Countertrade

Countertrade or counter trade (구상무역/求償貿易) means exchanging goods or services which are paid for, in whole or part, with other goods or services, rather than with money. A monetary valuation can however be used in counter trade for accounting purposes. In dealings between sovereign states, the term bilateral trade is used. OR "Any transaction involving exchange of goods or service for something of equal value."

Types of Counter Trade
There are six main variants of countertrade:

Barter
Barter (바터, 물물교환) is an exchange of goods or services directly for other goods or services without the use of money as means of purchase or payment. Barter is the direct exchange of goods between two parties in a transaction. The principal exports are paid for with goods or services supplied from the importing market. Korea usually sells apples and other fruits to the Philippines in barter with bananas.

A single contract covers both flows, in its simplest form involves no cash. In practice, supply of the principal exports is often held up until sufficient revenues have been earned from the sale of bartered goods. Furthermore, during negotiation stage of a barter deal, the seller must know the market price for items offered in trade.

Bartered goods can range from hams to iron pellets, mineral water, furniture or olive-oil all somewhat more difficult to price and market when potential customers must be sought.

Counterpurchase
In a counterpurchase (대응구매) arrangement, a private firm agrees to sell products to a sovereign nation and tp purchase from the nation goods which are unrelated to the items which it is selling. The company may sell goods and services to other company in a foreign country on condition to make a future purchase of a specific product from that country with the proceeds. For example, a Korean contractor builds a plant in a Middle East country where it is required to buy an equivalent amount of crude oil.

Each party is paid in currency upon the delivery of its products to the other party. It is common in such transactions for a private firm to be allowed a period of time following the delivery of the goods that it is selling in which to fulfill its purchanse obligation.

Private firms resort to a variety of methods to dispose of goods which they are forced to purchase, but most frequently resell these goods to trading companies or directly to end users, often at a discount or disagio. In the above-mentioned example, the contractor is usually offered to sell the crude oil carried by a tanker even before the tanker arrives in the destination port.

Buyback
Buyback (환매) 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. It is also referred to as compensation transaction. It frequently involve significantly longer periods of time during which the firm will be permitted to fulfill its purchase obligation than in counterpurchase.

Unlike counterpurchase transactions, the products which the private firm purchases in compensation trade are frequently of marketable quality and in demand in the international marketplace. It's because the firm knows well about the resultant products of the plant which it has just built.

Offset
Offset (상계) is an agreement that a company will offset a hard currency purchase of an unspecified product from that nation in the future. It is an 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 or highly sophisticated product in the buyer nation.

In an offset arrangement, an advanced country sells high-speed train to a developed country, where the seller is required to buy a certain portion of materials and equipment or allow co-production or licensed production of such train.

Clearing arrangement
Clearing transactions (청산거래) occured between West Germany and East Germany before the unification. Private companies in West Germany sold goods and services to a East German company, and registered its proceeds at its own account with a desginated clearing bank. Other West German companies did the same thing, and vice versa in the East Germany. At the end of clearing period (or fiscal year), two clearing banks in the East and West made a settlement, and the remainder, usually called as "swing", was the obligation of the import-surplus country. Following the German model, the clearing arrangement has been regarded as the best practice between the two Koreas as it does not need hard currency which the North is badly in need.

Switch trading
Swich trading (스위치 거래) is a practice in which one company sells to another its obligation to make a purchase in a given country. It is a device used to balance a bilateral clearing agreement. At the end of the clearing period, a country has a credit in its clearing account, or as is frequently described, a surplus of other country's clearing dollars.

In the swithch trading, one party locates a third party that is interested in purchasing other party's goods, and substitute the third party's purchase of other party's goods in satisfaction of its own purchase obligation.

Necessity
Countertrade also occurs when countries lack sufficient hard currency, or when other types of market trade are impossible.

For an instance, in 2000, India and Iraq agreed on an "oil for wheat and rice" barter deal, subject to UN approval under Article 50 of the UN Persian Gulf War sanctions, that would facilitate 300 thousand barrels of oil delivered daily to India at a price of $6.85 a barrel while Iraq oil sales into Asia were valued at about $22 a barrel. In 2001, India agreed to swap 1.5 million tonnes of Iraqi crude under the oil-for-food program.

The Security Council noted: "... although locally produced food items have become increasingly available throughout the country, most Iraqis do not have the necessary purchasing power to buy them. Unfortunately, the monthly food rations represent the largest proportion of their household income. They are obliged to either barter or sell items from the food basket in order to meet their other essential needs. This is one of the factors which partly explains why the nutritional situation has not improved in line with the enhanced food basket. Moreover, the absence of normal economic activity has given rise to the spread of deep-seated poverty."

Prospects
US economist Paul Samuelson was skeptical about the viability of countertrade as a marketing tool, claiming that "Unless a hungry tailor happens to find an undraped farmer, who has both food and a desire for a pair of pants, neither can make a trade". (This is called "double coincidence of wants".) But this is arguably a too simplistic interpretation of how markets operate in the real world. In any real economy, bartering occurs all the time, even if it is not the main means to acquire goods and services.

The volume of countertrade is growing. In 1972, it was estimated that countertrade was used by business and governments in 15 countries; in 1979, 27 countries; by the start of 1990s, around 100 countries. (Vertariu 1992). A large part of countertrade has involved sales of military equipment (weaponry, vehicles and installations).

More than 80 countries nowadays regularly use or require countertrade exchanges. Officials of the General Agreement on Tariffs and Trade (GATT) organization claimed that countertrade accounts for around 5 percent of the world trade. The British Department of Trade and Industry has suggested 15 percent, while some scholars believe it to be closer to 30 percent, with east-west trade having been as high as 50 percent in some trading sectors of Eastern European and Third World Countries for some years. A consensus of expert opinions (Okaroafo, 1989) has put the percentage of the value of world trade volumes linked to countertrade transactions at between 20 to 25 percent.