Counter Trade, Barter
COUNTER TRADE SIMPLIFIED
Remember grade school days, when another student’s lunch looked better than yours, so you swapped?
It still happens today in international trade.
I have read estimates stating that as much as 5% to 20% of world trade falls into the category of counter trade, although the exact numbers are hard to verify. What exactly constitutes counter trade?
While several forms of counter trade exist, in its most basic form it is exchanging goods for goods, commonly called bartering. Likely, one or both parties do not have access to the other party's currency. When both parties have merchandise the other wants to use or to sell, they may mutually agree upon an exchange of goods.
COUNTER TRADE: UNINTENDED CONSEQUENCES
After the exchange, both parties should have the ability to use or sell the goods acquired. If they don't, they may find some unexpected consequences. A popular story involves an aircraft manufacturer. They received an order from a country that did not share their currency but offered to exchange canned ham for the aircraft. The seller agreed.
When the canned ham arrived at the port of importation, U.S. customs officials would not approve the ham for sale in the country. The manufacturer of the aircraft negotiated with the customs agency to release the goods with the condition that they would not sell the goods. Responsibility for determining the final use for the large quantity of canned ham fell to the staff in the company's cafeteria.
COUNTER TRADE: COMPLICATED
Counter trade becomes complicated when more than two parties and more than two countries are involved. A hypothetical example of a three-way trade would be one involving a shipment of oil from Venezuela. The purchaser in Germany offers to pay for the oil with medical equipment. The Venezuelan oil producer does not need medical equipment, so they find a distributor in the United States who takes the medical equipment and pays for it with automobiles, which the party in Venezuela can use. The shipment of oil goes to the party in Germany who sends medical equipment to the party in the United States who sends automobiles to the party in Venezuela and everyone lives happily ever after. Obviously, such a transaction has complications and has potential for things to go wrong.