21st Century Counter Trade By William CateThe U.S. Department of Commerce hates it. The World Bank questions its long-term economic impact. However, an estimated 130 countries are doing almost US$500 billion worth of global trade under counter-trade-related schemes.
If
world relied solely upon Counter Trade, U. S. wouldn't have a $278,000,000,000.00 trade deficit. The world debt crisis and growing weakness in American Dollar has made trade financing very risky and thus increasingly costly. Western countries, watching jobs flee overseas, are slowly returning to idea of bi-lateralism as a way to reduce trade imbalances.
There are five basic types of Counter Trade: barter; buy-back, counter-purchase; tolling and offset. We're going to compare a simple multi-country barter model against traditional export model. We'll assume that exporter can get ninety day net terms from American manufacturer. And, we'll presume that air cargo shipments take two days and surface shipments take forty days. We'll assume that pre-tax profit at each step will be 33% and that exporter will structure their company to minimize their legal tax obligations. Keep in mind that there are tens of thousands of potential products, two hundred countries in world and nearly an infinite number of ways to put counter trade deals together.
The Traditional Export Model
The Exporter will move to Reno and incorporate export business in Nevada. Their business is to export American-made computer microchips. They have a buyer in Singapore offering a 90 Irrevocable Letter of Credit (ILC) and their manufacturer is willing to defer payment for 90 days. They buy $200,000 worth of microchips, airship them and sell them in Singapore for $275,000. Ninety days later, they have a gross profit of $75,000 and a pretax profit of $66,000. After paying U.S. Federal income tax, they earn about $44,800. Since they can repeat microchip export four times each year, their after tax profit is nearly $100,000. This is more money than majority of people earn living in Nevada. Not bad.
The Counter Trade Model
The Exporter incorporates their Counter Trade business in Belize. Their business office is in Barbados. They have same relationship with an American computer microchip manufacturer. They have a buyer in Singapore offering to barter their computers for American microchips. They have an importer in Senegal willing to take computers and pay for them in high quality textiles that a buyer in London wants and will pay for in 75-year-old scotch. And, they have a gem broker in South Africa who wants scotch against a payment in uncut diamonds. The counter trader has a deal with a diamond dealer in Toronto. The Canadian wholesaler has retail buyers in States, who want diamond rough.
