from BarterNews issue #17, 1988.)
American Way To Countertrade
C.G. Alex and Barbara Bowers
is controversial because it is a trade management practice. However,
trade management is widespread; the United Nations estimates that
fully 50% of present world trade is managed trade, with countertrade
accounting for half of that, or 25% of total world trade.
The slow response of government and academia to the institutionalization
of countertrade has left U.S. international business students
and managers to learn the hard way how to use a trade management
mechanism to their own advantage.
managers, most of whom finished school some years ago, had never
heard of countertrade explosion in reciprocal trade. They either
lost lucrative sales through refusal to engage in the mysterious
practice of countertrade, or signed a countertrade contract first
and then discovered that they needed some sort of strategy.
who would never hear of putting the company into a new market
without extensive research and strategy formulation innocently
put the company unprepared into a whole new trading environment.
They had to stumble through their early countertrade transactions--learning
on the job by trial and error.
It is not surprising then, that many U.S. companies have no specific
policy or strategy concerning countertrade. Some deliberately
downplay countertrade, feeling that it is only a small part of
their international operations and thus is not worth the trouble
of special policy and strategy formulation.
are interested in countertrade, perhaps even enthusiastic about
its possibilities as a marketing tool, but have not been able
to develop an effective strategy due to inexperience, confusion,
intercompany conflict, or lack of intercompany coordination.
The basic policies and strategies outlined here represent and
attempt to classify and compare the countertrade practices of
selected American companies, and might be used by other companies
to evaluate their own countertrade practices.
Frameworks for strategy formulation and the strategic process
in countertrade are also provided. The terms "policy" and "strategy"
are often used interchangeably, although distinctions can be made
between the two terms.
policy is defined here as the company's attitude toward countertrade.
While countertrade strategy is defined as the approach the company
takes to countertrade planning and transactions. There are two
basic types of countertrade policies: company advantage and mutual
a company advantage policy, countertrade/offset is used primarily
for the company's benefit (to make a sale, to maintain market
share, etc.), with the needs of the buyer country being met at
the minimum possible levels. Most companies follow this policy.
effectiveness of the company advantage policy varies. At best,
it results in a satisfactory arrangement for both seller and buyer.
At worst, it can be a disaster; companies may try to get out of
their obligations once the sales contract is signed--on the theory
that it will be easier to pay the penalty than carry out the offset--and
then get into a lot of trouble with the buyer country.
contrast, companies with a mutual advantage policy give the needs
of the buyer country equal weight with their own. Under this policy,
the company is concerned with the goals of the buyer country (i.e.,
modernization, industrialization, balancing trade, increasing
living standards, etc.), and how the countertrade transaction
will help achieve these goals. These companies are willing to
meet the challenge of achieving mutual benefit through countertrade,
and in most cases their efforts are successful.
choice of a countertrade policy may be an early and deliberate
decision on the part of the company president. More often, however,
the policy evolves slowly, growing out of the company's experiences
in trading with different companies. If the company trades with
"good" countries--those in which the state trading officials are
well-intentioned, straight forward, and efficient in carrying
out their side of the deal--it will probably develop a mutual
There are also some cases in which the company begins to follow
a mutual advantage policy in a particular country because of a
foreign-born executive's loyalty to that country, and then expands
the policy to include trade with other counties.
which have countertraded with "problem" countries usually hate
countertrade; depending on how difficult their experiences are,
they will either approach countertrade with extreme caution or
wish it would disappear.
If the company has encountered corrupt foreign officials, slow
delivery or non-delivery of counterpurchase products, poor quality
products, sudden changes in product availability, demands for
the moon (secret product formulas, proprietary technology, etc.)
or other aggravations, it can hardly be blamed for following a
company advantage policy.
On the other hand, some companies whose countertrade transactions
run relatively smoothly still resent having to countertrade. This
resentment may be due to something concrete, such as lowered profits,
or to something intangible, such as a belief in the pure forms
of free trade and fair competition. Sometimes the company is simply
new to countertrade, and wants to move cautiously until it builds
policies may change over time, due to many factors. These include
changes in corporate leadership, the weight of accumulated countertrade
experiences, profit levels, and the overall international trade
and financial environment.
the policy moves from the lower form of company advantage to the
higher form of mutual advantage, although sometimes a singularly
bad countertrade experience can push the policy backward to the
policy normally evolves out of a company's experiences in
trading...moving from a lower form (of company advantage)
to a higher form.
Dual policies may exist within the same company, with some divisions
believing in company advantage and others in mutual advantages.
This situation reflects ambivalent leadership. Some companies
are in a state of flux concerning countertrade policy.
these reasons, the policies of individual companies are somewhat
difficult to identify, but they can be roughly classified. The
following examples of the two policies given reflect the author's
observations of companies' countertrade activities rather than
policy statements of the companies themselves.
Cyrus Eaton Co. and Armand Hammer's Occidental Petroleum Corp.
are classic examples of companies with mutual advantage policies.
Both companies have been trading and countertrading with socialist
countries since the 1950s. Each company has exceeded $50bn in
trade and investment. They are heavily involved in infrastructure
projects for economic development and modernization.
These projects include agriculture and dairy technology, mining
and chemicals, energy and transport, and high technology. Cyrus
Eaton and Armand Hammer have been powerful positive forces in
the promotion of East-West trade.
Coca-Cola Co. operates under a mutual advantage policy through
Coca-Cola Trading Co. In most countries, Coca-Cola goes much further
than simply selling syrup and taking back local products; the
company transfers food and beverage technology and assists in
developing foreign marketing programs.
of these programs are designed to help the countries penetrate
the American market. For example Coca-Cola assisted Yugoslavia
and Romania in the production of wine for the American market,
advising them on American taste in wines and appropriate package
designs, as well as making agreements with American wine distributors.
In Turkey, Coca-Cola set up a joint venture to produce tomato
paste for the American market and other markets, providing management
and technology for the plant. Coca-Cola generally tries to set
up a partnership with customer countries.
Colt Industries, and Grumman International are examples of companies
following a company advantage policy. Avon uses countertrade to
release blocked funds; they build plants in various countries
and export part of the production in order to generate hard currency.
Avon products made in developing countries are exported to other
developing countries, rather than to industrial countries. (Unlike
most products, 80% of the cost of cosmetics is promotion; thus
there is no cost advantage in making cosmetics in low-wage countries
for export to industrial markets. Avon does not accept counterpurchase
Colt's defence divisions do a small amount of countertrade in
order to compete with foreign defence firms. They usually limit
their countertrade obligations to sourcing or counterpurchase;
they do not buy back or export products related to the original
sale. Counterpurchases are liquidated through trading companies.
defense divisions of Grumman handle substantial amounts of countertrade.
Their countertrade methods include sourcing, counterpurchase,
and subcontracting. Grumman uses trading companies to liquidate
indirect offset obligations.
Boeing and McDonnell Douglas are examples of companies with dual
countertrade policies; their military and commercial divisions
each follow different policies. Boeing Commercial Aircraft Co.
follows the company advantage policy. In the sale of the 747 and
other civilian transport aircraft, they will accept only minimal
countertrade obligations, and will then liquidate these obligations
through outside trading companies.
In some cases, they will handle direct offset such as aircraft
maintenance facilities. Boeing's defense divisions operate under
the mutual advantage policy, however; as illustrated by programs
like the Peace Shield offset with Saudi Arabia in which Boeing
is helping the Saudis develop a number of high-technology projects.
In contrast to Boeing, the commercial company of McDonnell Douglas
follows the mutual advantage policy, while the military follows
the company advantage policy. Douglas Co. was one of the first
companies to market civilian aircraft through countertrade. They
emphasize export development in buyer countries, helping the countries
market nontraditional as well as traditional exports.
A recent large project is the offset with China for the sale of
MD-82 jetliners. The offset includes subcontracting of components
to the Shanghai Aviation International Corp., manufacture of landing
gear doors in China, technical training, and participation of
Chinese engineers in the design of new generation McDonnell Douglas
The military aircraft company, McDonnell Co., has a small countertrade
staff to fulfill direct offset obligations, and liquidates other
obligations though a New York trading company which it helped
Four Countertrade Strategies
The countertrade strategies of American companies may be divided
into four general types, defensive, passive, reactive, and proactive.
Defensive, passive, and reactive strategies correspond to the
company advantage policy, while proactive strategy is derived
from the mutual advantage policy. Again, the following identification
of strategies for individual companies is based on the author's
policy is a company's attitude toward countertrade. CT strategy
is the approach the company takes to countertrade planning
Defensive. Companies with a defensive countertrade strategy
ostensibly do not countertrade at all; however, they make many
countertrade-type arrangements with buyer countries. These companies
will avoid any contractual countertrade obligations, but they
make it clear to the country that they will reciprocate in some
way for the sale. Some companies will sell their products at rock-bottom
prices and promise to help the country with export development.
participate in barter deals by having an intermediary like an
independent trader take title to the goods on each side, therefore
making the transaction appear to be conventional import and export
rather than a swap. No matter what kind of deal is made, however,
these companies will insist that they do not countertrade. They
seldom have in-house trade units.
A variation of the defensive strategy is that of companies that
say they do not countertrade, although they do it openly and regularly
with Eastern European countries and China. They seem to think
that this trade does not count, offering the excuse that "it's
the only way to do business in socialist countries." They may
also be defining countertrade as practice restricted to developing
most industrial country governments that practice military offset
among themselves follow a defensive countertrade strategy. The
beneficiary countries call their requirements "industrial benefits"
and swear that they are against countertrade; the partner countries
go along with this by refusing to include military offset in the
definition of countertrade.
Examples of companies following a defensive countertrade strategy
are Bell Helicopter, Textron, EBASCO, Gould, and Borden.
Passive. Companies with passive countertrade strategies
regard countertrade as a necessary evil. They participate in countertrade
at minimal level, on an ad hoc basis. Some companies operate this
way because they have product leverage (i.e., little or no competition),
while others follow the passive strategy because of disinterest
with a passive CT strategy regard it as a necessary evil,
and participate at a minimal level on an ad hoc basis.
These companies will accept contractual offset and countertrade
obligations, but only on their own terms. They will rarely obligate
themselves to export development or indirect offsets such as counterpurchases.
However, they will use countertrade for sourcing, which is a form
of export development.
Passive strategy companies regard countertrade primarily as a
form of export financing. They will not initiate countertrade
or offer it as a sales incentive; rather, they will wait until
the buyer country requests countertrade. Some of these companies
have small in-house countertrade units.
chemical companies and manufacturers of chemical products have
passive countertrade strategies. These include DuPont, Dow Chemical,
Cyanamid, Smith-Kline, and the chemical divisions of Amaco and
the Ethyl Corp.
Some of the defense companies with product leverage also have
passive strategies, including Lockheed-Georgia, Martin Marietta
Aerospace, Texas Instruments, Sperry Corp., and Singer Co. Other
companies using passive countertrade strategies are Alcoa, Polaroid,
S.C. Johnson & Sons, and Nabisco.
Reactive. This is the most common strategy among American
companies. Companies with reacting strategies will cooperate with
the buyer country in offset/countertrade requirements, they use
countertrade strictly as a competitive tool, on the theory that
they cannot make the sale unless they agree to countertrade.
Although they may consider countertrade as a permanent feature
of their international operations, they do not see it as a marketing
tool for expansion. Reactive companies often have large in-house
countertrade units, and use outside trading companies when necessary.
They rarely have in-house world trading companies.
American companies have a reactive strategy toward CT, using
it strictly as a competitive tool on the theory that they
cannot make the sale unless they agree to CT.
defense companies have reactive strategies. Among these are the
defense divisions of Litton, Grumman International, Garrett, BMY,
TRW, Perkin-Elmer, Emerson Electric, General Dynamics, Northrop,
Allied Signal, McDonnell, Motorola, ITT, Raytheon, and LTV Aerospace
and Defense Co. Non-defence companies with reactive countertrade
strategies include Kodak, Xerox, Dresser Industries, Chrysler,
Burroughs, and IBM.
Proactive. Companies with proactive strategies have made
a commitment to countertrade. They use countertrade aggressively
as a marketing tool, and are interested in making trading an active
and profitable part of their business. They regard offset and
counterpurchase as an opportunity to make money through trading,
rather than as an inconvenience.
with proactive strategies have made a commitmemt to CT. They
use it aggressively as a marketing tool...regard its use as
an opportunity to make money through trading rather than as
Proactive companies participate in all kinds of countertrade,
including global sourcing, releasing of blocked funds, trade development,
and trade financing. They often have in-house world trading companies,
and will sometimes liquidate countertrade obligations for other
Examples of companies with proactive countertrade strategies include
Cyrus Eaton, Occidental Petroleum, Continental Grain, Caterpillar,
Monsanto, General Foods, Goodyear, Rockwell, General Electric,
FMC, Westinghouse, Tenneco, 3M, General Motors, Ford, Coca-Cola,
United Technologies, Pepsi-Cola, and the civilian product divisions
of McDonnell and Lockheed.
A company's strategy should be guided by the policy it has formulated
to achieve its goals. Unfortunately, the guidelines derived from
company policy are not always specific. This can result in either
the wrong strategy, or multiple and conflicting strategies within
When a company has an ambiguous countertrade policy, the divisions
are left to interpret the policy as they see fit, and they will
develop strategies on a trial and error basis. Sometimes one division
will take the initiative in countertrade/offset; the manager of
that division becomes the company countertrade expert by default,
and other divisions will follow his strategy.
This at least results in a consistent strategy, even if it happens
to be the wrong one. In other cases, the divisions handle countertrade
independently, with each division following its own strategies
or adopting various contingency strategies. The entire company's
countertrade related sales performance suffers because of a lack
of coordination and teamwork.
first step the company must take in developing a countertrade
strategy is to define its policy clearly to its divisions. It
should then make periodic reviews and evaluations to ensure that
the strategy being used is consistent with the policy.
the divisions should have the flexibility to use contingency strategies,
as long as these strategies are within the framework of company
policy. Finally, it is important that the divisions coordinate
their countertrade operations, in order to minimize conflict and
improve cost effectiveness.
The countertrade policies discussed here are mutual advantage
and company advantage and, as noted earlier, proactive strategy
is usually associated with the mutual advantage policy, while
the defensive, passive, and reactive strategies fit the company
advantage policy. In rare cases, however, proactive strategy may
be used by a company following the company advantage policy.
The mutual advantage countertrade policy is the appropriate policy
for socially responsible multinational corporations. Multinationals
are expected to contribute to the economic development of developing
countries through the transfer of management, marketing, finance,
and technology. Countertrade is part of this effort, and is treated
as a developmental activity. In industrial countries, multinational
corporations are expected to provide technology and employment.
Many U.S. corporations agree with this policy in theory, but cannot
afford to follow it. American business is geared to short-term
profit because of the st ructure of financial markets. Only the
largest corporations can afford to undertake socially responsible
projects; such projects are usually oriented to long-term profit.
Large-scale countertrade operations involving economic and trade
development usually fall into this category.
Under the proactive strategy of a company following a mutual advantage
policy the major task is to design a countertrade/offset project
that will be profitable for both parties. The objective is to
get continued and expanded business in the country (market growth)
through the establishment of a long-term relationship, even if
it means losing money for the first few years.
following a company advantage policy are more entrepreneurial
and opportunistic than socially responsible. They are usually
profit maximizers. The most effective strategy under a company
advantage policy is the reactive strategy. The major objective
of the reactive strategy is to make the sale through cooperation
with the buyer country.
goal is not so much long-term business as it is satisfaction of
the buyer country in a particular countertrade/offset deal. The
objective of the passive strategy is either sourcing or export
financing; cooperative arrangements with the buyer country are
not very important.
least effective strategy is the defensive strategy. Companies
using this strategy are the "sneaky countertraders," they want
the benefits of countertrade (making the sale, export financing,
etc.) without the responsibility of contractual, countertrade
operations. This is a short-term strategy.
Synergy And Strategy
the context of countertrade, synergy means the benefits accruing
to the company from the cooperative activities of the countertrade
unit and the divisions. The choice of strategy directly effects
the level of synergy, as well as the financial position of the
1 shows a matrix in which countertrade strategies are classified
by levels of synergy and cost-benefits of the countertrade unit
to the company. The nine cells position three of the four basic
strategies-- proactive, reactive, and passive--according to their
relative proportions of costs and benefits.
The defensive strategy is not included in the matrix because companies
using that strategy usually do not have a countertrade unit. The
optimum position in the matrix is cell 1.1., which represents
the maximum in synergy and benefits. The lowest position is cell
3.3., where synergy is low and costs are high. The median position
is 2.2., where synergy is median and costs are at break-even.
Some companies may find that their strategy does not correspond
with one particular cell because of the varying practices of the
divisions, each of which may have its own countertrade offices
Many companies do not have a clear strategic process for countertrade/offset
bids and transactions, although they may have a well-defined overall
strategy such as reactive or proactive. The strategic process
in countertrade is not directly related to the type of strategy
used; rather, it is a series of steps that companies should follow
in countertrade operations, as illustrated in Figure 2.
first step is to analyze the countertrade/offset needs of both
the company and the buyer country. The company's needs may include
entering a new market, maintaining market share, or releasing
blocked funds. Some typical needs of buyer countries are industrial
development, export development, import substitution employment,
and the generation of foreign exchange. In analyzing these factors,
the company must decide how it can match its needs with those
of the buyer country.
second step is the cost-benefit feasibility analysis. The company
should estimate the cost of: (1) human resources, which is the
cost of doing the entire transaction in-house versus giving it
to a trading company or other service provider, or a combination
approach, and (2) other costs such as legal, insurance, shipping,
and financing. These costs must then be weighted against the anticipated
benefits in terms of profit, market share, and future sales to
the country (market growth)
the countertrade needs and cost-benefits have been analyzed, the
company is ready to prepare its sales bid and accompanying countertrade
proposal. (Some portions of the countertrade cost is usually factored
into the sales bid; although this practice is routinely prohibited
by buyer country governments, it is necessary.) After the proposals
are submitted, the company enters into negotiations with the buyer
Areas covered in the countertrade/offset proposal negotiations
may include the offset percentage, amount and type of technology
to be transferred, amount of investment in joint ventures, degree
of technical and management training to be provided, duration
of the obligation, level of nonperformance penalty, method of
enforcement of the obligation (best efforts, liquidated damages,
etc.), and details about the counterpurchases (products available,
quantities available, delivery dates, etc.)
In some countries, the countertrade regulations may specify such
things as additionality (exports above the usual level), specific
markets for exports, or prohibition of the use of third-party
traders. These points must also be negotiated, if the company
feels unable to carry out the proposed obligations under specific
contracts are signed when the negotiations are completed: one
for the sale and one for the countertrade. In sales implementation,
the company should adhere to the promised delivery schedules.
In the implementation of the countertrade/offset obligation --
which may include counterpurchase, buyback, technology transfer,
joint ventures or sourcing--the company should make periodic progress
reports to the buyer country. Throughout the countertrade implementation
period, the company should make periodic cost-benefits evaluations.
An authorized agency of the buyer country will issue a certification
when the countertrade obligations have been fulfilled. At this
point, the company should do a cost-benefit analysis. The analysis
should be used as guide for improving future countertrade transactions.