Countertrade's Impact on the Supply Function

COUNTERTRADE IN PERSPECTIVE Countertrade, a trade-balancing method whereby goods or services are exchanged for other goods or services in full or partial payment for a sales transaction, has long been an interest of business executives and researchers. Countertrade enables firms to sell products in markets where other forms of payment may be difficult or precluded. While U.S. businesses have traditionally turned away from countertrade demands and insisted on compensation in the form of cash, letters of credit, or borrowed funds from private or public sources, many firms have found that to compete in the global marketplace and to enter new markets, countertrade must often be accommodated as an alternative means of trade finance. During the 1970s and 1980s, many second- and third-world countries accumulated enormous external debt. Increasingly, convertible currency earnings from exports had to be diverted to servicing this debt, thereby reducing the funds available to pay for imports. At the same time, multilateral lending institutions and Western commercial banks experienced numerous defaults and intensified requests for debt rescheduling, causing the world financial community to severely restrict additional loans. For countries facing convertible currency shortages or borrowing constraints, countertrade provided a means of circumventing structural trade imbalances. As such, countertrade has promoted worldwide business and expanded trade, further drawing American firms into the global market. Due to intense global competition and the secrecy surrounding countertrade transactions, little data is available regarding the scale and scope of this trading practice. No records are kept by the federal government, and few comprehensive surveys on countertrade have been conducted.[1] Numerous articles and books have presented anecdotal evidence, but these studies provide an unbalanced picture (and suffer from low external validity) because selected experiences are reported in order to illustrate an argument.[2] Among the surveys performed, most have focused either on furnishing profiles of active countertrade practitioners,[3] or on uncovering motives for countertrade involvement.[4] Few studies have looked beyond the initial countertrade decision to consider reciprocal purchases and their placement at the conclusion of the transaction.[5] In 1985, the United States International Trade Commission (USITC) conducted a one-time survey of American involvement in countertrade, covering the first half of the 1980s.[6] With 369 major export firms responding, this survey collected data from the broadest group of American businesses to date. The study discussed in this article updates the findings of the USITC survey and compares the two surveys' results, to the degree possible. The combined information outlines a pattern of American involvement in countertrade during the past decade. To achieve this objective, the following research question and issues were examined: * What has been the pattern of American involvement in countertrade over the past decade? * What has been the trend of countertrade volume and its corresponding share of international trade? * With what parts of the world do U.S. companies have outstanding countertrade obligations? Has any geographic change taken place? * In what parts of the world is countertrade growing? By how much? * Why do American firms get involved in countertrade? Has any shift in motivations occurred? This study also explores countertrade's effect on the supply function by considering the placement of reciprocally purchased goods - a task most frequently assigned to purchasing. Purchasing's role in countertrade has traditionally begun after a sales agreement has been signed, when compensatory items must be selected and assessed for value, quality, usability or salability, and delivery requirements.[7] Compensatory items usually consist of raw materials, components, or finished goods (including MRO supplies), although they can also include the transfer of technology. …