What Is Countertrade and How Is It Used?
The Pros and Cons of a Cashless Trade
Countertrade is an alternative means to structuring an international sale when conventional means of payment are impossible, complex or nonexistent. Here we focus on the most common form of countertrade, bartering—why it is used, which company has put it to use and what the pros and cons are.
What Is Countertrade?
According to “Does Countertrade Help Small Business Exports?”, countertrade has rapidly grown to one-third of all world trade.
In countertrade transactions, which involve trading in goods and services as opposed to money, cash does not change hands. This is oftentimes referred to as bartering, which forms the oldest countertrade arrangement. Many governments reduce imbalances in trade between countries by use of a countertrade system of international trading.
Companies that consider countertrade typically want to expand into a foreign market, increase sales, build customer and supplier relationships and overcome liquidity challenges. That said, countertrade is used primarily to:
- Enable trade in countries that are unable to pay for imports. This can be the result of a shortage of foreign currency or lack of commercial credit, for example.
- Help find new export markets or protect the output of domestic industries.
- Balance overseas trade.
- Gain a competitive edge over competing suppliers.
- Sidestep the lack of credit or other alternative financing measures.
- Develop a workaround on the rules and regulations of a foreign country.
- Foster customer goodwill. Your willingness as a seller to accept a countertrade deal fosters long-term customer goodwill. Once the customer’s country improves, you can capitalize on the customer goodwill cemented over the years.
Example of a Countertrade Barter Deal
One of the classic examples of a barter deal of the century—that went awry—was when Pepsico Inc. signed in 1990 with the Soviet Union to double its soft-drink sales there, open two-dozen new bottling plants and launch its Pizza Hut restaurants in the country's biggest cities. To finance the expansion, Pepsico promised to increase its sales of Russian vodka in the United States and begin a new venture selling and leasing Soviet-built ships abroad. The title of this article divulges the outcome: “Doing Business: Bloc-Buster Deal: Pepsico's $3-billion-plus Soviet expansion was the 'deal of the century.' Then, the deal crumbled along with the country.
Pros to Countertrade
Regardless of the complexity, companies still use countertrade as a strategy for growth because it:
- Allows for entry into difficult markets.
- Increases company sales where you might not otherwise have business.
- Overcomes credit difficulties.
- Allows for disposal of declining or surplus products.
- Gains competitive advantage over competition (you don’t want to lose a market share as a result of competitors).
Cons to Countertrade
A disadvantage to countertrade is that the value of a deal—the goods being exchanged—may be uncertain, causing significant price volatility. Other disadvantages include, but are not limited to:
- Time-consuming. As in any unconventional tactic, there will be haggling over the good trades, so expect a long, drawn-out negotiation until all parties are satisfied.
- Complexity in the nature of the negotiations. What should you do with the goods being offered?
- Higher transaction costs (including brokerage, for instance). Costs can quickly add up, especially while looking for a buyer for the goods, commissions to middlemen and so forth.
- Logistical issues, especially if commodities are involved.
- Greater uncertainty on the value of the goods being traded and uncertainty on the quality of the goods.
Is countertrade the best option for small businesses? Only if they have exhausted other payment means and can absorb the delivery delays, contract negotiation challenges and product quality issues.
Countertrade is most attractive to large, diverse multinational organizations that know the lay of the land on exporting. Even then, that sort of experience doesn’t guarantee success.