Today's strong dollar brings to light the important role that countertrade can play in world trade. For U.S. exporters, countertrade represents a marketing tool that can overcome uncompetitive exports due to the high dollar.
For commodity producing nations strapped between reduced export earnings, limited foreign exchange reserves and high debt interest payments, countertrade offers continued opportunities for economic growth. Though rarely appreciated by corporate managers and Wall Street, foreign currency translation effects on income statements can be mitigated by creative utilization of countertrade techniques.
What is countertrade? Although no single definition exists, countertrade is generally a medium of exchange. Where the traditional medium of exchange has been standardized and streamlined by currencies, today's mode of international trade has undermined the functional criteria for using currency. Factors such as uncertainty concerning the value of currencies and protectionism have forced nations to return to the primitive trading pattern that occurs where there is a 'double coincidence of wants'.
Therefore, countertrade is a trading medium that not only uses currency, abut also creates a coincidence of wants that take shape in the form of counterpurchase agreements, switch-trading, compensation, buy-back, and, in rare instances, barter.
Consider how counterpurchase agreements can protect or expand markets for U.S. exporters. A counterpurchase agreement is where the exporter "negotiates" to purchase commodities, goods or services from the importing country in exchange for the purchase of the export contract. Such agreements can be beneficial to the U.S. exporter where a significant price differential is caused by the appreciation of the dollar relative to other currencies.
Although counterpurchase agreements are complicated and involve risk concerning protocol, performance, quality, market access -- counterpurchase agreements can offer nontraditional export opportunities as well.
For instance, McDonnell-Douglas was able to export DC-9 passenger jets to Yugoslavia in exchange for purchasing consumer goods and services from Yugolsavia. Counterpurchase agreements with protocol such as this enableds McDonnell-Douglas to effectively out-bid the likes of Boeing, Airbus Industries of France, and Bristol. Opportunities for LDCs
Countertrade also offers trade opportunities for developing nations and LDCs (least developed countries). Namely, LDCs such as Jamaica, Indonesia, Peru, and others cannot import essential raw materials due to de facto and explicit protectionist policies adopted by the industrialized West. Policies such as trigger-pricing, agreement quotas, and tariffs have clearly created barriers to free trade.
While the appreciation of the dollar has increased pressures for industrialized nations to practice protectionist policies, it has also contributed to the present international illiquidity that has squeezed vital credit facilities for LDC nations. To that extent, U.S. Federal Reserve monetary policy has pushed up interest payments on dollar-denominated bank loans, further draining the foreign exchange reserves of LDC nations.
Consequently, various LDCs such as Jamaica and Indonesia have adopted "mandated compensation" requirements. Mandated compensation requires that exporters undertake to purchase the importing country's products over a given period of time -- usually equal in value to the export contract.
Until recently, mandated compensation requirements were predominantly a matter of accepted practice by the Eastern Bloc nations. Historically, Eastern Bloc foreign trade offices (FTOs) used mandated compensation requirements were predominantly a matter of accepted practice by the Eastern Bloc nations. Historically, Eastern Bloc FTOs used mandated compensation requirements to conserve the …