Barter Essay ⋆ Business Essay Examples ⋆ EssayEmpire

Barter is a form of countertrade where goods and/or services are exchanged simultaneously without using money or similar monetary instruments. This type of trade refers to a single contract between two parties who are fully compensated by the traded nonmonetary items. This clearly distinguishes barter from other forms of countertrade that may include a third party or allow for partial monetary compensation, such as counter purchase or buy-back deals. Among all forms of trade, barter can be considered as being the simplest and oldest implementation of it. From an anthropological perspective, barter is seen as a natural tendency of human beings distinguished from gift-giving. While the latter implies trust and credit, which are necessary for future cooperation, barter is seen as a one-off action with no implications for future collaboration.

Through barter, companies can increase their sales volume and sell excess production or resources more easily. In international trade, barter allows circumvention of certain trade barriers such as unfavorable regulations concerning international monetary transactions or overcoming economic restrictions to trade. However, there are also some severe drawbacks related to this type of trade. Barter assumes a double coincidence of wants and needs of the organizations involved. Apart from that, barter assumes that traded goods are arbitrarily divisible in order to match their underlying value. These circumstances may not always be the case. Compared to monetary trade, barter involves negotiations for two goods and/or services and requires two simultaneously concluded and fulfilled delivery contracts. Therefore, barter can be more time-consuming and expensive. It also reduces the flexibility of both companies involved to react quickly to new market conditions. As only a limited range of products can be provided by the contractual parties, goods and services may not be related to one’s own business and therefore other markets have to be found where these products can be resold to third parties. This may also take time and cost money.

Generally, barter transactions are not superior to monetary trade and are only implemented if external requirements and circumstances make agents prefer nonmonetary operations. At times of communist power, a bulk of transactions between Western and Eastern countries included barter. Austria played a key role as a mediator in these transactions. In 1993 43 percent of Austria’s transit exports were delivered to eastern European countries and 33 percent of them to western Europe. One of the reasons for barter trade was the lack of hard foreign currency and trade barriers. Therefore the direct transaction of goods and services was favored.

For trade with Third World countries, barter also played an important role because they had no cash to pay for the goods needed and imported. As a consequence, their creditworthiness was low. Therefore they gave resources in exchange in order to meet their debts and to overcome their liquidity problems. Compared to money, goods better collateralize future payments/compensations than money, because claims on property rights on physical items can more easily be enforced than claims on future cash flows.

In Russia, an explosive growth of barter dealings was reported in the early 1990s. This trend has been described as “re-demonetization” and was caused by a high rate of inflation. In the 20th century many European and Latin American countries suffered from a devaluation of their currencies. As a result, people engaged in barter transactions as prices increased and trading partners lost their confidence in money. It can be said that high inflation is a driver for barter transactions that limit the effects of a devaluing currency as the intrinsic value of one good/service, in terms of other goods/services, does not change. In other words, barter locks out the exchange rate risk.

Finally, organizations tend to barter if the tax system in a country does not favor their operations. In Russia, tax officials were allowed to block the bank account of those companies or individuals that were in tax arrears. Consequently, it was not possible for those people to withdraw money from their accounts and pay their debts for goods and services received. As a result, nonmonetary trade increased, which enabled circumventing this barrier to trade.

Modern bartering is often conducted through bartering clubs or bartering networks, such as the Swiss Wirtschaftsring (WIR) or the International Reciprocal Trade Association (IRTA). Members of such networks pay fees in order to get listed to be considered for barter transactions. Such clubs increase the likelihood of double coincidence as they match supply and demand.

Counter purchase and buy-back deals are special forms of barter that may include third parties, such as banks, which reliably arrange payment flows, and traders, who are willing to resell exchanged goods. Import certificates that give the right to import a certain value of goods increase the flexibility of barter operations. They allow separating the import and export transaction from each other. Counterpurchase, buy-back, and import certificates imply cross-subsidization from a foreign exporter to a domestic importer or vice versa. In the former case, the foreign exporter could generate considerable profits that cannot be realized due to low purchasing power in the domestic country. The domestic importer, in contrast, would lack purchasing power without being supported by the foreign exporter. In the latter case, a foreign importer would subsidize a domestic exporter by purchasing import certificates. Otherwise the domestic exporter would not be able to sell its products at the given market price and exchange rate.

Bibliography:

E. Buffett, “Why I’m Not Buying the U.S. Dollar,” Fortune (July 21, 2008);
Hammond, Countertrade, Offsets and Barter in International Political Economy (Palgrave Macmillan, 1990);
Malinowksi, Argonauts of the Western Pacific (Routledge, 1922);
Mayerhofer, “Change in the Service Trade Regime with CEE Countries,” Austrian Economic Quarterly (WIFO 1/1999);
Noguera and S. J. Linz, “Barter, Credit and Welfare, A Theoretical Inquiry into the Barter Phenomenon in Russia,” Economics of Transitions (2006).

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