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Global Financing - Essay Example

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Countertrade is a term that covers a whole range of barter like agreements. It is used mainly when a company is exporting to countries whose currency is not freely convertible, and who may lack the foreign exchange reserves necessary to purchase the imports…
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Global Financing
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Download file to see previous pages Countertrade is classified under five divergent types namely; barter, counter purchase, offset, switch trading and buyback. There are five distinct types of countertrade -- barter, counter purchase, offset, switch trading, and buy back. Under this essay, we will focus on the meaning and the significance of each type in the international trade scenario.
Barter can be defined as a direct exchange of goods and services, or both, between two parties without a cash transaction. It involves exchange of goods for goods and does not involve cash payments or receipts. Although in theory barter appears to be the simplest arrangement, in practice it is not commonly applied or practically implemented.
It can be said that the expansion of bartering in the US is mainly because of barter companies or barter exchanges. According to popular estimates, there were roughly 600 barter exchanges among which 500 acted as clearinghouses for the exchange of goods and services between their clients and 100 were corporate trade brokers that exchange trade credits for assets, and goods and services so as to make it a part trade and part cash transaction. In a manner, barter dealers or barter exchanges facilitate a common platform upon which members exchange goods and services either through pure barter or through mixture of barter and cash. The barter exchange generates its profits from membership and renewal fees and from certain commissions which are based on a percentage of the gross worth of each operation. The fees usually range between 5 to10 percent. Under certain arrangements, some barter exchanges also charge a monthly administrative fee. The most significant purpose of a barter exchange is to match the needs of potential traders.
Counter Purchase
Counter purchase is a form of mutual buying agreement. It occurs when a firm agrees to purchase a certain amount of materials back from a country to which a sale is made. Typically, there will be two distinct contracts. One of them will relate to the sale of goods/services by the trading company for which it will be paid a specified amount of hard currency. The other form will require the trading company to spend some proportion of this revenue to buy goods from a list provided by the importing country. The counter-purchase may vary in value between 10 and 100% of the original export order. The imports bought require not be related in any way to the goods/services exported. Generally, there is a specific time period (normally three years) within which the counter-purchase must be made. Thus, in this form of counter-trading (unlike pure barter), exports only partly finance the purchase of imports. In fact, they simply help balance costs on imports at a later date. In this manner, a counter-purchase transaction is not undertaken because of a lack of convertible currency or incapability to obtain credit. Nevertheless, it has often been used by planned economies as a tool for scheming foreign trade and ensuring that exports balance imports.
Offset is similar to counter purchase since the exporter is required to purchase goods and services with an agreed percentage of the proceeds from the original sale. The main difference is that the exporter can fulfill this obligation with any firm in the country to which the sale is being made. Certainly, its importance appears to be growing fast. It involves an agreement under which an exporter integrate into his final product, along with certain components and ...Download file to see next pagesRead More
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