Updated Mar 28, What Is Countertrade? Countertrade can be classified into three broad categories: barter, counterpurchase, and offset. Countertrade Explained In any form, countertrade provides a mechanism for countries with limited access to liquid funds to exchange goods and services with other nations. Countertrade is part of an overall import and export strategy that ensures a country with limited domestic resources has access to needed items and raw materials. Barter Bartering is the oldest countertrade arrangement.
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Trade demands create domestic production and the inflows of funds from overseas. Countries that have limited domestic resources, such as Singapore, must be able to keep up with domestic production of various goods and services so as to maintain a trade surplus, as they cannot produce everything they need in within their own borders.
Exporting is increasing yearly, globally. This is due to various factors. First, both large and small firms export — not just large firms. When a firm decides to export to another country, it needs to address the following: Market opportunities — which can it identify? Foreign exchange risk — how can it protect itself? Import and export financing — does it understand the banking systems? Challenges of doing business in a foreign market — does it know what it will face? This usually occurs when a company has reached a certain saturation or limit in its domestic market and it needs to expand.
This is why large firms tend to aggressively explore new export possibilities. While it is true that many small firms export, they tend to be more reactive and let opportunities come to them. Many companies, especially small, tend to underestimate the potential of the export market, and are overwhelmed by the intricacies, laws, and regulations surrounding exportation.
Below are common pitfalls of exporting: Insufficient or inadequate market research and analysis Lack of understanding of competitive conditions An absence of product customization for foreign markets Inferior distribution or marketing program Ineffective or poor marketing campaigns Difficulty finding financing Miscalculation of the amount of expertise needed to enter a foreign market An underestimation of the differences in a foreign market A perception that the way of doing things back home is superior and will work abroad An underestimation of the bureaucracy and red tape involved Export Expertise However, if the proper groundwork is done, firms can avoid many of the aforementioned perils of exporting.
For example, some countries offer exportation advice and help to local companies. Both Japan and Germany have established export institutions. US firms do use the U. Department of Commerce to find export information. Also, the International Trade Administration and the U. Another resource is the Small Business Administration, as well as local and state governments. Another means is via export management companies EMCs. These are companies that provide all the services a firm needs to export.
They can work as the export department for a company or simply on behalf of the exporter. There are two basic types of EMC relationships. The first is working with a view to let the exporting firm take over once the groundwork has been done. But firms that rely too heavily on the EMC may never learn the ins and outs of exporting, and thus will never build such skills.
Export Strategy Exporting has its risks, but these risks can be mitigated in various ways. As previously discussed, an EMC can work as a consultant to identify markets and sort through the regulations on behalf of the company. Also, firms should focus on only one or just a few markets initially.
To start, enter markets on a small scale, so as to limit the damages caused by any potential failure. Companies need to be realistic about the time, commitment, and resources needed. Firms should do their best to establish good relationships with distributors and clients.
Whenever possible, locals should be employed in the foreign markets. Companies should exercise a proactive attitude. Firms should adopt local production in the countries they export to. Financing Transferring of funds internationally, to parties with which one has never done any prior business is often complicated, as there will likely be a lack of trust between them. To overcome this lack of trust, reputable international banks are included in the transaction.
Bank promises to pay exporter on behalf of importer 3. Exporter makes shipment to the bank, trusting the bank to pay 4. Bank pays the exporter 5. Bank sends shipment to importer 6. Importer pays the bank A letter of credit can be issued by a bank on behalf of the importer.
This states that the bank will pay a certain amount to another party usually the exporter , upon receipt of certain documents. A letter of credit instills trust as a bank is involved. A draft, or bill of exchange, is the means normally employed for international payment. There are two types of drafts: Sight drafts and time drafts. Sight drafts demand payment upon presentation, while time drafts request payment in 30, 60, 90, or days.
A bill of lading is a document from the common carrier which transports the good to the exporter. It is a receipt, a contract, and a document of title.
Financial Export Assistance Companies that wish to export can look to their government for guidance and assistance in their financial matters. The Export-Import Bank provides financial aid to those exporting, importing and exchanging commodities between the US and other nations. Eximbank is an independent US government agency. The main services it offers are loans and loan guarantees. Such insurance guards US exporters against importers that do not make payments.
FICA offers insurance coverage against both political and commercial risks. Such bodies are necessary to facilitate the US export of goods, and to help maintain a healthy domestic economy. Countertrade At times, standard goods-for-cash payment structures do not work, are cumbersome, expensive, or simply impossible. In these cases, companies can adopt countertrade. Countertrade involves the exchange of goods in barters or other ways in place of money. Countertrade was common in the USSR in the s when its currency was nonconvertible.
It was their only means of purchasing foreign goods. Countertrade grew in the s as many other nations did not have the foreign reserves required to make imports. Countertrade increased yet again during the Asian financial crisis in , as many currencies became devalued and had severely limited buying power. Poland did the same with Coca-Cola but paid in beer. Countertrade can be separated into five variants: 1.