CHAPTER 6 COUNTERTRADE: COMMERCIAL PRACTICES, LEGAL ISSUES AND POLICY DILEMMAS
| Jurisdiction | United States |
(Mar 1985)
COUNTERTRADE: COMMERCIAL PRACTICES, LEGAL ISSUES AND POLICY DILEMMAS
Lane & Mittendorf
Washington, D.C
In recent years, the use of countertrade in international trade transactions has increased dramatically. Despite the tremendous upsurge in countertrade, it is a highly controversial practice, particularly for U.S. firms that only recently have encountered it to any significant degree in their overseas business activities. Although this phenomenon exists in many forms, its most common element consists of a requirement in a contract for the sale of goods that the seller of the goods, typically a private firm, agree to purchase other products from the buyer, typically a sovereign nation, in a "linked" transaction. Critics of countertrade contend that it is an anticompetitive practice that distorts the free flow of trade, presenting serious long-range economic and political ramifications. In this article, the author provides a general overview of the commercial practices of countertrade including a discussion of the various types of countertrade transactions, the history of countertrade, and the technical aspects of negotiating, structuring, and financing countertrade and barter transactions. He then examines the variety of legal issues that a U.S. firm should consider in evaluating whether to become involved in a countertrade transaction. Finally, he reviews the policy issues raised by these practices and the response of the United States and foreign governments to the increasing incidence of countertrade.
A curious practice known as countertrade1 is beginning to appear
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with increasing frequency in the world of international trade. Countertrade is an arrangement in which two parties agree to sell or otherwise convey products to each other in a reciprocal fashion. Most often, one party insists that it will agree to purchase goods from the second party only if the second party purchases goods from it. In other instances, the two parties merely exchange products in lieu of the use of foreign exchange. In all cases, however, there is a specific linkage of an export and import transaction.
Parties imposing countertrade requirements usually are sovereign nations purchasing products and technology in the international marketplace. Parties that submit to these requirements generally are private firms seeking to sell their products to these nations. In most cases, private firms prefer conventional forms of trade, but accept the risk and inconvenience of countertrade in order to complete the sales of their products to their overseas buyers. In view of the awkward and arguably coercive nature of these types of arrangements, countertrade has been referred to as "unnatural trade," "bad business,"2 and "the greatest disease of our time."3
According to some estimates, countertrade now accounts for between 20 and 30 percent of world trade and may account for up to 50 percent of world trade by the year 2000.4 While many experts
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disagree that the current volume of countertrade has reached this level, all agree that countertrade constitutes a significant and rapidly growing portion of world commerce. Countertrade has been an established business practice in transactions between Western firms and communist nations for many years. Recent economic developments, however, have resulted in a remarkable increase in the use of countertrade by a substantial number of Third World nations as well. This expansion is best shown by the surge of interest in countertrade within the last year in Latin America and Southeast Asia as a result of the moratorium in Third World lending.5 As a result, most U.S. exporters now must deal with countertrade in a noticeable portion of their overseas business transactions with Eastern Europe, Latin America, Southeast Asia and, to a limited extent, Western industrial nations.6 Many of those familiar with these practices are convinced that countertrade, if allowed to flourish, will alter dramatically the current patterns and practices of international commerce before the end of the present decade.
This significant increase in countertrade has focused attention upon the practice and its potentially disruptive effects upon international trade. Countertrade represents a significant departure from conventional forms of commercial dealing in which a seller is merely required to deliver acceptable goods in order to be entitled to payment. It creates untold complications in the practices of international business and undermines centuries of progress in commercial dealing. In addition, observers claim that countertrade violates many of the major principles of our free market economic system as an allegedly coercive, anticompetitive practice that serves as an impediment to free and open trade.
Nonetheless, many view countertrade as an effective tool in accelerating the economic development of the world's poorest nations. It is directly responsible for increasing employment, industrial
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capability, and export capacity in Third World nations, as well as generating foreign exchange to finance essential imports including food, medical supplies, and energy products.7 At the present time, however, the long-term effects of countertrade on the world economy are unknown.
In addition to its economic ramifications, countertrade raises a number of significant issues in the area of U.S. foreign policy and national security. Over the past decade, countertrade practices have facilitated the wide-scale transfer of Western technology to the Soviet Union and Eastern European nations, including the areas of natural gas transportation and production equipment and technology.8 Western firms that agree to accept marginally undesirable products from communist nations pursuant to countertrade commitments serve as financiers of these transactions, allowing valuable industrial and technological resources to be transferred to the communist world without the need for the purchasing nations to divert hard currency from other high priority uses such as defense. In a recent study published by the U.S. International Trade Commission (ITC), for example, it is reported that countertrade has been involved in the financing and development of some 2,000 turnkey plants in a variety of industries in the Soviet Union and Eastern Europe.9
Countertrade also raises a series of far-reaching legal issues regarding antitrust, import relief, and unfair trade practices.10
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Although the antitrust implications of countertrade remain uncertain, countertrade transactions have been challenged under numerous import relief provisions, including section 406 of the Trade Act of 197411 and the U.S. antidumping law.12 As the incidence of countertrade increases and the effects of these practices upon domestic and world commerce become more widely recognized, legal challenges to countertrade are likely to increase.
Despite the substantial risk and inconvenience created for private firms by countertrade, many private sellers—including a substantial number of major U.S.-based multinational firms—are submitting to countertrade requirements at an alarming rate. In light of the significant increase in the use of countertrade in recent years, it is important for legal counsel to U.S. firms to become familiar with these practices, both to safeguard the interests of their clients involved in countertrade transactions and to challenge those of their clients' competitors.
The purpose of this article is to introduce the international legal advisor to the practices of countertrade and to highlight some of the pertinent legal and policy issues attendant to this rapidly developing phenomenon. This article first will discuss in detail the commercial practices of countertrade, including the various types of countertrade, its history in communist, Third World, and Western trade transactions, and the increasing involvement of U.S. firms in countertrade activities. The article then will analyze the technical aspects of various types of countertrade transactions, including methods for negotiating, structuring, and financing barter and counterpurchase transactions. Next the article will discuss a number of legal issues with which a U.S. firm may wish to be familiar in entering a countertrade relationship, such as those within the antitrust, import relief, and related unfair trade practices areas. Finally, the article will examine the policy issues surrounding countertrade, including the "free trade" question, the impact of the importation of countertraded goods upon U.S. labor, industry, and export competitiveness, the implications of low cost technology transfer to developing nations, and the foreign policy and national security
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issues raised by countertrade that will face U.S. decisionmakers in the coming decade.
AN OVERVIEW OF COUNTERTRADE
Unnatural Trade
As a general working definition, countertrade is a practice in international trade in which two parties link an export transaction and an import transaction in a reciprocal fashion. In most instances, a private firm simultaneously agrees to sell certain goods to a sovereign nation and to purchase certain goods from the nation in a parallel transaction.13 In recent years, however, the term countertrade has been expanded to refer to a broad range of additional practices in which a seller conveys other types of benefits to a purchasing nation to induce the sale of its goods, such as hiring local subcontractors located in the nation, transferring technology to the nation, or undertaking investment in the nation.
Countertrade frequently is confused with the concept of barter. Barter is an exchange of goods effectuated without the use of currency.14 As noted above, countertrade is most frequently used to refer to two reciprocal sales transactions in which each party is paid in currency.1...
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