Countertrade: Definition, Types & Examples

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Lesson Transcript
Instructor: Shawn Grimsley
Countertrade is an important means of trade used by developing countries. In this lesson, you'll learn what countertrade is, the types of countertrade that are available, and also be provided some examples. A short quiz follows the lesson.

Definition of Countertrade

Countertrade is a system of international trading that helps governments reduce imbalances in trade between them and other countries. It involves the direct or indirect exchange of goods for other goods instead of currency.

Countertrade is often used when a foreign currency is in short supply or when a country applies foreign exchange controls, which are limits imposed on the availability of foreign currencies to importers for the purchase of foreign products. Countertrade is often used by developing countries to control trade and as a development technique.

Types of Countertrade & Examples

Countertrade can take several different forms. Each form can be used separately or in conjunction.

A direct offset occurs once a seller of a product to be imported into a foreign country agrees to purchase parts or materials used to produce the product. The direct offset will effectively reduce the price of the imported good because of the profit earned by the local foreign company selling components to the seller. Keep in mind that the objective here is to improve trade imbalances between exporting and importing countries. Consequently, the purchaser of the foreign good doesn't necessarily benefit from the direct offset, but the economy of the foreign country does.

Let's say you are a defense contractor that is authorized to sell arms to an ally of your government. One of your potential customers is a small country in Eastern Europe that's interested in buying some tanks. The foreign country agrees to buy a battalion worth of tanks from your company so long as you buy the steel used to make the tanks from one of its steel firms. You agree to the deal and start rolling out the tanks.

The idea behind an indirect offset is the same as a direct offset, but the offset doesn't involve the same trade transaction. An indirect offset occurs when a foreign government requires an importer to make a long-term investment in a country's economy. A common example may be the construction of a factory in the country, which will create jobs and help build the country's economy.

Switch trading occurs when a third country has a trading relationship with two other countries that have a significant imbalance in trade. The third country will purchase what the second country needs from the first country, and then trade it to the first country in exchange for a product that the third country needs. It's not as complicated as it may sound.

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