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Policy response to countertrade and the U.S. trade deficit: an appraisal.

*Jong H. Park is a faculty member in the School of Business Administration, Kennesaw College, Marietta, GA, 30061. He is indebted to Michael Curley of Kennesaw College for making useful comments on the previous drafts of the paper. An earlier version of this paper was presented at the Second Annual Symposium of the Institute for International Economic Competitiveness held in Radford, VA, in April 1989.

At present, the United States has no clear and consistent policy stance on international countertrade, when addressing the problem of the trade deficit and export promotion. This paper evaluates the U. S. government attitudes toward countertrade and examines the potential contribution it could make toward promoting U. S. exports. In the face of huge trade deficits, any policy measures that either will promote exports or remove various disincentives to export competitiveness should not be eschewed. Countertrade is an area that deserves serious examination.

RECENTLY, A HUGE trade deficit, hovering around $150 billion, has become an important public policy issue in the United States. One of the public policy responses to the problem has been adoption of export promotion measures. Various programs have been made available to business firms to help increase their awareness of potentially profitable export markets overseas and to help overcome barriers to exporting. In 1982 the Export Trading Company (ETC) Act was instituted in order to encourage the development of trading companies, especially for the benefit of small and medium-sized companies that, for many reasons, have not fulfilled their export potential. Although the effectiveness of the Act in promoting exports has yet to be determined, the legislation has been regarded as a positive public policy response to the problem.

At the same time, however, the United States has no clear and consistent policy stance on international countertrade, one of the most important recent developments in international trade and business. At present, the U. S. government does not interfere with private business firms' engagement in countertrade. However, it opposes foreign government-mandated countertrade and seeks to limit the widespread use of countertrade through bilateral and multilateral channels. In so doing, it creates indirect but rather significant disincentives for countertrade for private business firms. Such a negative policy response is increasingly at odds with the trade policies of both developing countries and OECD countries as well and can only hurt the U.S. competitive position in world markets.

ARGUMENTS FOR AND AGAINST COUNTERTRADE

Both private and public reactions to countertrade as an alternative mode of doing international business vary widely. But, first, what is "countertrade"?

Forms and Extent of Countertrade

Countertrade refers to all forms of trading practices that link exports and imports of goods and services, either directly or indirectly. These trading arrangements are aimed at either minimizing the use of hard currency or imposing some form of reciprocity in trading relations. Forms of countertrade may be grouped into five basic types: simple barter, clearing-account arrangements, counterpurchase arrangements, buybacks or industrial compensation arrangements, and offsets. The first two are explicitly designed to avoid or minimize cash transactions, whereas the other three require some form of reciprocity in trade.

As the oldest and simplest mode of trade without cash, simple barter involves a direct exchange of goods between two parties. The quantity and quality of goods are negotiated, and a single contract is agreed to. Typically, no middlemen are involved.

In a clearing-account arrangement, two parties agree in a single contract to exchange a specified value (in hard currency) of goods from each other over a stated period of time. Goods to be exchanged are generally those products not readily sold on the open market through normal marketing channels. This form is widely used in state trading between governments.

Under a counterpurchase arrangement, two separate contracts linking exports and imports are negotiated between two parties. A seller (exporter) agrees to sell a product at a set price to a buyer (importer); the payment may be made in the form of cash, trade credits, or goods and raw materials from a specified list. If goods or raw materials are involved, each of the two shipments is paid for separately, and they need not be synchronized. The exporter who has no use for the goods to be received in payment may transfer rights to these goods to a third party who can use them.

Under a buyback or industrial compensation arrangement, the exporter of plant and equipment or a technology package is paid in the form of the resultant output" from the plant and equipment exported. As in the case of counterpurchase, two separate contracts are involved - one involving the export of the plant and the other the import of the resulting output from the plant; third parties may participate in the sale of the buyback products.

Finally, governments, when they make large purchases from foreign companies, frequently require that the purchase price be offset in some way by the exporter. Such offset requirements may include sourcing parts, or assembling the product in the importing country.

Estimates of the extent of countertrade in terms of total world trade volume vary widely from a low of 8 percent to a high of 30 percent. More than thirty countries are reported to have recognized countertrade officially as an accepted trade practice, and the number of countries requesting or requiring countertrade arrangements has increased dramatically in recent years (see Appendix Table 1). Countertrade is undeniably spreading globally in its scope and intensity, and many believe the trend will continue in the foreseeable future.

Arguments Against Countertrade

Some argue that countertrade practices are an inefficient form of international trade and that they represent a return to bilateralism through the various modernized forms of bartering.[1] To this group, countertrade transactions are cumbersome, time-consuming to conclude, and tend to increase the cost of trade because additional risks not usually present in normal bank-financed trade must be covered. For instance, in the case of buyback and counterpurchase arrangements, considerable uncertainty prevails about the availability and quality of products to be purchased in the future. As these arrangements extend over many years, risks invariably increase. Countertrade arrangements, in many instances, may actually reduce rather than promote the volume of international trade.

Countertrade practices also are believed to have disruptive effects on existing world markets. Dumping countertraded goods in third markets may undercut the normal trade relations and could trigger a series of protectionist actions by third countries affected. These countertrade practices, especially when they are mandated by governments, could create discrimination and distortions in the international trading system. Countertrade is backward; it is a retreat from the progress made in establishing a liberal and multilateral trading and payments system since World War II.

Arguments For Countertrade

Others disagree. Private business firms in general maintain more pragmatic views toward countertrade. To some, countertrade is perceived as "the only game in town." To many government officials of Third World developing countries, it is becoming an indispensable part of development strategy. Today's countertrade practices no longer take the ancient form of bartering. Rather, they involve a complicated contractual exchange of goods, services, and resources, either for now or for the future. Countertrade arrangements often are regarded as ways of circumventing temporary economic difficulties. Basically, however, they are a rational response to situations where the superiority of market-mediated transactions is not well established.

It is true that the success of a barter-like system very much depends upon the existence of a "double coincidence of wants." Frequently, countertraded goods may not be suitable for the trading firm's own use. Countertrade intermediaries such as switch traders and barter houses take over the job of disposing of these goods by "shopping the world" for customers. In so doing, they in effect create a secondary market for countertraded goods, and thereby help multilateralize those countertrade transactions that began initially on a bilateral basis.[2]

In many instances, countertrade may not be inefficient at all; it may actually promote rather than inhibit the growth of international business. Especially when "a technology proprietor cannot exploit his advantage by means of ownership of a production facility abroad, a sales contract with buyback provisions may, in fact, be a trade-enhancing resolution to a situation of information-asymmetry between buyer and seller." [3] Not all forms of countertrade can therefore be summarily dismissed as inefficient. The alleged efficiency of the present international trading system already has been marred with a multitude of loopholes in the GATT, which, in fact, successfully accommodated the growth of managed trade," i.e., trade regulated by various forms of negotiated export/import restrictions on specific commodities or countries.[4] Both managed trade and countertrade represent a substantial departure from the underlying philosophy and principles of an "open" trading system.

PUBLIC POLICY RESPONSE TO COUNTERTRADE

Public policy attitudes towards countertrade vary widely among countries.

Policy Response of Developing Countries

For many less-developed countries (LDCs), countertrade offers the option of some trade rather than no trade. Several motives unique to many LDCs are behind the generally active, procountertrade stance maintained by these countries. For many nonoil producing LDCs the primary motive for engaging in countertrade has been, at least in the short run, to circumvent the liquidity crises triggered by external imbalances, growing debt-service burdens, and shortfalls in their commodity export earnings. Countertrade allows these countries to maintain necessary imports and conserve convertible currency. Without countertrade, large debtor countries such as Brazil, Mexico and the Philippines would have used all of their export earnings just to service debt.

Another motive for seeking active countertrade policy is to foster exports of nontraditional products. Frequently, no established market channels exist for these new products. They are subject to protective trade barriers and their quality may be generally inferior, making it difficult to sell in developed country markets. Counterpurchase arrangements, designed to utilize the skills and distribution channels of multinational corporations (MNCs), may help overcome this initial difficulty in penetrating foreign markets. In addition, a large number of LDCs are now using countertrade as part of their modernization and development plan. Government-mandated countertrade requirements are viewed by LDCs not only as a viable solution to easing liquidity problems in the short run, but also as a means to meet import requirements for continued economic growth and development in the long run.

Finally, countertrade is perceived as a means to increase leverage for Third World developing countries in dealing with MNCs. The maturation of Third World nationalism and increased competition among MNCs for world markets have combined to create a global, politico-economic environment that is very much conducive to countertrade. For these LDCs, linking trade flows through countertrade arrangements has become "a major tool by which diversification of trading partners and the exertion of national sovereignty over multinational corporations can be achieved."[5]

As shown in Appendix Table 1, many LDCs are active in countertrade. After all, it is their inability to prosper under the present trading system that gave rise to countertrade beyond the East-West trade. A majority of these countries either maintain mandated countertrade or provide various incentives for countertrade as well as government assistance.

Policy Response of the U.S. Government

It is rather difficult to identify a consistent and precise position of the U.S. government on countertrade.[6] Different views and positions taken by officials of the various federal government agencies provide us with "a patchwork of inconsistent and at times contradictory policy responses."[7] Sometimes, the significance of countertrade as a "new" emerging instrument of international business is unrealistically discounted. In its report to Congress, 1987 National Trade Estimate Report on Foreign Trade Barriers, for instance, the Office of the United States Trade Representative considers countertrade and offsets no more than just one of twelve categories of significant foreign trade barriers to U.S. exports, which include "government-imposed measures and policies that restrict, prevent or impede the international exchange of goods and services."[8]

Nonetheless, two tenets comprise the U.S. government policy attitudes toward countertrade. First, the United States generally views countertrade as contrary to an open, free trading system, and strongly opposes foreign government policies that impose mandatory countertrade requirements.[9] Such a position is based on the belief that countertrade practices are inefficient and distort the free flow of trade and investment. Second, in spite of such objection to government-mandated countertrade, the United States will not interfere with private business firms engaging in countertrade, apparently to enable these firms to remain competitive in world markets. It is not clear, however, to what extent the government will become involved in providing assistance to U. S. firms in carrying out countertrade transactions in this evolving global economy.

While discouraging countertrade in the private sector, the U. S. government has a radically different view on military countertrade involving offset requirements for the sale of military equipment. In fact, the Department of Defense, citing the importance of the foreign policy and national security tradeoffs, has legitimized countertrade in a military context. Also, it is well known that for many years the barter program, administered by the U.S. Department of Agriculture, had been used to trade agricultural surplus commodities held by the Commodity Credit Corporation for various "strategic and critical" materials necessary for the National Defense Stockpile. In fact, barter was an important element of U.S. trade policy from 1950 until 1973 when the USDA barter program was suspended.[10] Today, a series of the recent U. S. Jamaican (bauxite for butter) Agreements reflect a renewed U.S. interest in barter. "Administrative ambivalence" and a "fragmented approach" characterize the attitude and policy response of the U. S. government toward countertrade.

Policy Response of the OECD Countries

Although they side with the United States on the theoretical objections to countertrade, nearly all the governments of Western industrialized countries acknowledge that countertrade may not be just a passing phenomenon; accordingly, they take a more realistic and pragmatic approach in their response to countertrade. While the U.S. government continues to maintain an inconsistent and "inflexible policy of passive disapproval,"[11] her European allies actively provide assistance to their business firms in dealing with countertrade transactions, thereby giving them a competitive edge over exporters from other countries. No OECD countries have outlawed countertrade practices, nor are they likely to do so in the future. Especially in the case of major imports of aerospace and military equipment, they all pursue an active countertrade policy in the form of offset requirements. Offsets are a predominant form of countertrade between developed countries (North-North trade). During 1980-84, out of total U. S. countertrade obligations, 80 percent involved military offsets primarily imposed by Western European countries.[12] With respect to nonmilitary countertrade, these countries take a more realistic approach, and offer comprehensive, government-supported countertrade services. In many countries, special government offices have been established to serve as clearing houses and sources of information and guidance for business firms with countertrade transactions. Examples of such offices include: Projects and Export Policy Division, Department of Trade and Industry for United Kingdom; Trading House and Countertrade Division, Department of External Affairs for Canada; Center on Countertrade, Office of Foreign Commerce for Belgium.

The government of Japan does not take a position on countertrade but gives full support to its business firms, and the Japanese general trading companies are widely known to be among the most active and efficient countertraders in the world. U.S. TRADE DEFICIT AND COUNTERTRADE

Among the multitude of suggested causes of the U. S. trade deficits, three major diagnoses stand out: (1) misguided macroeconomic policies at home in the early 1980s; (2) gradual changes in the global competitive environment and the alleged decline in U.S. competitiveness in the world markets; and (3) unfair trading practices by foreign trading partners.

Even if some serious cases of unfair trade practices exist in many countries, including the U.S., these practices, however unfair they may be, cannot be the major cause of today's U.S. trade problems. The U. S. trade deficits occurred across a wide range of its major trading partners. It is simply inconceivable to believe that unfair trading practices increased in these countries and regions at the same time, and no available evidence indicates that they did.

Likewise, the gradual erosion of the U.S. competitiveness in global markets may have taken place over time, exacerbating current trade problems. But it has little to do with the loss of export competitiveness on the part of the U. S., causing massive trade deficits in the 1980s. That loss in U.S. competitiveness was due to the unprecedented appreciation of the U. S. dollar, which in turn was due mainly to a deterioration in macroeconomic policies undertaken by the United States in the early 1980s. The U. S. has become a net importer of foreign capital only to finance a huge excess of domestic absorption over current output (or the net national dissavings) brought about by the low rate of personal savings and rising government budget deficits. This, of course, is the mainstream economist's view of the trade deficit: the fundamental cause of the U.S. trade deficit can be traced to internal macroeconomic imbalances, namely the net national dissavings primarily caused by huge budget deficits at home.

The policy implications of this mainstream explanation of the trade deficit are clear. As long as the net national dissavings (more specifically, the budget deficit) persist, the trade deficit must also persist. Consequently, any change in the current account alone, operating on its own, will not and cannot remove the trade deficit.[13]

Unfair Trade Practices and Trade Policy

It is unfortunate that a less important cause of the trade deficit - unfair foreign trade practices receives most attention in the current debate on the problems of U.S. trade and competitiveness. The belief that the trade deficit is due to unfair trading practices from abroad has led to a Congressional consensus to encourage the greater application of trade laws in order to support "fair trade" and ensure a "level playing field" for U.S. firms. As a result, in the 1980s U. S. trade policy has moved increasingly toward "process" protection"[14] and unilateral protectionism.

The mainstream economic analysis clearly indicates that the trade deficit cannot be reversed unless the budget deficit is reduced. Protectionist trade policy changes and measures will only make it harder for foreign countries, especially LDCs to sell in the U.S. markets. Moreover, protectionist measures can easily be emulated by others, ultimately making it harder for U. S. firms to sell abroad and creating an environment that will be more conducive to countertrade and other nontraditional forms of trade. Worldwide protectionism breeds countertrade.

Countertrade and Export Promotion

Instead of attacking unfair foreign trade practices with trade legislation, steps could be taken to reduce or eliminate those disincentives to U. S. export competitiveness that may have been created either intentionally or unintentionally. The absence of a cohesive U.S. policy on countertrade and the lack of active support for U. S. business firms confronting countertrade requirements currently serve as an important disincentive to U.S. export competitiveness vis-a-vis foreign exporters in world markets. Of course, American business firms were given freedom to conduct their own countertrade arrangements, but only as long as they operate within American laws such as the 1977 Foreign Corrupt Practices Act, and assorted antitrust legislation.[15] Unexpectedly, the Foreign Corrupt Practices Act of 1977 has become a stumbling block for American countertraders ! The U. S. government's negative policy stance toward countertrade and lack of support have contributed very little in helping American countertraders in world markets and in promoting U.S. exports. The recent U.S.-Jamaican barter agreement, however, has amply demonstrated the great potential that barter and countertrade can contribute toward export promotion.[16] Through this agreement, the U. S. was able to export dairy products to Jamaica in exchange for top quality bauxite at a greatly reduced price. With no barter agreement, Jamaica would have imported butter and other dairy products from Canada, France and New Zealand. In addition to export promotion, the barter agreement also helped the U.S. achieve other defense and foreign policy objectives by reducing its bauxite deficiency and by helping the Jamaican government build greater economic stability, thus strengthening U.S.-Jamaican political ties.

CONCLUSION

Historically, barter and other nontraditional forms of trading practices have flourished in times of economic difficulties and uncertainty. If global economic conditions and environment improve, countertrade may well lose its appeal as a second-best mode of doing international business worldwide. One could, therefore, ignore the expansion of countertrade and hope for better times to come. Can one really afford to do that?

Whatever its motives and effects, countertrade has grown into a phenomenon too important to ignore, and it is quite possible that countertrade may soon emerge as one of the most significant (and perhaps troublesome) international trade policy questions of the coming decade. Many business firms and governments have already found it necessary to reexamine their strategic responses to countertrade as it poses both new "opportunities" as well as "threats." In particular, the U.S.'s major European trading partners and competitors have adjusted their responses to countertrade effectively and pragmatically, viewing it both as a reality and opportunity. They, along with Japan, can easily displace U.S. exports to Asia, Latin America and Africa, which together now account for about 40 percent of U.S. exports. And it is in these Third World developing countries where countertrade practices have gone beyond the traditional realm of East-West trade.

In view of this evolving global economy and its changed environment and especially in the face of huge trade deficits, the U.S. policy response to countertrade needs to be reexamined. Viewing countertrade merely as one category of the trade-distorting barriers is too simplistic and unpragmatic an approach. Countertrade must be examined not just as a "threat" to the spirit of the GATF but as an "opportunity" to increase the efficiency of global trade in general and to help promote U.S. exports in particular. Now is the time for the U. S. to transform its "inflexible policy of passive disapproval" into a more positive attitude toward countertrade. Such a positive policy response would mean, among other things, providing active support for U. S. business firms confronting countertrade requirements in world markets.

FOOTNOTES

Officials and writers representing various international institutions (e.g., IMF, World Bank, OECD and GATT) generally take this position.

1. For example, Daimler-Benz, the West German automotive firm, sold thirty flathed trucks to Romania in exchange for 150 jeeps, which a switch trader in turn sold to Ecuador for bananas, which were then sold to a supermarket chain in West Germany for marks. The transaction initially begun as a bilateral barter has thus expanded into a multicountry, multiproduct trade.

3. R. Mirus & B. Yeung, " Buyback' in international Trade: A Rationale," Weltwirtschaftliches Archiv, 122 (2), 1986, p. 374.

4. World trade in textiles and clothing under the Multifiber Arrangement (MFA) is an excellent example of managed trade in practice. Other negotiated trade restrictions include voluntary export restraints" (VERS) administered abroad in the exporting country but frequently pressured by the importing country, intergovernmental bilateral voluntary restraint agreements" (VRAs) or multilateral "orderly marketing arrangements" (OMAs) outside the GATT legal disciplines. These trade restrictions are designed primarily to limit the volume and sometimes the prices of certain exports to certain importing countries, and they are particularly common for trade in steel, automobiles, food, textiles, clothing, machines tools, footwear and consumer electronics. In the early 1980s it has been estimated that over half of world trade was subject to some form of these negotiated trade restrictions and therefore was "managed."

5. John C. Griffin & William Rouse, "Countertrade as a Third World Strategy of Development," Third World Quarterly, January 1986, p. 196.

6. In the early 1980s, Trade Policy Review Group (TPRG), comprised of representatives of eighteen federal government agencies and under the direction of the Deputy U.S. Trade Representative, evaluated the ramifications of countertrade for the U.S., apparently resulting in a uniform interagency policy toward countertrade. The TPRG report, however, is classified and many doubt it will be released.

7. Thomas M. McVey, "Countertrade: Commercial Practices, Legal Issues and Policy Dilemmas Law and Policy in International Business, 16 (1), 1984, p. 61.

8. Office of U.S. Trade Representative, 1987 National Trade Estimate Report on Foreign Trade Barriers, Washington, D.C.: Government Printing Office, 1988, p. 2.

9. Ibid., p. 348.

10. E.C. Lee, "Bauxite for Butter: The U.S.-Jamaican Agreement and the Future of Barter in U.S. Trade Policy," Law and Policy in International Business, 16 (1), 1984, pp. 239-40.

11. S.C. Carey & S.A. McLean, "The United States, Countertrade and Third World Trade," Journal of World Trade Law, 20 (4), 1986, p. 445.

12. U.S. International Trade Commission, Assessment Of the Effects of Barter and Countertrade Transactions on U.S. Industries, Investigation No. 232-185, U.S. International Trade Commission, 1985.

13. For a summary discussion of the mainstream view, see R.G. Lipsey, "Global imbalances and American Trade Policy," Atlantic Economic journal, 16 (2), june 1988, pp. 1-11; S.W. Arndt & L. Bouton, Competitiveness: The U.S. in World Trade (Washington, D.C.: AEI for Public Policy Research, 1987), Ch. 2.

14. Protectionism that has become embedded in the administrative "process" of determining import relief and of retaliating against foreign trade practices that are deemed to have an "unjustifiable, unreasonable, or discriminatory" effect on U.S. trade. The major channels of process protection include: Section 201 and Section 301 of the Trade Act of 1974, antidumping and countervailing duty laws, voluntary export restraints (VERs), and Super 301 provisions in the Trade Act of 1988.

15. C.E. Maynard, Indonesia's Countertrade Experience, New York: The American-Indonesian Chamber of Commerce, 1984, p. 27.

16. The U.S.-Jamaican Agreement, signed on February 25, 1982, involved the procurement of approximately 1.6 million tons of Jamaican bauxite for the National Defense Stockpile in exchange for dairy products held by the Commodity Credit Corporation (CCC). The success of the Agreement has sparked a renewed interest in using barter as a means of dealing with agricultural surplus commodities and of acquiring critical materials, and the U.S. subsequently signed a second agreement on November 17, 1983 and a third on january 26, 1984.
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Author:Park, Jong H.
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Date:Apr 1, 1990
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