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Disadvantages of international barter

Scientific research




Lidia Fedorova

Violetta Pachina

Mikhail Smirnov

Maria Terkina

Irena Timofeeva


Saint- Petersburg

Classifying Countertrade Arrangements

The terminology used in countertrade is unfortunately characterized by a lack of standardization. A number of different expressions are often used to mean the same thing and sometimes the same expression is used with several different meanings. Examples of some terms used are: barter, countertrade, counter purchase, counter sale, clearing agreements, switch trading, bilateral trading, offset trading, reciprocal trading, parallel trading, linked trading, triangular trading, compensation agreements or arrangements, buy-sell, pay-back, back to- back transactions, and other terms too numerous to list


Barter is a onetime exchange of goods with no direct use of money. There can be many variations of this basic exchange:

· Parallel barter or counter purchase or buy-back takes place when goods are exchanged for equal amounts of money.

· Offset is parallel barter with a promise to assist in the sale of goods replacing one of the contractual obligations to purchase goods.

· Reverse reciprocity is parallel barter for scarce goods such as oil for nuclear power plants.

· Multilateral barter is a chain of barter transactions contracted simultaneously among more than two parties.

· Parallel barter with co-operation is a set of two offsetting parallel barter arrangements between three organizations.

· Barter with co-operation and bank credit allows for a timing difference between the two parts of a parallel barter.


Barter Economy may be regarded as the mother of all economic concepts prevalent today. It is the most primitive and very basic economic theory, which does not consider currency as a medium of exchange. Rather, commodities and services are considered to be the means of all exchanges, as money was unknown to man in ancient times.

The beginning of the barter trade originated at the time human societies began to develop, and continues to exist in some societies today. Modern day money developed through the trades and exchanges of bartering with the primary exchange being that of "cattle." Cattle, which included everything from cows to sheep to camels, were the oldest form of modern day money. This developed into the trade of shells and other items, and continued to evolve all the way to the modern form of paper money in use today.

Bartering is traditionally common among people with no access to a cash economy, in societies where no monetary system exists, or in economies suffering from a very unstable currency (as when very high rates of inflation hit) or a lack of currency. In these societies, bartering oftentimes has become a necessary means of survival.

Barter and countertrade were very popular in the 20th century, it played a significant role in the trade between Western countries and countries of Eastern bloc and the third world countries. In the second part of the 20th century barter and countertrade's share of annual world trade volume growed rapidly - from an estimated two percent in 1976 to as much as 30 percent for 1982.[1] In East-West trade, barter and countertrade reach about 50 percent, due to hard currency shortages endemic to centrally planned economies. Many third world nations have substantial foreign debts with Western financial institutions, which produce hard currency shortages and exchange controls. Following a tradition established earlier by Eastern bloc economies, these third world countries increasingly rely on the exchange of basic commodities to acquire Western capital goods, and to avoid depleting hard currency reserves. OPEC nations also found barter and countertrade attractive, exchanging oil for sophisticated military and industrial equipment. Additional reliance on barter was stimulated by the desire of Western governments to reduce credits to third world nations on the brink of insolvency, and to Eastern bloc nations, as well, due to their increased indebtedness and for political reasons.


Responding firms produce a wide spectrum of products from food, apparel, industrial chemicals, extractive commodities, transportation equipment and services, industrial machinery, defense related products, to consumer goods and consumer services. The product lines most frequently bartered or countertraded by these firms were industrial equipment and machinery, transportation equipment and parts, and industrial chemicals - product lines previously identified as most subject to barter and countertrade demands.

Compared to conventional international trade, the majority of the products bartered or countertraded were commodities or low technology products. High technology products were more likely obtained by conventional methods of exchange. For firms whose product lines are similar for both types of transactions, simple barter or offset were the most frequently used arrangements. Firms whose product lines are more diversified, however, used more complex trading arrangements, and frequently had a barter or countertrade department or a trading subsidiary. For firms trading a less diversified product line, transactions are generally channeled through existing organizational structures such as the export department or the international division.

The extent of firms' product diversification in barter and countertrade is also associated with the degree of market diversification. Firms with a more diversified product offering for barter/countertrade are active in three or four times as many markets. While Eastern and Southern Europe are the most frequent regions for these firms, a surprising amount of activity occurs in Africa and Latin America. The latter destinations fit the recent movement among commodity exporters toward countertrade as a means to compensate depressed earnings from exports. Firms offering a narrower or similar product line were concentrated in Eastern Europe with minimum participation in all other regions.

Advantages of international barter

The advantages of barter and countertrade cluster around three subjects: market access, foreign exchange, and pricing.

Among the many advantages related to market access, managers specified opportunities to 1) enter new markets, particularly socialist nations within the eastern bloc; 2) facilitate transactions with governments and expand business contacts; 3) encourage further business by sales of foreign partners' products through counterpurchase arrangements; 4) gain an edge over competition; and 5) reduce the impact of protectionist regulations imposed by foreign governments.

Managers' comments on the issue of foreign exchange and pricing include barter/countertrade's contribution to 1) reducing problems of fluctuating currency values; 2) lessening risk by trade in products rather than unstable currencies; 3) avoiding exchange controls; 4) allowing purchases by countries with nonconvertible currencies; and 5) guaranteeing payment from cash-strapped eastern bloc and developing markets. Two additional pricing advantages related to commodities and taxation may dissipate, should the U.S. government take an active role in discouraging barter and countertrade. First, the advantage of shielding commodity prices may invite competitors' claims of price discrimination or dumping, particularly if a few firms dominate the market, or if substantial discounts are used to consummate barter/countertrade transactions. These claims may subject offending firms to antitrust or anti-dumping laws. Second, tax advantages may also dissolve should the Internal Revenue Service take an aggressive stance on how barter/countertrade transactions are treated. Tax implications already complicate these transactions, since part of the value of products or services received constitutes taxable income.

Disadvantages of international barter

Managers' opinions about the disadvantages of barter and countertrade revolve around the issues of profitability, pricing, product quality, risk, and the added time, costs and complexities required by these transactions.

On the issues of profitability and pricing, disadvantages include: 1) uncertainty in projecting the potential profitability of any given transaction; 2) diminished capital flow limiting financial resources available to the firm; and 3) the higher costs due to the complexities of the transactions. Executives offering basic commodities also see special problems in the fluctuating value of goods when trading arrangements extend over a long time period. Additional disadvantages are: 1) the difficulties of finding suitable markets and setting suitable prices for over-priced goods received in barter, particularly in glut market conditions; 2) the complexities of agreeing on commodity prices or determining product value for capital goods during negotiations; and 3) the resulting lower profit margins compared to conventional sales. With long term trading arrangements, such as compensation trading, these pricing issues are magnified.

Closely linked to the pricing issues are managers' views about low product quality, which range from nonconformity of goods with contract specifications, to the difficulty of inspecting or testing goods received in simple barter or in more elaborate, compensation trading arrangements.

Risk also is seen as a significant disadvantage which could be predicted considering the statements of respondents about profitability, pricing, and product quality. Naturally, the amount of risk exposure depends on the trading arrangement. Executives whose firms use simple barter or counterpurchasesee significant risks in holding merchandise until buyers are found, while the executive of a firm involved in an offset/compensation trading arrangement views technology transfer as a major risk.

All respondents see these alternative trade approaches as adding time, complexities, and costs to international transactions, particularly for companies with elaborate countertrade arrangements. The estimate, by an experienced European trading specialist, that only 5-10% of negotiations results in a final deal, explains respondents' aggravationwith the lengthy negotiation process. Complexities are linked to handling negotiations, arranging prices, setting up and administering deals, and coordinating activities between departments or divisionswithin the firm. Executives also see tax and customs requirements as adding complications, since part of merchandise value represents taxable income and customs officers must value and apply duties to imports "paid" for in kind.

A further complexity is that the timing of transactions, especially for perishable, consumer services may favor one party over another. For firms receiving goods which are not complementary to existing product lines, respondents indicate that marketing costs will generally be higher than those of cash sales. Without question, the combined impact of these factors increases costs, which explains why large firms dominate barter and countertrade today.

Several general criticisms raised by executives suggest the far-reaching impact of barter and countertrade on the system of international exchange: l) a projected shift from traditional financing approaches to countries' insistence on partial or total barter, assuming present conditions in the international economy remain stable; 2) a confusion of seller-buyer responsibilities in the marketplace; and 3) a sweeping indictment of these approaches as essentially burdens on world trade, which represent foreign countries' attempts to solve internal problems by imposing external solutions.


Barter in Russia

Barter transactions were possible at an unprecedented scale in Russia’s transition economy in part because a double coincidence of wants routinely occurred. Using relational capital established under the Soviet regime, Russian food producers and processors traded goods; suppliers to construction or construction materials companies were willing to take payment in services or product. Similar types of pairings were widespread in the early 1990s, motivated in large part by deteriorating economic and financial conditions, and facilitated by the Soviet legacy of firms that routinely, albeit unofficially, traded goods to facilitate plan fulfillment. Yet frequently, multiple firms were involved in what would have been a single transaction in a cash economy. Barter chains emerged as Russian enterprise directors negotiated for the acquisition of inputs, sales and delivery of output, and means for payment of their workers in cash or in kind.

Three major explanations see barter as a choice made by firms. The first explanation involves the ‘virtual economy’ hypothesis, according to which firms use barter to hide revenues and exaggerate costs in order to avoid restructuring. A second explanation states that barter allows firms to take advantage of their monopoly power to price discriminate. According to a third explanation, firms choose barter to avoid taxation. Russia’s tax system prior to 1998 was confiscatory, based on revenues and not on profits. Thus, it was rational to avoid taxes because they could account for up to 120 percent of revenues. Moreover, during the early stages of transition, tax payment was due upon payment for the transaction. In the near hyper-inflationary environment between 1992 and 1995, delaying payments significantly reduced the firm’s actual tax burden

Date: 2015-12-24; view: 3963

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