Countertrade

Countertrade

Subject: Economy

Section : External Sector

Why in the news?

Countertrade has  emerged as an important mode of international transactions for countries facing currency or cross- border payment challenges.

Concept:

What?

Countertrade is a reciprocal form of international trade in which goods or services are exchanged for other goods or services rather than for hard currency. This type of international trade is more common in developing countries with limited foreign exchange or credit facilities.

Types:

1. Barter: Exchange of goods or services directly for other goods or services without the use of money as means of purchase or payment.
2. Switch trading: Practice in which one company sells to another its obligation to make a purchase in a given country.
3. Counterpurchase: The sale of goods and services to a company in another country by a company that promises to make a future purchase of a specific product from the same company in that country.
4. Buyback: occurs when a firm builds a plant in a country, or supplies technology, equipment, training, or other services to the country, and agrees to take a certain percentage of the plant’s output as partial payment for the contract.
5. Offset: Agreement that a company will offset a hard-currency purchase of an unspecified product from that nation in the future. Agreement by one nation to buy a product from another, subject to the purchase of some or all of the components and raw materials from the buyer of the finished product, or the assembly of such product in the buyer nation.
6. Compensation trade: Compensation trade is a form of barter in which one of the flows is partly in goods and partly in hard currency.
7. Debt-for-goods:a country avails itself of funding for a development project, and full or partial repayment of the debt is through exchange of goods or services to the lender country.

For the lender country, such a model can provide avenues for exports of high value-added goods and services tied to the development financing, while also helping secure the supply of key raw materials through imports from the borrower country.

For the borrower country, such a model helps in financing critical infrastructure development, without depletion of scarce forex resources.

India’s example:

1. Barter trade agreement with Iraq under the ‘oil-for-food’ programme wherein Iraq agreed to facilitate daily delivery of a fixed quantity of oil to India at a fixed price in exchange for exports of rice and wheat from India.
2. Counter purchase agreement with Malaysia wherein a rail construction project was undertaken by IRCON International Ltd. in Malaysia, for which the Malaysian government made payments to IRCON through the supply of palm oil of equivalent value to India.
3. Buyback arrangement with the erstwhile Soviet Union wherein the National Textiles Corporation Ltd. (NTC) of India bought 200 sophisticated looms, in return for a buyback commitment by the Soviet Union to purchase 75 percent of the textile produced from the looms
4. Debt-for-goods arrangement with Vietnam wherein India Exim Bank extended a Commercial Line of Credit to Vietnam  and in return, the Food Corporation of India imported rice from Vietnam and paid to IDBI/India Exim Bank for the imports;
5. Clearing arrangement with Iran wherein a Rupee payment mechanism was established between India and Iran in 2012 under which the Rupee accumulated from payments for imports by India was utilised for payment for exports of products, projects and services to Iran.