Aug 30, 1986

COUNTERTRADE HERE TO STAY?.

GENEVA AUGUST 28 (IFDA/CHAKRAVARTHI RAGHAVAN) -- External financial stringency of third world countries and depressed demand in export markets expanded counter-trade transactions in the 1980ís, but even with more favourable world economic climate counter-trade would not return to the levels before 1980ís.

This is the view of the UN Conference on Trade and Development.

The issue has been dealt with by the UNCTAD Secretariat in three recent reports: the trade and development report 1986 (TDR/6), a study on payments arrangements among countries with different economic and social systems, and another on trade financing for third world countries.

The term counter-trade in an umbrella term for various forms of international trade that are not covered by the multilateral payments systems, and involves an exporterís sale of products, services or technology against partial or full payment in the form of importerís goods and services.

Various kinds of counter-trade include barter, counter-purchase, compensation buy-back, offset, inter-bank arrangements, and limited payments arrangements.

According to TDR/6, uncertainty over what is counter-trade, and lack of a comprehensive reporting system either at national or international levels, and the efforts of TNCS to maintain confidentiality on their global procurement operations linked to counter-trade, make estimations of extent of counter-trade difficult and controversial.

But if a sufficiently broad definition is used, UNCTAD estimates that the extent of counter-trade "is unlikely to be much less than 15 percent of world trade, and may be substantially greater".

The continuing crisis in third world economies, proliferation of payments arrears, debt rescheduling, fluctuations in exchange rates and sluggish world trade, according to UNCTAD, have all led to "a marked growth of bilateral trade agreements between exporters and importers", and many third world countries most affected by the crisis have adopted a series of measures and regulations for counter-trade.

"At present", UNCTAD says, "the system is being widely used in international trade, including in trade among countries having different economic and social systems".

In east-west trade relationships, the socialist countries have found counter-trade arrangements useful to export their goods and services, and thus pay for imports, in the face of protectionism and difficulties in breaking into western markets.

In east-south trade relationships, bilateral payments agreements, long-term sale and purchase agreement, and buy-back or compensation deals tied to production ventures set up with assistance of socialist countries, have been useful to third world countries to expand non-traditional export to socialists countries, particularly of semi-manufactures and manufactures, which face intense protectionism barriers in the OECD economies.

UNCTAD noted that in terms of international trade of third world countries, while a number of factors have led to growth of counter-trade, financial difficulties of these countries and depressed export demand for their products have been "particularly important" for expansion of counter-trade.

General trade theories view counter-trade as economically inefficient and costly.

However UNCTAD suggests that for third world countries experiencing an external liquidity squeeze and payments crisis, even when the extra charges associated with counter-trade are taken into account, "this solution to paying for imports will not necessarily compare unfavourably with attempts to use conventional methods of financing and payments".

When a country is facing an external liquidity squeeze, and there are fears that its external financial obligations may not be met, costs of credit and payments for its imports rise, and in extreme cases are not even available.

While this is happening mainly in terms of trade between third world countries and the OECD countries, UNCTAD suggests that in third world mutual trade also, where both parties may be experiencing severe constraints on foreign exchange, counter-trade could become a viable option.

During a external credit squeeze, import financing for a debtor country involves special costs.

Since normal trade financing through banks may not be available or only at high costs, the debtor country faces the alternative of paying in cash, generally at the time of transaction, and this means, when there is delay in receipt of shipments, the importer is financing the exporter.

It assumes that foreign exchange is available to the debtor country, which may not event be the case.

Where confirmed letters of credit have to be opened, the extra costs involved may be five to ten percent of the value of imports.

The rates on "forfeiting" Ė the purchase at a discount of financial obligations associated with trade transaction without recourse to the seller Ė could be more than five percent above international inter-bank rates, according to UNCTAD .

And as the risks of non-payment assumed by suppliers and financial institutions increase, their charges to debtor countries also increase in normal trade financing, and with penalty interest rates and increase in price of goods, rates as high as 50 percent could be involved, UNCTAD notes.

Counter-trade, UNCTAD notes, could also involve payment of discounts or commissions to intermediaries.

For bulk commodities, commissions could be as low as one to three percent, while for hard-to-sell manufactured goods it could be as high as 20 percent. Commissions for intermediaries could range from 0.5 to five percent.

However, UNCTAD notes that there are forms of counter-trade that could be entered into which might not involve any additional costs, even if they require international financing.

In comparison with conventional trade, counter-trade would often be associated with additional non-financial costs (discounts, commissions to intermediaries, etc.), in the range of approximately five to 15 percent of the value of transactions, UNCTAD suggests.

"However", it notes, "this comparison takes no account of the increases in charges associated with conventional methods of financing and payments which confront countries experiencing difficulties over meeting external obligations, nor does it allow for the possibility that some of these methods may cease to be available in such circumstances".

UNCTAD adds: "Where both partners are undergoing external financial stringency, as will often be the case in the mutual trade of developing countries, barter deals and other forms of counter-trade which avoid the expenditure of foreign exchange can make for trade which would not have taken place in their absence".

"These forms of counter-trade are also capable of reducing the costs of financing and economising foreign exchange in connection with imports of developing countries from the developed markets economy countries".

The prospects for future growth of counter-trade, according to UNCTAD, are "controversial", and would be crucially affected by macro-economic developments on demand in world markets and availability of foreign exchange to third world countries.

They would also be influenced by experience of parties involved in counter-trade: governments, exporters, exporters and intermediaries, and perceptions of costs and benefits.

More of financial stringency on third world countries too would have a similar effect, but its absence over the next few years could well result in "further expansion of counter-trade".

But such an expansion would not necessarily be along the lines of the 1980ís so far, and with increasing experience, governments could be expected to take more account of possible adverse impact of counter-trade on resource allocation or various disadvantages of counter-trade transactions.

However, UNCTAD questions the current over-emphasis on the threat of counter-trade to the open trading system and to efficient allocation of resources, and suggest that the relevance of these arguments to the current situation are doubtful.

"Recourse to counter-trade is taking place in conditions characterised by many other divergences from a theoretically optimal pattern of resource allocation, in particular by widespread levels of unemployment and surplus capacity in both developed and developing countries", UNCTAD underlines.

Another aspect of counter-trade to which third world governments might give increased attention would be the extent to which such transactions actually generate additional exports.

Two separate UNCTAD reports, on trade and payments arrangements among countries with different economic and social systems, outline a number of examples of such transactions involving counter-trade.

Soviet cotton is exported to India to be processed at yarn and textile mills in India, and the cotton fabrics and textile goods made with this cotton are re-exported to the USSR.

For the one-billion dollar Capanda hydro-electric power and irrigation complex, under construction in Angola in co-operation with Brazil and the USSR, the USSR is providing the 130 megawatt turbines and Brazil is handling the construction and supply of technology.

Angola is to pay Brazil for its 600-700 million dollar participation with petroleum over a 12-year period.

A Colombia-Romania buy-back/barter arrangement related to supply by Romania of equipment for mining coal to a Colombian concern which had proven coal reserves but was unable to extract or sell coal for lack of financing and working capital.

The equipment supplied by Romania is to be paid back by shipment of coal to Romania. In addition, the Colombian enterprise is to sell a basket of Romanian goods for the agricultural and industrial sector of Colombia, for pesos and use the amount for working capital, repaying for the imported goods through future exports of coal.

Facing a debt crisis, Peru in 1984 negotiated with USSR countertrade arrangements to cover repayment of its debt. The 1984 agreement involved Peru supplying 200 million dollar worth of Peruvian goods, including a ten million order for Peruvian shoes.

Some Asian countries, like Indonesia, have advanced regulations for conduct of counter-trade.

By early 1985, Indonesia has signed counter-trade agreements worth 1.5 billion dollars with 22 countries for supply of non-oil commodities.

Thailand has signed agreement with Romania for exchange of fertilisers, agricultural machinery and tractors from Romania in return for sale of rice, tapioca products, sugar, etc.

Counter-trading UNCTAD suggests needs to be understood as part of the response of third world countries to external financial stringency and depressed export markets.

Even if this environment becomes more favourable, its incidence would be unevenly distributed.

At least for some third world countries, and some sectors, "there would be continued resort to counter-trade on account of the interaction of financial difficulties and depressed markets".