries during a financial and economic crisis. The countries can establish new marketing relationships, strengthen political ties, fairly close a deal, and allows countries with low foreign exchange reserves to engage in imports. Also, the flow of technology products stimulates economic development.

Key Takeaways

  • Countertrade is an international barter transaction with zero or partial involvement of cash settlement.
  • Significant types include barter, counter purchase, buyback, offset, switch trading, and compensation trading.
  • It helps countries find new markets, strengthen political ties and save foreign exchange reserves.
  • Malaysia has entered into barter trade agreements with a handful of nations. They primarily exchange palm oil which is abundant there, to get the products they require from other countries, like military or defense equipment from Russia.

Countertrade Explained

Countertrade is an example of a bilateral agreement or side deal common in international tradeInternational TradeInternational Trade refers to the trading or exchange of goods and or services across international borders. read more, and its importance is ever increasing. It often involves entities from both developed and developing or undeveloped countries. The provisions of the agreement will be mutually appealing to the parties. The deal requires the exporter to purchase products from the partner or importer in an amount proportional to the value of his sale to the importer.

The important element of the deal is reciprocity, and it can be fully or partially devoid of cash settlementsCash SettlementsCash settlement is a settlement option frequently used in trading futures and options contracts, where the underlying assets are not physically delivered at the expiration date. At the same time, only the difference is paid by either of the parties, depending on the market rate.read more. It usually involves the flow of domestic products or technologies from one country to another where they are high in demand due to their scarcity. It can be a spot transaction or involve long-term contracts. Import and export in this framework will manifest efficiency gains.

Financial Modeling & Valuation Courses Bundle (25+ Hours Video Series)

–>> If you want to learn Financial Modeling & Valuation professionally , then do check this ​Financial Modeling & Valuation Course Bundle​ (25+ hours of video tutorials with step by step McDonald’s Financial Model). Unlock the art of financial modeling and valuation with a comprehensive course covering McDonald’s forecast methodologies, advanced valuation techniques, and financial statements.

Types of Countertrade

It represents different types of trading arrangements. Let us discuss a few of them.

Types of countertrade

You are free to use this image on your website, templates, etc, Please provide us with an attribution linkHow to Provide Attribution?Article Link to be Hyperlinked
For eg:
Source: Countertrade (wallstreetmojo.com)

Barter

It is a direct and on-the-spot exchange of products of equivalent value or importance. It doesn’t involve payment using money; parties in the barter system benefit from receiving the products they require by exchanging what they have in surplus. Since money is not a factor, it helps financially weak countries to get into international tradeInternational TradeInternational Trade refers to the trading or exchange of goods and or services across international borders. read more. For example, countries enter into barter deals to obtain military equipment by transferring locally produced commodities.

Counter Purchase

The counter purchase involves an importer obtaining goods and services from an exporter with an assurance that the exporter will purchase other specific goods or services from the importer. For instance, a domestic company can sell its product to a foreign company based on an agreement to buy another product from the foreign company within a set time. This way, the money does not change hands. For example – Brazil exports vehicles, steel, and farm products to oil-producing countries from which it buys oil in return within a set time.

Offset

Another type of countertrade is offset agreement, also known as industrial compensations or industrial cooperation. They are often observed in the deals involving aircraft and military equipment. The agreements usually portray an exporter manufacturer agreeing to the importer’s terms like marketing their products, final assembly of exported items in the importer’s country, and buying other goods and services from the importer’s country. It is generally categorized into direct offset and indirect offset. Direct offset is related to the product or service involved in the trade, and the agreement involves coproduction or subcontracts. Indirect offset agreements are not related to the main product, but the exporter may be obliged to buy goods or services from the importing country.

Switch Trading

Switch trading involves a minimum of three parties. It enables one party to sell its obligation or assurance to another party to a third party. For example, country A exports its product to country B. Country B will ship other products to another country C, known as switch trader. Country C, in turn, provides or exports the product needed by country A.

Buyback

Buyback occurs when one party provides the inputs like technology and equipment to another party and, in return, receives a certain amount of finished goods made using those facilities as a part of compensation. It is also evident that the products shared by the parties to the agreement are related as input and output. For example, one country provides the auto parts, machinery, and workforce to another country and receives a large consignment of auto vehicles.

Compensation Trade

The form of arrangement in which the repayment against the input received is done from the revenuesRevenuesRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more generated by that inputIt also ensures that payment flow is partly in goods and cash.

Examples of Countertrade

Let us explain a few examples signifying its importance:

Malaysia is the world’s second-largest producer of palm oil. In addition, Malaysia has entered into barter trade agreements with a handful of nations. They acquired large infrastructureInfrastructureInfrastructure refers to fundamental physical and technological frameworks that a region or industry establishes for its economy to function properly.read more project contracts, combat tanks, supersonic planes, and other items by bartering palm oil. Malaysia, for example, received 18 MiG-29 Fulcrum fighter jets from Russia in 1994 as part of an offset deal. The countertrade agreement called for a portion of the payment to be made in palm oil and palm oil products.

The second example comes from the agreement between Iran and Sri Lanka. In 2021, Iranian authorities signed a deal with Sri Lanka to allow them to repay its debtDebtDebt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or state.read more to Iran through tea exports. The Ceylon Petroleum Corporation (CPC) of Sri Lanka owes Tehran $251 million for past oil imports. As part of the agreement, Sri Lanka’s Treasury is anticipated to issue around $5 million in rupees every month to pay tea exporters. It is also beneficial to Sri Lanka since they are experiencing financial difficulties in the tourism business due to the Covid-19 outbreak and forex crisis.

Frequently Asked Questions (FAQs)

What is countertrade?

It refers to the exchange of goods and services between two or more parties where they make payment partially or fully with other goods or services rather than a complete cash settlement. This form is widely practiced in international trade connecting export and import activities.

What are the five types of countertrade?

Five types are barter, counter purchase, offset, switch trading, buyback, and compensation trade. The categorization is based on several factors like repayment terms, the relationship between products mentioned in the agreement, etc.

What are countertrade products?

In this kind of trade involving reciprocity, the products can be different things that may vary with countries. For example, a country abundant in oil can exchange it for military equipment from another country. In this case, the products are oil and military equipment. Similarly, nations exchange locally produced or domestic products.

This has been a Guide to Countertrade and its Definition. We explain what is countertrade, examples, products involved, & international barter transactions. You can learn more about accounting from the following articles –

Reader Interactions

Leave a Reply

Your email address will not be published. Required fields are marked *