COUNTERING WITH COUNTERTRADE

More countries and companies are turning to countertrade as a solution to pressing economic problems.

The United States, for example, countertraded 14,000 tons of surplus dairy products to Jamaica in exchange for 400,000 tons of Bauxite.McDonnell Douglas sold planes to Yugoslavia in exchange for canned hams and tools.

The Philippines countertraded agricultural commodities for Soviet farm equipment and Polish coal.

Japan financed a Brazilian aluminum plant in exchange for finished aluminum.

Pierre Cardin has agreed to serve as a consultant to China in return for silks and cashmeres.

Such transactions are evidence that countertrade is playing an important role in international business. Countertrade transactions differ as to the time needed to complete them, the type of goods exchanged and the financial arrangements. The most common forms of countertrade are:

* Barter arrangements.

* Compensation or buy-back arrangements. In these a company supplies technology, expertise and equipment to a developing country and receives full or partial payment in the resulting products.

* Counter-purchase transactions. These are separate but related deals in which the supplier receives cash for goods sold, but is committed to purchasing goods produced by the customer country.

* Industrial offset, commonly used in military equipment sales. In these an exporter of finished goods buys components in the importing country.

Approximately 100 countries are requesting or requiring countertrade, and countertrade is estimated to account for as much as 30 percent of the world's $2 trillion of trade.

Countertrade is not likely to subside for at least the next decade. As long as hard currency remains in short supply, and the problems of protectionism and international debt persist, it will continue to be perceived as the best available option. Developing nations will depend increasingly on countertrade to expand their purchasing and selling opportunities.

In periods of low growth and falling commodity prices, countertrade will

allow them to promote their exports, and continue importing without increasing their debt or tapping their currency supplies. In addition, it will enable them to acquire Western technology and expertise. Thus, countertrade will continue to expand, to attract new players and to take on new and increasingly sophisticated forms. By the year 2000, it is likely countertrade will account for 50 percent of all world trade.

Considering the trading environment, the percentage of U.S. transactions involving countertrade is relatively low. Although the figure approaches 50 percent in some industries such as aerospace, on the whole it accounts for less than 10 percent of U.S. international trade. That's because U.S. businesses traditionally have considered countertrade to be a primitive, unimportant and even unacceptable method of conducting business.

This attitude perhaps was justified when countertrade was relatively uncommon and U.S. firms were giving little attention to international trade. But times have changed. U.S. concerns are competing in a global market and countertrade has increased dramatically.

There is an urgent need for U.S. concerns to recognize the strategic opportunities that expanding countertrade markets present and to be prepared for the challenges that lie ahead. Intense worldwide competition for new markets makes the decision to countertrade an easy one. U.S. business managers must either agree to countertrade, or watch a competitor get the business.

U.S. companies can include countertrade in their strategic planning in a variety of ways. One option is to use countertrade as a marketing tool. Countertrade supplements traditional marketing methods by allowing companies to penetrate new markets that would otherwise be inaccessible. In countries where it is mandated, concerns that have the foresight to enter the market early and begin building strong customer relationships, will have a competitive advantage, especially if countertrade requirements are later lifted.

Armand Hammer, president of Occidental Petroleum, used countertrade to enter the Soviet market over 60 years ago. He has recently negotiated similar transactions to gain a foothold in China.

Countertrade can also be utilized as an effective financial mechanism. Companies having trouble resolving past due accounts may find, in some cases, that countertrade is the only way to collect their debts. When Zaire, for example, failed to pay off its account to McDonnell Douglas, the company requested and received copper as payment. Countertrade can be equally useful in repatriating blocked funds, profits and dividends frozen in accounts of subsidiary op erations.

Perhaps most importantly, countertrade may be used to exert control over external conditions. U.S. companies can positively affect their external environment by using it to reduce nationalistic sentiment and develop a stable operating environment. This is especially important for multinationals operating in Latin America and Africa.

It can be used also to:

* Overcome protectionist trade policies and obtain government approvals. In Indonesia, for example, all foreign companies awarded government contracts for construction projects and major precurement must export specific Indonesian products.

* Obtain a reliable long-term supply of raw materials, or finished products that may be significantly less expensive because of low labor costs.

* Maintain and even increase market share. Under economic conditions, many firms are finding that competitive prices may not be as important as a willingness to engage in countertrade. General Electric, for example, won a contract to sell $150 million worth of nuclear power plant turbines to Romania over its European and Japanese competitors because of its involvement in a countertrade deal.

Countertrade is not a panacea for every U.S. company involved in international trade. It is often slow, complex, difficult and not the most efficient way of conducting business. Before entering into countertrade, U.S. firms should assess carefully their ability to handle countertrade and evaluate their external environment, including government regulations, social, economic and political factors.

Countertrade requires skillful negotiation, knowledgeable personnel, available financing and the capacity to deal with countertraded goods. If, however, U.S. companies are capable of handling countertrade and willing to incorporate it into their global business strategies, they can become more competitive, more profitable and substantially stronger in the international arena.

Dr. Vardiabasis is a professor at the School of Business and Management at Pepperdine University, Los Angeles.

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