Many firms are turning to international trade in a move to not only increase the market for their products but to also take advantage of cheap labor in other countries. In this regard, agreements have been made between different countries to ensure that goods from each country receive relatively equal treatment. When the issues about the inequality of products prevailed, the concepts of free and fair trade were introduced into international business.
Because countries sometimes lack hard cash, the idea of countertrade has also been introduced (Onkivist & Shaw, 2004). Countertrade refers to the process by which payment for some goods or services is done either in part or whole by other goods or services. It is, however, crucial to note that in some instances, a monetary value is attached to the goods and services for the sake of book keeping.
Countertrade as a form of conducting business is fast gaining ground, especially in international business. Countertrade has prospered contrary to the belief of many that it is difficult to conduct due to the need for double coincidence of wants (Gitman & McDaniel, 2008). Initially, countertrade was practiced among a few neighboring countries.
However, nowadays, countertrade accounts for more than 20% of world trade. It is important to note that countertrade usually takes place in the world daily, and it is part and parcel of the international business. Though some governments are skeptical about countertrade, many multinational companies are usually involved in the process. Countertrade has proved beneficial mitigating the problem of transactional costs, moral hazard-agency problems, and other market imperfections (Gitman & McDaniel, 2008).
One of the most recent examples of countertrade is the agreement between Iraq and India. Iraq is known to be well endowed with oil while at the same time, India has a competitive advantage in the production of rice. However, citizens from the two countries do not have the economic power to pay for their transactions in cash. Consequently, the two countries agreed on a barter deal in the year 2000, known as the oil-for-food program. Under this program, India can get oil at a reduced price, while Iraq is assured of rice from India (Siddaiah, 2009).
On the same note, citizens of the two countries who would not have the ability and the money to pay cash can get the products they need. Unfortunately, the program has not met its expectations since most Iraqis’ nutrition has not improved as was expected. Also, India is compelled to offer very large quantities of rice compared to the quantity of the oil that it receives from Iraq. Similarly, the two countries lose because their products are undervalued as compared to the price they could have received if the products were sold on cash terms (Onkivist & Shaw, 2004).
The emergency of the internet has highly enhanced sharing of information between countries. In this regard, feedback from various ventures is easily available to people at any time. As a result, firms engaging in countertrade can easily contact each other and finalize their deals.
On the other hand, the internet has led to the emergency of other methods of payment other than the use of hard cash (Siddaiah, 2009). Subsequently, this has led to a decrease in the number of firms ready to use countertrade. However, it should be noted that countertrade continues to play a significant role in international trade. Given the volume of trade that takes place through countertrade, it is high time governments accorded countertrade the required support to foster it.
References
Gitman, L. J. & McDaniel, C. (2008). The Future of Business: The Essentials (with Builiding Your Career Booklet) (Book Only). Stanford: Cengage Learning.
Onkivist, S. & Shaw, J. J. (2004). International Marketing: Analysis and Strategy. London: Routledge.
Siddaiah, T. (2009). Financial Services. New Delhi: Pearson Education India.