Countertrade, as compared to monetary trade, may at first appear to be an outdated practice. Yet it offers a number of benefits to both trading parties as it moves inventory for both.
It is obvious that countries that demand countertrade have reasons to do so. First, a country can gain access to raw materials, products, and technology that it needs. Second, the country is able to dispose of items that it produces. Third, countertrade allows the country to conserve its hard currencies.
From a seller's perspective, countertrade allows the seller to gain access to a market that might otherwise be closed. Also the firm can largely ignore the costs of currency conversion as well as the movement of currency exchange rates. Furthermore, the firm can charge full price (or even more than that) because it gains leverage when goods are exchanged for other goods.
The benefits derived from countertrade also lead to problems. First, countertrade is a cumbersome and complex process, and all parties must consider the additional risk, time, effort, and costs involved. Second, the additional expenses inevitably and ultimately reduce the parties' profits. Third, the products involved may not be internationally competitive in terms of pricing and quality. Both parties' inflated prices increase the cost of international transactions. Finally, countertrade may encourage "covert dumping." A country may offer its goods at a discount so as to induce its supplying partner to participate, while the supplying partner may hastily dump the goods it receives in order to receive cash.
From the perspective of international trade, countertrade is a form of protectionism. A buyer, instead of buying from the most efficient producer, may end up buying from a manufacturer who is less efficient b ...