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224 Răvaş, O. Unstable business partner relationships and rapidly changing social norms limit the extent to which economic exchanges can be sustained by reputation, by repeated interaction or by embedding them in social networks. This paper tries to explain how barter as an economic institution can help deal with the problem of contract enforcement across national borders in international trade and within borders in transition economies. Barter trade has received much attention lately. But it is not a new phenomenon. In the 1980s, in the aftermath of the international debt crisis, barter became prevalent in international trade with developing countries and Eastern Europe. Since the 1990s, with the domestic debt crisis in transition economies, barter has continued to be a dominant phenomenon in domestic trade in these countries. What explains the appearance of barter in international trade in the 1980s and in domestic trade in transition countries in the 1990s What makes barter, or countertrade, as it is more generally called, preferable to conventional forms of trade In particular, the term ``barter`` is used with different meanings, sometimes as a term that refers to countertrade transactions in general, sometimes in a more specific sense. ``Countertrade'' is used as the general term to denote transactions in which a party from an industrialized country supplies goods, services, or technology to a second party in an Eastern European or developing country, and in which, in return, the first party purchases from the second party an agreed amount of goods, services, or technology. A distinctive feature of countertrade is the existence of a link between the two transactions, the import and the subsequent export. Countertrade transactions take a variety of forms. The three forms are ``barter,'' ``counter purchase,'' and ``buyback.'' Barter in the strict sense of the word refers to an import that is paid entirely or partly with an export from the latter country without using foreign exchange. Counter purchase refers to a transaction in which the import is paid with foreign exchange but the industrialized country commits to buy export goods from the Eastern European or developing country in return. Buyback is a transaction in which the first party supplies a production facility and the parties agree that the supplier of the facility will buy goods produced with that production facility. All three forms of countertrade are frequently observed in international trade. The actual countertrade can take many different forms. The first form is barter. This form of countertrade has received a lot of press; however, it is the least practiced. Barter is a simultaneous two-way trade. In other words, I'll give two glass beads for your one shell. This is one of the oldest forms of countertrade...the least practiced, but the most written about. The second type is offsets. They pertain mostly to military and commercial aircraft sales. The name comes from the fact that part of the cost of the product is offset by purchasing products in the country where the goods are being sold. Offsets are divided into two parts. First, direct offsets: like McDonnell Douglas sold MD 82 mid-size passenger aircraft to China. The contract included provisions for the Chinese to manufacture aircraft components such as doors to be used for landing gears, passengers, and cargo.
The Utility of the Barter Agreement in International Commercial Trade 225 The second form of offsets is indirect offset. These are goods that are not used in the products sold to that country. A good example: the price of DC-9s sold to Yugoslavia was indirectly offset by the purchases of Elan skis. The third type of countertrade is clearing accounts. This form normally occurs between Eastern European countries and the LDC's (less developed countries). The LDC ships products to one East European nation, creating an accounts payable entry on that country's trade books (country A owes US$ for this product). One country can then satisfy the entry with either its own products or it can be satisfied by another country that comes along and buys first's country's debt. For example, we may sell product to Brazil and receive payment from one of Brazil's trading partners. Sometimes it is part cash and part products from that country. The fourth type of countertrade is compensation--also known as cooperation or buy-back. In an effort to promote an understandable lexicon, it's preferable to call it compensation. This is where a company agrees to build a plant or to sell technology into a country. The company then gets compensated for technology or capital with exported products produced by that plant. The last type of countertrade is counter purchase. Counter purchase is an agreement between two business units to buy from each other in carrying amounts over varying periods of time. This transaction creates hard currency that is then used in turn to purchase products. Forecasting the size of countertrade is very difficult because countertrade information is not collected and recorded in any one place. There have been many estimates put forth by the U.S. government, the United Nations and various independent studies. The general consensus is that countertrade is somewhere between 10% and 20% of all world trade. A recent study at the Centre for Advanced Purchasing Studies found that in the companies that answered the survey, countertrade rose 74% as a portion of sales agreements. (The survey covered a four year period ending in 1989.) In other words, in 1985, 5% of the sales contracts involved countertrade; and by 1989, 9% of the sales contracts involved countertrade. In terms of total dollar volume, countertrade grew 30% from $13.6 billion in 1985 to $17.7 billion in 1989. This study also had some other very interesting findings: • A majority of companies participate in countertrade due to a requirement of a foreign government or customer. Countertrade therefore is not being utilized as an aggressive marketing tool. • Those companies that have utilized countertrade have found it to be an effective way of expanding sales and improving efficiency in operations. • Companies can avoid the pitfalls of countertrade by involving countertrade experts and their purchasing departments early in the negotiation. • The purchasers surveyed reported 71% more advantages than disadvantages, indicating that their experiences with this form of trade practices have been largely positive. From another point of view, Elderkin & Norquist, in their book "Creative Countertrade," say that companies countertrade in order to:
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