Counter Trade
What Is
Countertrade?
Countertrade is a reciprocal form of
international trade in which goods or services are exchanged for other goods or
services rather than for hard currency. This type of international trade is more common
in developing countries with limited foreign exchange or credit facilities.
Countertrade can be classified into three broad categories: barter, counter
purchase, and offset.
1. Barter
Bartering is the oldest countertrade
arrangement. It is the direct exchange of goods and services with an
equivalent value but with no cash settlement. The bartering transaction is referred to
as a trade. For example, a bag of nuts might be exchanged for coffee beans or
meat.
2. Counter purchase
Under a counter purchase arrangement, the exporter sells goods or
services to an importer and agrees to also purchase other goods from the
importer within a specified period. Unlike bartering, exporters entering
into a counter purchase arrangement must use a trading firm to sell the
goods they purchase and will not use the goods themselves.
3. Offset
In an offset arrangement,
the seller assists in marketing products manufactured by the buying country or
allows part of the exported product's assembly to be carried out by
manufacturers in the buying country. This practice is common in aerospace, defense
and certain infrastructure industries. Offsetting is also more common for
larger, more expensive items. An offset arrangement may also be referred
to as industrial participation or industrial cooperation.
Benefits and
Drawbacks
A major benefit of countertrade is that
it facilitates the conservation of foreign currency, which is a prime
consideration for cash-strapped nations and provides an alternative to
traditional financing that may not be available in developing nations. Other
benefits include lower unemployment, higher sales, better capacity utilization,
and ease of entry into challenging markets.
A major drawback of countertrade is that
the value proposition may be uncertain, particularly in
cases where the goods being exchanged have significant price volatility. Other disadvantages of countertrade include
complex negotiations, potentially higher costs and logistical issues.
Additionally, how the activities interact
with various trade policies can also be a point of concern for open-market
operations. Opportunities for trade advancement, shifting terms, and conditions
instituted by developing nations could lead to discrimination in the
marketplace.
Various
Forms of Counter Trade are:
BARTER : the direct exchange of product for product;
Compensation Deal : where the
seller from the exporting country receives part payment in his own currency and
the remainder in goods supplied by the buyer;
Buy
Back : where the seller of plant and equipment from
the exporting country agrees to accept some of the goods produced by that plant
and equipment in the importing country as part payment;
Counter
Purchase : where the seller from the exporting country
received part payment for the goods in his own currency and the reminder in the
local currency of the buyer, the latter then being used to purchase other
products in the buyer’s country.
Transfer
pricing
Transfer prices are those
charged for intracompany movement of goods and services. Firms need to make
transfer-pricing decisions when goods are transferred from the headquarters to
the subsidiaries in another countries. This transfer prices are important
because goods transferred from country to country must have a value for
cross-border taxation purposes. There are three basic approaches to transfer
pricing:
Transfer
at cost. The transfer price is set at the level of the
production cost and the international division is credited with the
entire profit that
the firm makes. This means that the production center is evaluated on
efficiency parameters rather than profitability.
Transfer
at arm´s length. Here the international division is
charged the same as any buyer outside the firm. Problems occur if the overseas
division is allowed to buy elsewhere when the price is uncompetitive or the
product quality is
inferior, and further problems arise if there are no external buyers, making it
difficult to establish a relevant price. Nevertheless, this approach has now
been accepted worldwide as the preferred (not required) standard by which
transfer prices should be set.
Transfer
at cost plus. This is the usual compromise, where
profits are split between the headquarters and the subsidiaries. The formula
used for assessing the transfer price can vary, but usually it is this method
that has the greatest chance of minimizing time spent on transfer-price
disagreements, optimizing corporate profits and motivating the headquarters and
subsidiaries.
Meaning
of Transfer Pricing:
Transfer
price is the price at which two related parties undertake a commercial
transaction between each other. The related parties are called associated
enterprises. So, transfer price is the price at which an associated enterprise
sells tangible or intangible properties, and services to another associated
enterprise.
Two
enterprises are associated when one of the two following conditions is
satisfied:
i. One enterprise participates directly or indirectly
in the management, control or capital of the other.
ii. Both enterprises belong to the same group or
conglomerate, so that the same person participates directly or indirectly in
the management, control or capital of both the enterprises.
5 Types of Transfer Pricing Methods used
in International Marketing
Transfer pricing is the pricing of goods and services exchanged
in intra corporate purchase transactions.
1)
Transfer at Cost:
Companies
using the transfer-at-cost approach recognize that sales by international
affiliates contribute to corporate profitability by generating scale economies
in domestic manufacturing operations. This approach assumes lower costs lead to
better affiliate performance, which ultimately benefits the entire
organisation.
The
transfer-at-cost method helps keep duties at a minimum. Companies using this
approach have no profit expectation on transfer sales; rather, the expectation
is that the affiliate will generate the profit by subsequent resale.
2)
Cost-Plus Pricing:
Companies
that follow the cost-plus pricing method are taking the position that profit
must be shown for any product or service at every stage of movement through the
corporate system. While cost-plus pricing may result in a price that is
completely unrelated to competitive or demand conditions in international
markets, many exporters use this approach successfully.
3)
Market-Based Transfer Price:
A
market-based transfer price is derived from the price required to be
competitive in the international market. The constraint on this price is cost.
However, there is a considerable degree of variation in how costs are defined.
Since costs generally decline with volume, a decision must be made regarding
whether to price on the basis of current or planned volume levels. To use
market-based transfer prices to enter a new market that is too small to support
local manufacturing, third-country sourcing may be required. This enables a
company to establish its name or franchise in the market without investing in
bricks and mortar.
4)
“Arm’s-Length” Transfer Pricing:
The
price that would have been reached by unrelated parties in a similar transaction
is referred to as “arm’s-length” transfer pricing. This approach requires
identifying an arm’s-length price, which may be difficult to do except in the
case of commodity-type products. The arm’s-length price can be a useful target
if it is viewed not as a single point but rather as a range of prices. The
important thing to remember is that pricing at arm’s length in differentiated
products results not in pre- determinable specific prices but in prices that
fall within a pre- determinable range.
5)
Tax Regulations and Transfer Prices:
Since the global corporation
conducts business in a world characterized by different corporate tax rates,
there is an incentive to maximize system income in countries with the lowest
tax rates and to minimize income in high-tax countries. Governments, naturally,
are well aware of this. In recent years, many governments have tried to
maximize national tax revenues by examining company returns and mandating
reallocation of income and expenses.
Grey market
A situation that consists of
unauthorized traders buying and selling a company´s product in different
countries. Companies confronted with a grey situation can react in many ways.
They may decide to ignore the problem, take legal action or modify elements of their
marketing mix. The option chosen
is strongly influenced by the nature of the situation and its expected
duration.
What Is a Grey Market?
A grey market is a market in which goods
have been manufactured by or with the consent of the brand owner but are sold
outside of the brand owner's approved distribution channels—an activity that
can be perfectly legal.
IMPORTANT
: Grey market goods are products sold by a
manufacturer or their authorized agent outside the terms of the agreement
between the reseller/distributor and the manufacturer.
Levis Strauss
Jeans and the E.U. Grey Market
U.K.-based supermarket giant Tesco began
to sell discounted Levi's jeans in the late 1990s, which it had bought on the
E.U. grey market. By buying them from countries with lower wholesale prices, it
was able to undercut Levi’s approved outlets by nearly half. Levi Strauss went
to court and claimed this trade violated European trademark laws and damaged
its brand.
In 2001, the European Court of
Justice ruled that grey market products are legal for resale in the E.U.,
provided that the equipment was originally sold by the manufacturer inside the
E.U. Levi Strauss could thus not restrict how Tesco acquires jeans within the
E.U., though acquiring goods from outside the E.U. was prohibited. However, in
November 2016, the U.K. Supreme Court ruled that the distribution of grey
market goods without the consent of the brand owner is a criminal offense.
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