Analyse a barter deal between a company from a developed and a developing country.

Barter in developing countries may be motivated by limited access to hard currency, as well as to decrease cash holdings, which minimizes the threat of extortion by organized crime syndicates and increases the probability that tax authorities accept non-cash payments. Furthermore, bartering may be used to decrease tax burdens, repatriate capital, deal with undervalued or overvalued domestic currency, circumvent the effects of inflation, or disguise dumping, in both developing and developed economies. Better reasons would include cash retention, a decreased need for bank loans, creation of goodwill, access to new markets, reductions of excess inventory, or increased production.

It is not a method of trading that businesses in developed countries favour. Still, that may be the only way to trade with a country that has few dollars.

 

Account for the reason why countertrade exists in international trade

Firstly, countertrade or barter is a kind of trade, where exchange of goods for goods happens, while other methods of international trade involve the use of money as measure of payment. Secondly, during the countertrade all parties are both sellers and buyers. Also, now barter is often used in transactions between western manufacturing countries and developing countries, because there is chronic shortage of foreign currency in developing countries. At the same time currency is usually used in transactions between developed countries. Besides, in some countries, for example in Russia, goods imported by countertrade are not taxed by VAT, in comparison with other methods of international trade.

 

Analyze pro and contra of a barter deal.

The advantages of countertrade are foreign currency conservation; ease of entry into challenging markets; better capacity utilization; higher sales and increased employment. The disadvantages of countertrade are uncertain value of the deal, causing price volatility; potentially higher costs and logistical issues; complex negotiations; time-consuming. A middleman often represents a developing country to reduce the risks of countertrade for these countries as the developed ones are more experienced and so that they may take advantage on the developing countries putting them at disadvantage.

 

Give reasons why countries engage in countertrade.

Countertrade emerges as a barter: importer does not pay the exporter with money but provides some service or goods in exchange in the equivalent of the sum of the contract. The reason is that it doesn’t have the appropriate sum of money to pay. It is occurred when goods or services cannot be traded for money, usually when the importer has lack of foreign exchange.

 

Expand on the possible problems associated with countertrade.

Such trading entails a high level of risk and requires a thorough understanding of markets in all countries involved. A major drawback of countertrade is that the value proposition may be uncertain, particularly in cases where the goods being exchanged have significant price volatility. Other disadvantages of countertrade include complex negotiations, potentially higher costs and logistical issues.

Additionally, how the activities interact with various trade policies can also be a point of concern for open-market operations. Opportunities for trade advancement, shifting terms, and conditions instituted by developing nations could lead to discrimination in the marketplace.

Countertrade is most attractive to large, diverse multinational organizations that know the lay of the land on exporting. Even then, that sort of experience doesn’t guarantee success.