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Global Financing and Exchange Rate Mechanisms

MGT/448

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Global Financing and Exchange Rate Mechanisms

Countertrade is a different way to complete a sale that is international when currency is just not an option. Barter is a well-known word that involves the exchanging or trading of goods instead of the use of money. In societies, before a currency system was put into place, they mainly relied on bartering goods and services. This type of system was very time consuming and eventually a money system was put into place so they could put a specific value amount on each item traded. They used to have groups that would grow corn and other groups that would raise sheep (Hill,2009). They made agreements to trade amongst each other for what was needed at that time in history. This type of system still goes on to a certain degree but most of the time money is also involved. On a local level the barter system seems to work good even when money is involved in the transaction. However, on a global level when currency is involved it tends to be somewhat difficult because the value of money in different countries make it a problem. We will discuss the basic countertrades through bartering, the strategies, and the different types used.
Countertrade is basically a system that involves bartering. Some businesses in some countries just are not able to accept currency that may not be convertible. They just simply make the transactions work through the system of bartering their goods or services. Some examples of these types of situations have occurred such as a transaction in Saudi Arabia where they agreed to buy over 10,000 jets from Boeing in exchange for crude oil that was discounted for them at about 10 percent below world prices. There was another transaction involving a deal made with the Venezuela government where they had a contract with caterpillar to trade 350,000 tons of iron ore for caterpillar equipment. Another example is the company Philip Morris who ships
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cigarettes to Russia in trade for certain chemicals. Then those chemicals are traded with China who then ships types of glassware products back to Philip Morris(Hill,2009).
There are different strategies used when making deals through countertrades. The first one is called a defensive strategy. This strategy is used very much when working with different nations to gain support. It is used for the simple fact of gaining alliances. For example, if one state finds itself in some type of trouble then another will come in a supply that state with certain resources to help them out. In return, there is a promise that they will come to support that state sometime in the future to help them out! Another type of strategy is what is considered a passive strategy where a very poor country has to rely on countertrades for supplies. In these circumstances they feel the pressure to keep up with others. Another type of strategy used is one that is called a reactive one. This one involves a poorer country and a wealthy one. The wealthy one offers assistance to the poorer one in the way of support through technological help, and in return has complete access to all of their resources. This one leaves the poorer country feeling like they got the bad end of the stick. The state is almost left dealing with certain types of inferiority fears after the deals. Then last but not least there is a strategy called proactive. The proactive strategy is just about opposite of the reactive one. In this type of situation the poor country takes the initiative to move in a forward direction. If let??™s say for example the poor country somehow finds itself in debt to creditors at some banks, they can work out a deal to mortgage their resources in trade to cover the debt and still use some of their resources to make

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alliances that may end up helping them out in the future with some types of new development. This is especially good if the poorer country is wealthy in natural resources.
Countertrades can also be broken down into different types. We??™ve already mentioned previously the use of barter. There is also one called counterpurchase. This is a type of purchase that one country purchases some goods from another with the promise that the other will spend some of that money gained on buying some of their products. There is another type of counterpurchase called an offset! An offset is sort of like a countertrade. In this situation they can fulfill their obligation with any firm in the country that the sale is made. This allows the exporter greater flexibility to choose the goods it wants. Then there is yet another called switch trading. Many times when a countertrade is done a country will end up with some additional credits. Switch trading happens when a third-party purchases those additional credits then sells them to a firm that can really use them. Then there is one called a buyback. A buyback is where a firm buys a plant in a country in exchange for using the resources from that plant over a certain number of years(Hill,2009).
Countertrades are a way that some countries deal with each other other than currency for purchases. There are a few pros and cons when it comes to countertrades however. The obvious is that it gives a country a way to barter other than using currency for exchange. Some of the negatives about countertrades are that many countries prefer to deal with cash, so it can be difficult to convince them. Another reason a country may not want to deal with countertrades is that there may be some poor quality or just unusable products that can??™t be sold
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off for currency. One country made a deal with Hungary and it ended up being bad because about half of the televisions ended up being defective.

references
Hill, C. (2009) International business: competing in the global marketplace
www.globalcountertrade.com