IntroductionGenerally, counter trade is considered to be one of the oldest forms of attaining goods. One of the elements of counter trade is that one does need to use money to pay for part or whole of goods or services. Counter trade can be divided into eight segments which are more defined in nature. Some of the classifications of counter trade are: barter trade, buyback, clearing arrangement, counter purchase, switch trade, offsets, tolling, and compensation. The paper looks at the risks of counter trade and their implications on trade as a whole (Trent, 2007).
Most people are under the assumption that the exchange of goods and services for alternative goods are not used in present day. However, counter trade is an ideal option used by governments to avoid using currency which has a number of inconveniences attached to the process. When a government needs to purchase a good or service for a fee, they are inclined to make an agreement with their peer government in order to get a convenient and affordable method of buying and selling goods. This form of exchange has in place advantages that enhance the growth of economies without the use of money which in most cases may require the use of loans (Butler, 2012).
One of the advantages with the use of counter trade is that one may attain goods that they do not produce in their country by exchanging goods and services that they have in plenty. In the process, each country does not experience much strain when trading with their partners. Another advantage that people who use countertrade as a method of trade get is that they are able to attain their goods at considerable discounted prices. This is because most of the goods are produced by companies in plenty for the exchange of goods that is scarce. As such, goods are processed for export with the aim of reducing the rate of liquidation in international trade while enhancing trade and development (Trent, 2007).
Risks of Counter Trade
Despite the various advantages that traders may get from the use of counter trade, there are a number of risks that are associated with the means of exchange. One of the factors to consider before the analysis is the convenience of the process to the trader, suppliers, and buyer with regard to the type of business operated. Apart from the government, most traders have adopted the use of this form of trade as their main option to reduce the use of money when exporting and importing goods. Companies that partake in counter trade experience many challenges with the trade owing to the complexities of the process. In turn, one has to have a clear understanding of the goods and services that they are trading before they venture into the business (Trent, 2007).
One of the risks involved in counter trade is that companies may be exposed to handling goods that they ideally are not familiar with. In this situation, a buyer may be compromised to accept goods that they do not have the market to supply. For example, one company may manufacture goods such as medical equipment and medical products while another company may manufacture goods used in the IT industry like computers and smart phones. In the case than one does not receive goods that they are accustomed to, they are likely to get a significant loss. Therefore, traders have to be well informed of the negative repercussions associated with the exchange (Butler, 2012).
Another risk in counter trade is that companies may invest in products and services which need extra care to manage. In the process, goods may be damaged in the exportation procedure due to unprofessional packing, transporting, and storage. Companies that succumb to this issue may have challenges getting their investment back. This is attributed to the lack of legal accountability especially when more than two countries are involved. Sometimes, traders may take more than one year pursuing a case which may limit their ability to invest in alternative products. For example, if a trader takes on a product title to cover goods that are damaged during a shipment; they are liable in the event that any of the goods are damaged. Hence, one has to be prepared for any circumstance through the acquisition of insurance, proper trade methods, and partners (Trent, 2007).
Lastly, counter trade is divided into various forms of trade which all have distinguishing factors. In turn, one has to be careful on the type of trade they intend to do. Failure to do so can result in the performance of the wrong activity. This can result in a miscommunication between involved parties especially during the initial stages of their trade (Butler, 2012).
To summarize, despite the disadvantages that come with the use of counter trade, a large percentage of the transactions done during this trade are successful. As a result, companies need to perform extensive research on the matter at hand before they invest in the concept.
- Butler, K. C. (2012). Multinational finance: Evaluating opportunities, costs, and risks of operations. Hoboken, NJ: Wiley.
- Trent, R. J. (2007). Strategic supply management: Creating the next source of competitive advantage. Ft. Lauderdale, FL: J. Ross Pub.