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COUNTERTRADE

G R O U P II ( A SSIG NMEN T N O . 1 ) M 3

PER EZ * SA B IJ O N * H A M IN * T IM T IM * R EM O R OZ A -PAR CON


WHAT IS COUNTERTRADE?

Countertrade refers to a range of barter-like


agreements that facilitate the trade of goods and
services for other goods and services when they
cannot be traded for money.
Types of Countertrade:
1. Barter
2. Counter purchase
3. Offset
4. Buyback or Compensation Agreement
5. Swap
6. Switch Trading
7. Clearing Arrangement
BARTER
This is the most simplified and perhaps the best-known form of counter-trade. The transaction involves
physical exchange of goods without price, though quantity and quality can be specified. Most barters
are void of terms of payments but rule out the re-export possibility to the third country. They also
stipulate the duration under which goods must be exchanged.
EXAMPLES:
1. Brazil exchanged 50,000 tons of soybeans for 50,000 tons. of Mexican matpe in 1982.
2. Indo Iraq Wheat and Rice for Oil deal: Indo-Iraq Barter Deal In 2000, India and Iraq agreed on an
"oil for wheat and rice" barter deal, subject to UN approval under Article 50 of the UN Gulf War
sanctions, that would facilitate 300,000 barrels of oil delivered daily to India at a price of $6.85 a
barrel while Iraq oil sales into Asia were valued at about $22 a barrel. In 2001, India agreed to swap
1.5 million tonnes of Iraqi crude under the oil-for-food program.
3. Occidental Petroleums exchange of its phosphate rock for molten sulphur of equal value each year
from Poland.
4. Volkswagens sale of 10,000 automobiles (Rabbits) to East Germany for other East German goods.
COUNTER PURCHASE
This is a reciprocal buying agreement. It occurs when a firm agrees to purchase a certain
amount of materials in future back from a country to which a sale is made. Volume of trade
does not have to be equal (may be covered by cash). Covered by two separate contracts.
More flexible than barter. Under one of the contracts, the sale of goods between an exporter
and importer is negotiated and paid for in a specified currency. The second contract obligates
the exporter to purchase goods from the importer at a specified value over a period of time.
Unlike buybacks, counter purchases involve hard currency.

Example: The sale of DC-9 aircrafts by McDonnell Douglas Corporation to the government
of Yugoslavia was made with an agreement to purchase canned ham and equipment along
with job offers to Yugoslavs in an airline business.

In 1989, Pepso and the former Soviet Union signed a $3 billion deal in which Pepsi agreed to
purchase and market Russian Vodka and ten Soviet-built ocean vessels in return for
doubling its Soviet bottling network and nationwide distribution of soft drinks in aluminum and
plastic bottles.
OFFSET
A party agrees to purchase goods and services with a specified
percentage of its proceeds from its original sale. Generally used in case
of Military Equipment. Direct Related Products; Indirect
Unrelated Products

Example: DIRECT - Shanghai Aircraft manufacturing Corp China may


buy jets from boeing using its proceeds from manufacturing the tail
sections of the jets from Boeing.
INDIRECT suppose Japan supplies a Chinese company with capital
inputs and asks China to promote its other services like tourism and trade
etc.
BUYBACK
This occurs when a firm provides a local company with inputs for manufacturing
products (mostly capital equipment) and agrees to buy a part of the produce in return for
the payment. It may also include technology transfer. Two separate contracts involved:
Sales and purchase contract

Examples:
1. Chinatex, a Shanghai based clothing manufacturer and Japans Fukusuke Corp.,
arranged a buyback whereby the latter sold 10 knitting machines and raw materials
in return for 1 Million pairs of underwear to be produced on the knitting machines
Chinatex benefitted from Fukusukes instructions on how to use the equipment and
its excellent after sales service
2. In Turkey, Coca-Cola set up a joint venture to produce tomato paste for the American
market and other markets, providing management and technology for the plant.
3. International Harvester sold a tractor plant to Poland and in return it has to purchase
all outputs of the tractor factory.
SWAP
The swap arrangement is in general used for minimizing costs of
transportation between countries. The routine is as follows: A swaps
goods with B and A agrees to ship goods to C while B agrees to ship
goods to D.

Example: In 1983, the Soviet Union agreed to a swap contract with


Venezuela. Venezuela had to ship a specified volume of crude oil to Cuba
while the Soviet Union would ship the same volume of crude oil to West
Germany. This arrangement apparently minimizes the transportation cost.
CLEARING ARRANGEMENT
These are bilateral trade agreements between two countries who agree to exchange
specified amounts of goods and services over a specified time period. Each country
extends to the other a line of credit in terms of an artificial clearing currency that can
usually be used only to purchase the goods offered under the agreement.
Example:
1. Specific examples of clearing arrangements include Moroccan oranges for Soviet
capital equipment; Hungarian electrical equipment for Egyptian cotton; a Soviet clearing
agreement with India that allows Britains Rank Xerox to export copiers from India to the
U.S.S.R.
2. In 1990, a Swedish company Sukab, accumulated a large surplus in its clearing
account with Pakistan. Sukab sold its credit to marubeni, a Japanese Company, at a
discount, and Marubeni in turn, liquidated the imbalance by purchasing Pakistani Cotton
and exporting it to a third country for hard currency.
SWITCH TRADING
Switch trading involves a triangular rather than bilateral trade agreement. When goods, all or part, from
the buying country are not easily usable or salable; it may be necessary to bring in a third party to
dispose of the merchandise. The third party pays hard currency for the unwanted merchandise at a
considerable discount.
Examples:
1. Switch Trading Brazil exported corn to East germany (before Unification) and received products in
return. Germany did not use corn, so it sold the corn to other countries for hard cash.
2. These include U.S. tyre making equipment for a COMECON countrys clearing credits exchanged
for Turkish lira credits in a bilateral agreement with the COMECON country. The Turkish lira were
used to buy chrome from Turkish sources which was then sold for hard currency.
3. As another example, Greece sold 81m of Rumanian credits for $700,000 of hard currency. These
credits were used by an African country to purchase Rumanian canned goods. Iranian credits for
Polish shoes worth $200,000 were sold to a switch broker for $160,000 who, in turn, sold them to a
buyer in East Africa for $165,000
IS PHILIPPINES PRACTICING
COUNTERTRADE?
On August 19, 1993, former President Fidel V. Ramos issued EXECUTIVE ORDER NO. 120 which
established a national policy on countertrade in the Philippines.
1. Directs the National Government, its departments, bureaus, agencies and offices, including
government-owned and controlled corporations, to adopt countertrade as a supplemental trade tool
in connection with transactions involving the importation or procurement of foreign capital
equipment, machinery, products, goods and services entailing the payment of at least US
DOLLARS: ONE MILLION (US$1,000,000.00) and above or its equivalent in other foreign currency
and to negotiate and conclude, on a best efforts basis, agreements or arrangements on
countertrade with respect to such importation.
2. Designates the Philippine International Trading Corporation (PITC) as the implementing agency
for this program on behalf of the Department of Trade and Industry.
3. Mandates the formulation and adoption of implementing rules and regulations (IRR) for this
program by an inter-agency committee composed of the Department of Trade and Industry,
Department of Finance, National Economic and Development Authority, and the Philippine
International Trading Corporation.
Section 4. Coordination by Government Agencies. The government agency or
government-owned or controlled corporation concerned shall closely coordinate with,
and provide information on, any planned importation or procurement as well as
countertrade efforts already undertaken, to the Department of Trade and Industry
and the Philippine International Trading Corporation prior to actual importation or
procurement, in order to assure the efficient implementation of this Executive Order.
Section 5. Supply Base and Trading Network. To achieve maximum implementation
and dispersion of the benefits of Countertrade arrangements which may be concluded
by government agencies or government-owned or controlled corporations, the Philippine
International Trading Corporation shall maintain and enhance its supply base and trading
network through constant and close coordination with various industry and export
sectors to ensure the availability of adequate and acceptable products, goods and
services which may be required under such countertrade arrangements.
Section 6. Implementing Rules and Regulations. The Department of Trade and
Industry, National Economic Development Authority, Department of Finance, and the
Philippine International Trading Corporation shall jointly promulgate the appropriate
guidelines, rules and regulations to implement this Executive Order
On November 14, 1994, the aforesaid inter-agency committee issued the IRR of the E.O. 120 which outlined
the fundamental procedures and guidelines for the Program Execution of the General Countertrade and
Offset Agreement by Philippine International Trading Corporation (PITC), a government- owned and
controlled corporation organized and existing under and by virtue of P.D. 1071 and the company:

PROCESSING AND EVALUATION OF COUNTERTRADE PROPOSALS:


(1) All departments, bureaus, agencies, offices and instrumentalities of the National government including
government-owned and controlled corporations must submit to the PITC no later than the second week of
November of every calendar year, a list of proposed importations which are covered by these guidelines, together
with their approximate values, product information and foreign suppliers of the said importation.
(2) PITC shall review the list submitted and shall thereafter coordinate with the government procuring offices.
(3) In the evaluation of the bid tenders or sales offers submitted by the foreign supplier, the government procuring
agency/office concerned shall give preference/priority to the foreign supplier offering the most favorable
countertrade arrangement for the Philippines .
(4) Within 5 working days or earlier from selection of the foreign supplier, the government importing office
concerned shall notify PITC in writing of the details of importation as well as the countertrade proposal.
(5) PITC shall evaluate the countertrade proposals submitted by the foreign supplier.
(6) PITC shall keep the government importing office concerned appraised/updated on all subsequent
developments relative to the countertrade package.
COUNTERTRADE PERFORMANCE:
PITC shall execute the necessary countertrade contracts with the foreign supplier or its
Countertrader. Such countertrade contract or agreement must be finalized and signed by
the parties not later than ninety (90) days from the signing of the Supply or Sales
Contract between the foreign supplier and the government procuring agency/office.
STANDARDS, TERMS & CONDITIONS:
(a) The level of countertrade obligations of the foreign supplier or its Countertrader shall be a
minimum of 50% of the contract price for said importation/procurement.
(b) The countertrade obligations must be carried out and fulfilled by the foreign supplier or its
Countertrader not later than three years (with a grace period of two years) from the date of
execution of the countertrade contract or agreement.
(c) Penalties for non-performance - 5% - 100% of the unfulfilled countertrade obligations payable
to PITC.
(d) Performance or bank guarantees to secure payment of the penalties for non-fulfillment of
countertrade obligations - shall be submitted to PITC by the foreign supplier or Countertrader
no later than thirty (30) days from the execution of the countertrade agreement.

NOTE: The laws of the Philippines shall be the governing law of all countertrade
contracts/agreements entered into pursuant to these rules.
FORMS OF COUNTERTRADE practiced in the
Philippines
OFFSETS
Whereby the primary supplier commits, as a condition of sale, to undertake or to
introduce a wide range of industrial and commercial activities for the benefit of the
buyer or the buyers country such as:
Investments
Technology Transfer
Training and Skills Upgrade
Research and Development
Donations
Others (like Priority Development Projects)

COUNTERPURCHASE (COUNTER EXPORTS)


Whereby the primary supplier accepts parallel obligations to purchase products
and/or services from the buyer's country.
EXAMPLES:
Philippine Exports (Countertrade): Exports of garments and Childrens dresses to the US amounting to PHP
28,506,500 (August, 2011) and Php 35,299,646 (August, 2013) were performed as fulfillment of Countertrade
obligations. The said exports were performed in compliance to the Countertrade obligations arising from the
Supply contract (various types of ammunition from Serbia) awarded by the Armed Forces of the Philippines to
JOAVI Philippines Corporation.
Inflow of Investments, Technology Transfer, Specialized Training Skills (termed as Offsets)
1. Investments amounting to Php 22,722,713 was made by Beiqi Motor Co. LTD of China for the
construction of the FOTON Subic Showroom of the United Asia Automotive Group Inc.(UAAGI). Said
investments were performed as Countertrade requirements resulting from the Supply Contract awarded to
UAAGI for the supply of Prisoners Vans (from China) to the Bureau of Jail Management and Penology
(BJMP).
2. GIGI Industries (Trust Trade) has conducted various Specialized Training events to the following
government agencies as beneficiaries:
Shooting Competition for the BJMP with a credit value of Php 164,000;
GLOCK Armourers Course for the Philippine National Police (PNP) valued at P 7,728,920;
GLOCK Tactical Pistol Course of the PNP (Luzon) valued at Php 7,309,041;
GLOCK Tactical Pistol Course of the PNP (Visayas & Mindanao) valued at Php 4,028,869.
Aforementioned training events were performed as a requirement to the awarding of two (2)
Contracts for the Supply of Rifles (from China) and Short Firearms (from Brazil) by the BJMP to Gigi
Industries
ASEAN COUNTERTRADE
INDONESIA
Indonesia officially introduced its counter-trade policy in 1982. It
stipulated that in cases of government procurement, arrangements must
be made to export Indonesian products at values equal to those of the
imported equipment or products, if Indonesian contracts with foreign
firms exceed a value of Rp500 million per contract. In spite of strong
objections, this policy has come to be accepted by time. By early 1986,
Indonesia had signed countertrade contracts with 29 countries
committing more than US$1.5 billion.
ASEAN COUNTERTRADE
VIETNAM
The Philippines imports Vietnam rice on countertrade: An initial importation of
900,000 tons of rice from Vietnam to the Philippines will be transacted under a counter
trade scheme, according to the Filipino importer. The Philippines and Vietnam
governments have agreed to pay the value of the 450,000 metric tons of rice in two
years through fertilizer, coconuts, and coconut by-products.The countrys total rice
importation for this year is estimated to reach 1 million tons. Vietnam and the
Philippines in 2002 discussed a counter trade volume of about US$600 million a year.
(Source: Manila Bulletin Compiled by The Vinh)
ASEAN COUNTERTRADE
MALAYSIA
The Malaysian Government also adopted the counter-trade policy in
1982 when its trade deficit grew to US$400 million. Prime Minister
Mahathir gave his approval on counter-trade and ever since September
1982, it has been on every Malaysian trade mission's agenda. Malaysia
encourages state agencies and private firms to engage extensively in
counter-trade with countries which have contracted major governmental
construction projects, or with which Malaysia has trade deficits; socialist
countries; and developing countries which have import potentials for
Malaysian primary commodities and manufactured goods.
ASEAN COUNTERTRADE
SINGAPORE
Singapore has extensive trading relations with numerous countries in ASEAN and the
world. The government has in fact taken measures to encourage countertrade. For
instance, starting May 30 1986, firms qualified to engage in counter-trade are given
certificates of new trades, and are exempt from income tax on their returns from
counter-trade for a period of 5 years. So far, these pioneer tax holidays were granted to
six trading companies, including Cargill Trading of the United States and Australia's
Centrobank, to establish subsidiaries engaging in counter-trade in Singapore. Four
additional firms may be granted the same status. It is to be noted that Singapore wants
to be a counter-trade center rather than use counter-trade in exporting its own domestic
manufactures.
ASEAN COUNTERTRADE
THAILAND
Faced with difficulties in exporting agricultural produce, the government under Prime Minister
Prem has set up Committees and Sub-Committees on Counter-Trade and a draft bill was
prepared in 1986 to promote counter-trade. The Counter-Trade Bill was dropped in 1986 but the
practice of counter-trade continues. In 1981, the value of Thai trade under counter-trade
amounted to Bl,050 million. The following year, a counter-purchase between Thailand and
Indonesia involving aircrafts and refined sugar was undertaken. Also in 1982, tapioca products
were exchanged for fertilizers between Thailand and South Korea. The counter-purchase of
agricultural surplus commodities (that is, tapioca, rice, maize, coffee, and so on) dominate the
Thai counter-trade with various countries, including the Philippines, Romania, Israel, and Brazil.
Currently there are ten cases of counter-trade exchanges which are under review or ongoing.
One of these is the exchange of Thai rice for an unspecified Chinese product.
THE END