Journal of Comparative Business and Capital Market Law 5 (1983) 347-351

North-Holland

ADVANTAGES AND DISADVANTAGES OF COUNTERTRADE *

Jacques de MIRAMON **

1. Introduction

Countertrade practices have expanded during the past decade. Long associ-
ated primarily with East-West trade, they appear to be spreading to other
areas. The international community, however, has not been effective in ad-
dressing these practices which are, in large measure, contrary to the basic
tenets of free and multilateral trade. The Eastern countries had refused to
discuss the matter with their trading partners until a meeting with Western
countries at the U.N. Economic Commission for Europe (Geneva) in Novem-
ber 1981. Unfortunately, this meeting ended in a deadlock.
In light of the fundamental differences between centralized Eastern European
economies and the decentralized Western markets, it is not surprising that the
two sides have divergent opinions on countertrade. The Eastern European
countries are almost unanimously in favor of such deals, the inference being
that they find countertrade mainly to their advantage. Western opinion of
countertrade, however, has been mostly unfavorable.

2. Reasons why the Eastern European countries find countertrade attractive

With few exceptions (e.g. Hungary), there has been no public discussion of
the advantages and disadvantages of countertrade in the Eastern European
countries. The ambiguity of the terms used, especially the confusion between
industrial and commercial compensation, hinders constructive discussion. East-

* This note presents a brief outline of the main advantages and disadvantages of trade in the
form of compensation deals. The arguments for and against this type of trade are discussed in
greater detail in an OECD publication: East-West Trade - Recent Developments in Counter-
trade (Paris, 1981). The views expressed in this paper are those of the author and should not be
attributed to the OECD.
* Head of Division 11, Trade Directorate, Organization for Economic Cooperation and Develop-
ment. Paris, France.

0167-9333/83/$3.00 ( 1983, Elsevier Science Publishers B.V. (North-Holland)

Published by Penn Carey Law: Legal Scholarship Repository, 2014

 J. de Mirarnon / Advantages and disadvantagesof countertrade

ern European countries support countertrade by invoking general arguments

stressing its mutual advantages.
One underlying reason for support of countertrade by Eastern European
countries is the nature of their governmental system. Countertrade facilitates
management of the centralized system of planned economies and approximates
the trading methods of the Council for Mutual Economic Assistance (COM-
ECON) which operate chiefly by reference to volume indicators. It mitigates
the unpredictable behavior of Western markets. Countertrade makes it easier
to achieve a balance by industry or by country, enabling fulfillment of planned
norms and resulting in bonuses for the responsible Eastern civil servants.
The unduly high demand for investment in Eastern countries requires
imports of Western capital goods that lead to an imbalance of trade flows with
the West. Countertrade enables the central government agencies to strengthen
their control over economic transactors. By laying down fairly stringent
countertrade ratios, Eastern European countries hope to moderate orders of
capital goods payable in convertible currencies, and to encourage the central-
ized foreign trade agencies or firms to search more actively for market outlets
for their goods. Countertrade is also a form of insurance against unforeseen
events. If unplanned imports are required, the financial equilibrium will not be
impaired if there is a requirement of compensation by sales.
Another reason why Eastern European countries favor countertrade is
because it allows them to gain a foothold in the international trading network.
In the context of restoring the trade balance, Eastern European countries use
countertrade to overcome the poor competitiveness of their goods in the
international marketplace. Pressure to link sales with purchases will continue
until the Eastern European countries substantially improve the variety, quality.
and marketing of the goods they seek to export.
Compensation can also help to resolve certain problems of access to markets
in Western countries. The goods are marketed by an intermediary, sometimes
in a third market, which may make it more difficult to allege "dumping" when
the offered prices are low. Similarly, producers hope that Western distributors
will find ways of avoiding import restrictions.
Eastern European countries stress that the industrial cooperation that
results from countertrade contributes to the stability of trade relations with
Western countries. It allows a greater degree of economic interchange with
market economy countries without altering the centralized economic systems.
Hence, industrial countertrade is promoted as a means through which West-
erners may "invest" in Eastern Europe. In certain industries, countertrade
deals facilitate the development of a complex subcontracting network, con-
trolled by Western providers of technology and assistance. It should be
recognized that these transactions may prove to be advantageous to the
Western countries. This is clearly the case when the goods offered in exchange

https://scholarship.law.upenn.edu/jil/vol5/iss4/5
 J. de Miramion / Advantages and disadvantages of countertrade

by the Eastern European countries are raw materials and energy-intensive

products.

3. Reasons why countertrade is unattractive to Western countries and their firms

Government authorities, as guarantors of the national interest, view coun-

tertrade differently than private exporting firms. Whereas exporters evaluate
countertrade according to its ability to broaden their markets and increase
profit, government authorities are concerned with trade policy implications.
From a trade policy standpoint, countertrade is a retreat from the progress
achieved in the area of trade liberalization since World War II. It is a return to
bilateralism at the very time when the international community is seeking to
safeguard and promote a multilateral trading system. Countertrade. in essence,
is a modernized barter system which disregards the progress achieved in
international settlements. Moreover, it is a body of practices reminiscent of the
war economies and partitioned markets. It is contrary to present policies that
aim to secure the openness of markets and to facilitate the expansion of trade
opportunities.
An increase in countertrade would lead to the creation of a special system in
which the terms and conditions of trade would be decided unilaterally by the
Eastern European countries. This system could result in discrimination and
distortion since it would not be subject to either international rules or
multilateral supervision. Because the bargaining power of the partners would
depend largely on their economic muscle, large firms and powerful countries
would have a distinct advantage. Moreover, the proliferation of countertrade
deals could bring about more direct intervention by Western governments in
trade negotiations with Eastern Europe in order to support their national
firms. Once this occurs, a drift toward legitimizing countertrade by laying
down operating standards is likely to follow.
Western government authorities must weigh these disadvantages against the
possible advantages of countertrade. It is true that Eastern European countries
may have few means other than countertrade to restore their trade balances
and to improve their level of production. The pivotal question is whether the
risk of spreading an undesirable trading system to countries outside of Eastern
Europe is greater than the possible benefit to East-West trade.
Most Western firms view countertrade as a constraint imposed by the
Eastern parties. The system complicates export procedures and increases the
risks and costs of exporting. Apart from very large firms, exporters often do
not wish to assume merchant functions in the resale of goods which lie outside
their area of marketing expertise.

Published by Penn Carey Law: Legal Scholarship Repository, 2014

 J. de Mirainon / Advantages and disadvantagesof countertrade

4. Arguments against Eastern European defenses of countertrade

Eastern European countries argue that countertrade stimulates reciprocal

trade flows which, in turn, encourages the expansion of trade. This argument
presents countertrade as a new trading technique or "new form of interna-
tional economic relationship" which helps preserve the buoyancy of East-West
trade. It is, of course, dangerous to conclude from a few specific examples of
favorable countertrade transactions between East and West that countertrade
is, per se, productive.
There is no proof that countertrade stimulates foreign trade. In practice, it
tends to restrict such transactions to large firms that are able to accept
compensatory imports as payment for exports. Insofar as the compensation
requirement and ratio are laid down unilaterally by the Eastern European
countries, the volume of reciprocal trade is determined by the exporting
capabilities of those countries. Given the present constraints on these econo-
mies, it is difficult to see how countertrade could enable Western countries to
expand their exports to Eastern Europe.
The hope for continuity in trade relations may be a justification for initial
sacrifices when entering a market. Industrial compensation deals generally
provide for delivery over extended periods of time. Commercial compensation
deals, however, are less likely to foster continuous trade flows because Western
exporters generally feel that such practices are not in their best interests.
Whenever possible, they will opt for the markets that do not impose counter-
trade obligations. If the Western partner feels that it is not making a sufficient
profit from the deal, it will find it difficult to continue in the relationship.
Countertrade practices do not appear to help Eastern European countries
overcome the chief problems responsible for their poor trading performance.
Other methods are far more effective than compensation in improving product
quality, ensuring regular updating of technology, training Eastern European
manufacturers to market their goods in the West, and making their systems of
economic management more flexible. By abandoning control over the market-
ing of their products to third parties which are basically interested in making
short-term profits, Eastern European firms are not creating long-term markets.
There is even .the risk that countertrade goods will compete with their direct
exports. Moreover, it is difficult for an Eastern European country to determine
whether a deal will be profitable because the prices set in each transaction are
interdependent, and it is not always possible to determine whether they will
settle at the right level. Furthermore, it is illogical to choose a supplier on the
basis of his ability to become a purchaser. The countertrade system therefore
will prevent Eastern European countries from developing a more rational cost
and pricing structure. Finally, the intervention of a Western intermediary slows
down the flow of information on market trends and delays the adaptation of

https://scholarship.law.upenn.edu/jil/vol5/iss4/5
 J. de Miramon / Advantages and disadvantages of countertrade 351

production in Eastern European countries.

Countertrade is a regression towards bilateralism. In certain countries, such
as Hungary and Poland, there has been increasing support for the idea that
opening up foreign trade requires the establishment of multilateral trading
relationships. The expansion of compensated trade encourages orthodox think-
ing in the Eastern leadership and discourages management reforms essential to
the improved efficiency of these countries' economies.

Published by Penn Carey Law: Legal Scholarship Repository, 2014