Why has countertrade grown so rapidly and will it continue to grow? What are the economic driving forces propelling its growth? Answers to these questions are important for understanding and evaluating countertrade opportunities.
Reasons for the Growth of Countertrade
There are many reasons for the growth of countertrade. These include:
1. Limited access to hard currency finances for most LDCs and COMECON countries. Countertrade avoids deterioration of payment imbalances.
2. Protectionism. By linking exports and imports in countertrade, there is often no net loss of jobs. Occasionally, jobs may even be created on a net basis. Countertrade is a viable response to increasingly widespread restrictions on international trade and investment.
3. New markets can be developed for a countries’ products with countertrade since it often beings in much needed marketing and quality control skills. Countertrade is often viewed as a good way to ‘prime’ a western market for developing countries’ goods. Thus, countertrade can be especially important for countries with small internal markets.
4. Surplus and poorer quality goods can be bundled with other goods and sold. Such goods may otherwise be difficult to sell. This can be an important consideration for centrally planned economies and for the western countries’ smokestack industries with overcapacity. Countertrade disguises dumping and discounting. It helps maintain artificial prices in periods of temporary surpluses or in periods when exchange rates are maintained at unrealistic levels.
5. Countertrade through bilateral and multilateral trade agreements may strengthen political ties between countries and may serve as a conduit for foreign aid. It may also be used to develop self-sufficiency within a region or an ideological block.
6. Countertrade can be used as an alternative to foreign equity investments, especially in areas of high risk. Countertrade and contract manufacturing allows MNCs access to lower cost resources. Countertrade allows MNCs an opportunity to serve huge markets not otherwise available, e.g. 260 million Soviets, 105 million other COMECON residents, over a billion Chinese, 700 million Indians, etc.
Countertrade continues to grow as it is profitable and creates value for the participants. Why is it profitable? In purely competitive markets opportunities for earning extraordinary profits are usually unavailable. However, market imperfections can provide opportunities with this potential. Thus, countertrade can be particularly profitable, primarily because it is a method for overcoming government restrictions and other market imperfections that restrain cross-border movement of goods and services.
Barter and crisis
Bartering is an alluring concept, especially when sales are down: You can unload excess inventory and get things your company needs--all without spending precious cash. So it's not surprising that bartering is on the rise. In a recent survey by American Express OPEN, 23 percent of small businesses said they had increased bartering activities since the onset of the recession. And this recession's most famous symptom — the liquidity crisis — means there's a need for barter. There's no cash, but lots of unbooked appointments; no income, but lots of inventory. But bartering isn't right for every company, and sometimes it can be deceptively expensive.
Part of the reason more businesses are bartering is simply that it has gotten easier. Several websites, called barter exchanges, have cropped up to connect businesses interested in swaps. Unlike a direct trade, in which a vendor accepts your goods or services as payment, on a barter exchange you sell your wares for so-called barter dollars. That currency allows you to buy goods or services from other exchange members. Since a typical member is purchasing a good or service in exchange for his or her own good or service, each purchase has a high likelihood of resulting in a completed sale transaction.
Barter can be useful for the inventory rich and cash poor. The exchanges promote their members through trade conventions, auctions and email advertisements, and the most successful barterers are able to keep cash in their pockets while attracting new customers through the network. They can use barter dollars, to pay for business costs like printing. And sometimes barter customers refer cash customers. When you buy by barter, the prices aren't any lower than if you were shopping with cash. In fact, exchange members are encouraged to offer their wares at full price. Instead, any financial benefit comes from unloading excess inventory or services that you would otherwise be unable to sell.
Barter exchanges are often considered secondary markets since most companies that enter into trades otherwise wouldn't be doing business. Therefore, barter transactions can be considered incremental business. In addition, the value proposition of barter networks is highest when companies are operating under full capacity. This usually translates into companies with unsold inventory or unused service capacity. Thus, when companies are having difficulty selling their goods or services in their primary markets, they can turn to barter networks as a means of absorbing the slack.
In doing so, a company can offer its goods or services to an entirely different market of potential buyers whereby new sales can arise even beyond the point of the initial transaction. Also, the company can limit its cash outflow by purchasing needed goods or services using cashless barter dollars.
Trades on barter exchanges are not completely cashless transactions. Many exchanges charge monthly fees of up to $30. And although exchange users pay one another in barter dollars, many barter exchanges charge both sellers and buyers transaction fees--typically 5 percent to 8 percent of each purchase, which must be paid in real dollars. Plus, the government requires sales tax on most barter sales.
Bartering works best when the cost of providing the product or service is relatively low, or where markup is substantial. "It's difficult to barter for new computers, for example, where the markup is traditionally low," says Don Mardak, founder and CEO of the online barter exchange International Monetary Systems. As a result, he says, "About 70 percent of our barter activities involve services rather than products."
Understanding the uses of barter and which clients can benefit from it improves accountants' adviser role. The CPA with clients that have decided to use barter should advise them to limit barter income to the extent of their ability to spend the trade dollars they earn. Companies new to barter usually find it helpful to begin slowly, to get a feel for the ebb and flow of trade dollars.
Clients considering barter should be sure the prospective barter exchange network is a member of IRTA, which sets a high standard of business and ethical conduct for its members and is composed of more than 250 companies. The client should seek a stable network--one that has been in business a number of years and can offer references from companies that have used the network for a year or more. If approached with care, barter can be an important business tool.