9.9.5 Buyback or compensation trading
This is probably the most common form of countertrade. It usually consists of the export of a technology package, the construction of an entire project or the provision of services by a firm. The buyer in return pays back the supplier by delivering a share of the output of the project in the future. For example, in 1980 the German, French, Italian and British governments subsidised companies to construct a $US4 billion natural gas pipeline in the former Soviet Union . The former Soviet Union paid for the project with natural gas.
The advantage of buyback trading is that it acts as a substitute for FDI in countries which do not welcome FDI. The disadvantage is that few situations are amenable to this form of countertrade. Theoretically, buyback could apply to LDCs but all the examples cited in the international business literature concern the former Soviet Union .
Countertrade provides both opportunities and problems for international business. The opportunities arise because countertrade provides an alternative way to do business when a country has no foreign exchange to pay for a goods trade. Problems arise because countertrade is often more complex than buying or selling in the usual way. Companies may find, for example, that they have agreed to accept goods which are not easily sold. In such cases the companies may have to accept a lower price for these products which means, in effect, a lower price for their own original goods.
In the recent past, countertrade has been conducted primarily with communist bloc countries which did not have convertible currencies. The move to a market economy may lessen countertrade with these countries, but LDCs with a shortage of hard currencies may give new impetus to countertrade. As can be seen in Figure 9.1, there are still a number of countries around the world using countertrade transactions in a range of products. Before completing this Chapter, turn now to the final reading from Chapter 15.
In your text
Hill 2005, Chapter 15, pp. 547-550.
Figure 9.1 Preferred items for export in countertrade transactions
Source: Czinkota et al. 2005, p. 587.
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