| Abstract: | Abstract Countertrade is a generic term for parallel business transactions linking sales contracts with agreements to purchase goods or services. Various forms of countertrade all have one common feature-reciprocity. Countertrade has been viewed as an inefficient and cumbersome way of doing business primarily because of problems associated with (1) Disposing of products accepted as part of the deal, (2) Quality variations and (3) Negotiation process and resulting increase in transaction costs. A review of the International Trade literature indicates that market imperfections (shortage of convertible currency, information asymmetry that may create the so-called lemon problem and moral hazard) provide a motivation for countertrade. This article looks at the economic rationalization for countertrade. Since the widespread existence of countertrade, particularly in North-South and in East-West trade, is somewhat of a puzzle, one explanation that is often proposed in the literature is that liquidity constraints might force firms to engage in countertrade (particularly barter). The article compares and contrasts two strategies facing the management team of a profit maximizing firm. The standard neoclassical mathematical model developed shows that countertrade strategy may be superior to standard money-mediated trade strategy when there is liquidity shortage. Therefore, countertrade (particularly, buy-back, counterpurchase and offset) may be a rational response to conditions that restrict standard trade. As such, countertrade can supplement standard money-mediated trade and contribute to the growth of international business. |
