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 lesser-developed countries with limited foreign exchange or credit facilities. Countertrade can be classified into three broad categories: barter, counter purchase, and offset.
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. Additionally, it provides the exporting nation with an opportunity to offer goods and services in a larger international market, promoting growth within its industries.
Bartering is the oldest countertrade arrangement. It is the direct exchange of goods and services with an equivalent value but with no cash settlement. The bartering transaction is referred to as a trade. For example, a bag of nuts might be exchanged for coffee beans or meat.
Under a counter purchase arrangement, the exporter sells goods or services to an importer and agrees to also purchase other goods from the importer within a specified period. Unlike bartering, exporters entering into a counterpurchase arrangement must use a trading firm to sell the goods they purchase and will not use the goods themselves.
In an offset arrangement, the seller assists in marketing products manufactured by the buying country or allows part of the exported product’s assembly to be carried out by manufacturers in the buying country. This practice is common in aerospace, defense and certain infrastructure industries. Offsetting is also more common for larger, more expensive items. An offset arrangement may also be referred to as industrial participation or industrial cooperation.
Other Examples of Countertrades
- A counter purchase refers to the sale of goods and services to a company in a foreign country by a company that promises to make a future purchase of a specific product from the same company in that country.
- A buyback is a countertrade occurs when a firm builds a manufacturing facility 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.
- An offset is a countertrade agreement in which a company offsets a hard currency purchase of an unspecified product from that nation in the future.
- Compensation trade is a form of barter in which one of the flows is partly in goods and partly in hard currency.
Benefits and Drawbacks of Countertrades
A major benefit of countertrade is that it facilitates the conservation of foreign currency, which is a prime consideration for cash-strapped nations and provides an alternative to traditional financing that may not be available in developing nations. Other benefits include lower unemployment, higher sales, better capacity utilization, and ease of entry into challenging markets.
A major drawback of countertrade is that the value proposition may be uncertain, particularly in cases where the goods being exchanged have significant price volatility. Other disadvantages of countertrade include complex negotiations, potentially higher costs and logistical issues.
Additionally, how the activities interact with various trade policies can also be a point of concern for open-market operations. Opportunities for trade advancement, shifting terms, and conditions instituted by developing nations could lead to discrimination in the marketplace.
Ethical Issues in International Marketing
Companies are always looking for new ways to become more competitive by providing better quality products at lower prices to its customers. Outsourcing production jobs to countries with cheaper labor costs is one way to do that. However, doing business in other countries presents US companies with ethical issues to face before opening a foreign operation.
- Outsourcing Production Jobs
Wages in the US are extremely high compared to labor rates in countries such as China, India, Phillippines and Mexico and major corporations are taking advantage of these wage differentials and moving jobs overseas. Rexnord, a Milwaukee-based manufacturer of machine parts, is an example of this trend.
According to Time Inc., Rexnord announced that it was closing its Indianapolis plant and moving the operations to Mexico, where labor rates average $3 an hour compared to $25/hour for top union employees in Indiana. Three hundred workers will lose their jobs.
This trend to move jobs to low-wage countries has been followed by other major U.S corporations such as IBM, General Electric, Carrier, AT&T, Verizon and Microsoft.
- Working Conditions and Standards
While outsourcing production work may result in lower labor costs, it brings social and ethical issue for management to face.
Generally, working conditions in foreign countries are worse than in the United States. Laborers often work longer hours in uncomfortable and hazardous environments with inadequate protection.
The United States created the Occupational Safety and Health Administration in 1970 to set standards for safe and healthy working conditions. Since its inception, OSHA has reduced workplace injuries and fatalities and improved safety on job sites. The downside to OSHA is that it cost money to meet and comply with these government rules and regulations.
Does an international company try to implement its home country OSHA standards or apply and accept the inferior work conditions of the host country? Compromises must often be made to have successful foreign operations.
- Bribery and Corruption
Not all companies in the international marketplace play by the same rules. Take bribing public officials and foreign corporate managers. In several Latin American countries, for example, bribery and kickbacks are normal and expected as a normal part of doing business.
In the United States, the Foreign Corrupt Practices Act prohibits US companies from paying bribes to foreign government officials to gain business favors and advantages. Other developed countries don’t have similar restrictive laws, and their companies are perfectly free to pay such bribes, putting US companies at a disadvantage. Germany, for example, recognizes bribes paid to foreign government officials and allows these payments as tax deductions.
As a result, managers of US corporations, who are under pressure to produce profits, sometimes resort to other means, maybe unethical, to influence foreign government officials. They may not directly violate the Corrupt Practices Act, but they might come close to it. If they do pay bribes, they have to find ways to hide the payments in the financial statements.
The pressure to produce profits strains the ethics codes of these managers to get results and keep their jobs.
- Gifts and Favors
Most US corporations have standard written policies regarding the acceptance and amount allowable of gifts. Managers of foreign operations would like to have clear guidelines, but, unfortunately, no such standard can be created that crosses the culture and accepted practices of all foreign countries. Each nation is different.
Gift-giving is acceptable in most cultures, but in others, it may be considered unethical. In most European countries and Canada, giving a gift gets attention because it isn’t expected. A German colleague will be particularly appreciative of a small, well-selected gift.
On the other hand, Asian counterparts do expect to receive a gift and will examine it closely for appropriateness. Certain colors of wrapping should be avoided, and, if a reciprocal gift is presented, it should never be opened in front of everyone. That’s considered as greedy. A Japanese businessman expects to be impressed with a gift that reflects the level of his position. A $25,000 watch would not be unusual for a Japanese executive, whereas, in the US, a gift of this amount would likely be considered a bribe.
Understanding the local customs of gift-giving is important to doing the right thing instead of being embarrassed with an inappropriate offer.
- Using Child Labor
According to data from UNICEF, over 150 million underage children in the world are working long hours in hazardous conditions. Because they live in highly impoverished countries, these children are forced to work to provide income for their families. The worst offenders are Somalia, Pakistan, India, Nigeria and Bangladesh.
Large garment manufacturers are some of the largest users of child labor because many of the tasks in the supply chain are better done by children rather than adults. Therefore, the large corporations have an economic incentive to use child labor, and they pretend they are unaware that the foreign suppliers and subcontractors are employing underage children.
Garment retailers put pressure on suppliers to keep costs down and improve shipping dates. Suppliers respond by paying low wages to the children and making them work excessive overtime hours.
- Human Rights Issues
Children are not the only ones working in deplorable conditions; adults are also affected.
Unlike the United States, many foreign countries deny their citizens the right to assembly, collective bargaining, strike and even to negotiate for better wages and working conditions. Many of these countries have weak or no laws for enforcing employee rights, and workers have few avenues in which to address their grievances for unsafe work conditions.
International businesses face the dilemma of complying with work standards of their home country versus the lack of such rights in the host countries. Does a corporation try to impose its own human rights policies on the host country or accept the deplorable conditions?
In an attempt to establish global standards for human rights related to business activities, the United Nations created the Guiding Principles on Business and Human Rights.
- Work Standards and Conditions
An absence of human rights policies can lead to difficulty in imposing work standards and creating acceptable work conditions.
Performance and quality standards that are well-defined and expected in the US can be difficult to apply in foreign countries. Incentives for better performance may not exist in places where employees have little or no hope for receiving higher wages or achieving better living conditions.
- Workplace Diversity and Equal Opportunity
Even though much progress has been made in the US in creating a more diverse workforce and equal opportunity, the same is not true in foreign countries.
Attention has been paid in the United States to create workforces made up of different races, genders and backgrounds. Corporations work with local schools and colleges to educate and develop students with the skills needed to fill the jobs demanded in the workplace. Equal opportunity is a policy offered to anyone who wants to earn a raise or a promotion.
Foreign countries are not as concerned with employee diversity and equal opportunity. Policies brought by US companies to overseas operations will not always be well-received.
- Social and Cultural Considerations
Understanding the cultural differences can make the difference between success and failure in a global market. Each nation has its own distinct customs, history, traditions and code of ethics.
One barrier is language. Businesses must often rely on translators when communicating with foreign contacts. Unfortunately, words don’t always carry the same meanings through a translation, leading to a misunderstanding or misinterpretation of ideas, expressions and feelings.
Gender is another issue. While the US has more women now in higher business positions, the same is not true in other countries. Women don’t always receive the same degree of attention and respect. International companies need to pay attention to the gender hierarchy in other nations when arranging meetings or designating managers for foreign subsidiaries.