Modern Barter

Simple swaps become big deals

Want to sell DC-9s for Yugoslav hams, beer and machine tools, or frozen New Zealand lamb for Iranian oil? How about U.S. jet fighters for Greek cement, or a 150 million-year-old Mongolian dinosaur skeleton for West German cars?

Welcome to countertrade, a modern form of bartering and one of the fastest growing ways of doing business around the world. Countertrade ranges from relatively simple barter transactions to intricate arrangements that can involve many nations and goods as well as complex financing and credits. Because so many countries, especially the less developed ones (LDCs), are having trouble paying cash for the goods they need, swapping merchandise and services is becoming increasingly attractive.

Countertrade has been practiced for centuries. The Indians sold Manhattan Island to the Dutch for some beads, cloth and trinkets, and during World War II Adolf Hitler sent Yugoslavia boxcars of aspirin in return for that country’s copper. Low commodity prices and a world credit crunch are causing the back-to-barter boom. In just eight years, countertrade in all its forms has grown from an estimated 2% of world commerce to roughly 33%, according to Business Trend Analysts, a New York consulting firm.

Much East-West trade involves convoluted deals: Western firms sell items like steel or chemicals to Communist state trading organizations in exchange for such items as tobacco, vodka, timber, trolleys and forklift trucks. The Western company then often resells the Eastern product through a middleman for cash. In one of the biggest of these accords, Occidental Petroleum and the Soviet Union have a 20-year, $20 billion agreement that calls, in part, for the annual exchange of 1 million tons of American superphosphoric acid fertilizer for 4 million tons of Soviet ammonia, urea and potash.

Despite its difficulties, countertrade appeals to a growing number of Western firms. West Germany and France, for ex ample, have sold the Soviet Union tractors, cranes and pipeline technology in exchange for long-term supplies of natural gas, which started arriving earlier this year. The project was also financed by heavily subsidized loans granted by the West Europeans. Sorimex, a Renault subsidiary, takes coffee, phosphates and other commodities in exchange for autos in deals with such countries as Colombia, Tunisia, Turkey, Egypt, Rumania and the People’s Republic of China. Last year those accords accounted for 30% of Renault’s business with developing countries. Almost a fifth of General Electric’s $4 billion in exports last year were under countertrade contracts.

Some large U.S. banks now barter goods as a sideline. Says Daniel Nash, a trader hired by Citicorp’s London countertrade division to turn commodities into cash for the bank’s commercial customers: “Countertrade enables banking activity to continue where it otherwise might not. No one wants it, yet it is there as the only practical alternative for the hard-pressed LDCS.”

Although some officials in Washington oppose countertrade on the grounds that it undermines free trade, the Government offers advice to U.S. firms on how to structure countertrade agreements. Complains Pompiliu Verzariu, a senior trade counselor with the Commerce Department: “U.S. exporters are willing to look at any options, even costly, inefficient op tions like countertrade, to do business.”

The pressure for more barter trade may increase as a result of the growing U.S. trade deficit, which could reach $120 billion this year.

Many economists fear that counter trade could severely weaken, rather than bolster, international commerce. It fosters bilateral agreements at the expense of multilateral trade and can reduce over all world commerce. Says Franklin Root, head of the Wharton School’s international business program: “Such arrangements are anathema to the free market.” Others disagree. Zenon Carnapas, head of the United Nations Conference on Trade and Development, says that countertrade deals are “a solution of last resort” for struggling LDCS. Still, no one disputes that postwar prosperity was built on the foundation of free and growing trade among nations.

—By Robert T. Grieves. Reported by Gisela Bolte/Washington and Lawrence Malkin/Paris