Advantages of international barter

The advantages of barter and countertrade cluster around three subjects: market access, foreign exchange, and pricing.

Among the many advantages related to market access, managers specified opportunities to 1) enter new markets, particularly socialist nations within the eastern bloc; 2) facilitate transactions with governments and expand business contacts; 3) encourage further business by sales of foreign partners' products through counterpurchase arrangements; 4) gain an edge over competition; and 5) reduce the impact of protectionist regulations imposed by foreign governments.

Managers' comments on the issue of foreign exchange and pricing include barter/countertrade's contribution to 1) reducing problems of fluctuating currency values; 2) lessening risk by trade in products rather than unstable currencies; 3) avoiding exchange controls; 4) allowing purchases by countries with nonconvertible currencies; and 5) guaranteeing payment from cash-strapped eastern bloc and developing markets. Two additional pricing advantages related to commodities and taxation may dissipate, should the U.S. government take an active role in discouraging barter and countertrade. First, the advantage of shielding commodity prices may invite competitors' claims of price discrimination or dumping, particularly if a few firms dominate the market, or if substantial discounts are used to consummate barter/countertrade transactions. These claims may subject offending firms to antitrust or anti-dumping laws. Second, tax advantages may also dissolve should the Internal Revenue Service take an aggressive stance on how barter/countertrade transactions are treated. Tax implications already complicate these transactions, since part of the value of products or services received constitutes taxable income.

Disadvantages of international barter

Managers' opinions about the disadvantages of barter and countertrade revolve around the issues of profitability, pricing, product quality, risk, and the added time, costs and complexities required by these transactions.

On the issues of profitability and pricing, disadvantages include: 1) uncertainty in projecting the potential profitability of any given transaction; 2) diminished capital flow limiting financial resources available to the firm; and 3) the higher costs due to the complexities of the transactions. Executives offering basic commodities also see special problems in the fluctuating value of goods when trading arrangements extend over a long time period. Additional disadvantages are: 1) the difficulties of finding suitable markets and setting suitable prices for over-priced goods received in barter, particularly in glut market conditions; 2) the complexities of agreeing on commodity prices or determining product value for capital goods during negotiations; and 3) the resulting lower profit margins compared to conventional sales. With long term trading arrangements, such as compensation trading, these pricing issues are magnified.

Closely linked to the pricing issues are managers' views about low product quality, which range from nonconformity of goods with contract specifications, to the difficulty of inspecting or testing goods received in simple barter or in more elaborate, compensation trading arrangements.

Risk also is seen as a significant disadvantage which could be predicted considering the statements of respondents about profitability, pricing, and product quality. Naturally, the amount of risk exposure depends on the trading arrangement. Executives whose firms use simple barter or counterpurchasesee significant risks in holding merchandise until buyers are found, while the executive of a firm involved in an offset/compensation trading arrangement views technology transfer as a major risk.

All respondents see these alternative trade approaches as adding time, complexities, and costs to international transactions, particularly for companies with elaborate countertrade arrangements. The estimate, by an experienced European trading specialist, that only 5-10% of negotiations results in a final deal, explains respondents' aggravationwith the lengthy negotiation process. Complexities are linked to handling negotiations, arranging prices, setting up and administering deals, and coordinating activities between departments or divisionswithin the firm. Executives also see tax and customs requirements as adding complications, since part of merchandise value represents taxable income and customs officers must value and apply duties to imports "paid" for in kind.

A further complexity is that the timing of transactions, especially for perishable, consumer services may favor one party over another. For firms receiving goods which are not complementary to existing product lines, respondents indicate that marketing costs will generally be higher than those of cash sales. Without question, the combined impact of these factors increases costs, which explains why large firms dominate barter and countertrade today.

Several general criticisms raised by executives suggest the far-reaching impact of barter and countertrade on the system of international exchange: l) a projected shift from traditional financing approaches to countries' insistence on partial or total barter, assuming present conditions in the international economy remain stable; 2) a confusion of seller-buyer responsibilities in the marketplace; and 3) a sweeping indictment of these approaches as essentially burdens on world trade, which represent foreign countries' attempts to solve internal problems by imposing external solutions.