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Countertrade

A Few years ago the only countries involved in Countertrade of any type were the then non-IMF countries such as the Peoples Republic of China and the COMECON group. Barter as such was limited between themselves or individually with an IMF country. Between IMF countries themselves, barter was and remains an IMF crime.

If any Third World countries who were members of the IMF tried to go via the COUNTERTRADE route for trade between themselves or with an IMF country, they immediately ran afoul of the IMF, with the resulting loss of access to badly needed soft credit. However, fashions change and the terminology “Countertrade” now is used to describe barter or quasi barter arrangements under the noses of the IMF. Under this system import and export transactions are routed through a “Special Trading Arrangement” or STA between government agencies or between private firms and/or government agencies.

For countries like Pakistan, there is simply no alternative to Countertrade and it is imperative we adapt our economy to it as fast as we can. We have permanent imbalance in trade, mostly because our goods cannot and will not find entry into “protected” markets, whereas our own liberal import policies enable the strong exporting countries to exploit our need of mainly industrial goods ruthlessly. The underlying theory behind the exporter to Pakistan must be obliged to accept as total or almost total settlement specified goods or services from Pakistan. In order to facilitate the length of time it takes to complete a transaction, financial arrangements may be made on the basis of the type of goods to be exchanged.

The four types of Countertrade can be broadly classified as BARTER, COMPENSATION, BUY BACK AND COUNTER PURCHASE.

The barter arrangement is now being practiced by Pakistan with the Peoples Republic of China and COMECON countries. Under this arrangement Pakistan imports specified goods. One of the primary factors of this type of arrangement is that no third party is involved. Our barter trade with the Peoples Republic of China, a mutually beneficial agreement envisages that Pakistan imports specified goods in exchange for full or partial payment in kind, but Pakistan’s partner in this trade transfers the purchasing commitment to a third party, a trading house or even the ultimate end user. Though officially not recognised as such this is exactly what is happening in all our barters with COMECON countries, most of whom have arrangements to transfer the commitments to trading companies, mainly Swiss, because Switzerland is not a member of the IMF.

Another form of Countertrade is the “buy back” arrangement, where an exporter provides plant, equipment or technology and would buy back from Pakistan, in partial or total settlement, the goods that are produced as a result. Our whole policy for industrialisation should keep this important arrangement in perspective.

“Counter Purchase” agreement forms the fourth commonly used form of Countertrade. Under this arrangement, the exporter would sell to Pakistan goods, technology or services and would agree to purchase a specified total value of goods selected from a list that excludes those products being manufactured by the technology being imported. Normally a trading firm would be used by Pakistan’s partner in Counter Purchase to market such goods as they may not use the goods themselves.

The need for Countertrade in Pakistan has been increasing with the motive of economising on the use of critically needed convertible foreign exchange, as also to improve access to markets and maintain market share. In this connection, the present civilian government and more particularly the Finance Minister, Dr. Mahbubul Haq, in tandem with the Commerce Minister, Mr. Salim Saifullah, have given an impetus to this by proposing US$ 500 million or more under Countertrade with multinational corporations. While it is fashionable to criticise the bastions of power for the many problems that they complicate further by sheer ignorance or crass insensitivity, it is clear that the decision to Countertrade represents a brilliantly outstanding attempt to break out of economic bondage imposed by the developed countries upon us and must not only be congratulated as such but applauded even more. Significantly, at least two of the multinationals involved in the final negotiations, are from the USA, and rightly so, because USA, right in the heart of IMF territory, does at least 15 to 20 per cent of its business with the COMECON countries under some form of Countertrade, and would in the next five years do another 20 percent in the same fashion with the rest of the world. One of the ways for the USA to help us is to give us neither arms nor alms in grants or easy credits, but allow free flow of our goods and commodities into the US market system.

Pakistan stands to benefit from all this experience and it is manifest in the mechanism adopted by the Government to route all the Countertrade proposals through the Trading Corporation of Pakistan (TCP).

By a peculiar association of ideas, facts and personalities, the Trading Corporation of Pakistan, led by the dynamic and progressive former Vice Chairman of the Export Promotion Bureau, Mr Mohammad Yousuf, is ideally suited, at the present time, to control and augment the flow of Countertrade till the more conservative elements in our bureaucracy accept that it is not a cardinal sin to run afoul of the IMF and that Countertrade would benefit the country.

This is despite the fact that the SUKAB barter with Sweden and the barter with KEMIRA OY of Finland have been running for years quite successfully.

There are, of course some disadvantages to Countertrade, as enunciated by the gurus of IMF in a very recent study. These are:-

a. A limited choice of goods being available for trading at internationally competitive prices e.g Pakistan, with traditional items of rice, cotton, fertiliser, etc.
b. Poor quality of goods, especially among the non-traditional items, like ready made garments, etc.
c. If the seller places geographical or commercial restraints on the marketing of goods lifted by the buyers, there would be a difficulty for them in marketing of these goods not directly consumed by the buyer.
d. Since payments of commission to the middlemen are involved in financing of the marketing of Countertrade goods, a higher product cost may result.
e. Our Countertrade partners may try and pick up from us more of our traditional items rather than having a happy blend of traditional and non-traditional items.

In the context of Pakistan these arguments should carry no weight whatsoever.
The prime consideration should be what is best for Pakistan. If somebody wants to sell us something, he must buy something in return, a package which should be evenly balanced between traditional and non-traditional items for export.

We take Japan as an example. One need only analyse what goods Japan exports to Pakistan and then assess what is actually take back in return. Are the goods that Japan has to offer not available in other countries, who may be more than willing to take back from us some of our goods and services? We do not mean to single out Japan, because South Korea, Hongkong, Taiwan and Singapore, are not far behind, but Japan is too blatant an offender in this respect to be ignored. One of the multi-nationals involved in the present negotiations for Countertrade is the Mitsubishi Corporation and we are inclined to agree with the skeptics that this Company will increase its sales of goods and commodities to Pakistan and cover its exports from Pakistan by paying discounts on Letters of Credit received by the other Japanese multi-nationals functioning in Pakistan, the resultant effect being negative instead of the opposite.

The prime consideration in Pakistan would be to have at first a regional trade policy that should strive for trade to be routed through the TCP to Iran and the SAARC countries.

For example, TCP has a Memorandum of Understanding (MoU) with its counterpart in Bangladesh, the Trading Corporation of Bangladesh (TCB), since December 1983. This MoU can be converted into a more binding STA.

Similarly so it should be with India through their State Trading Corporation (STC) and so on with the other countries of the region.

The MoU between TCP-TCB, however non-binding it may be, has worked in fits and starts but significantly our trade with Iran has increased dramatically under a more widened MoU which is a very welcome development. We enjoy very good and fraternal relations with Iran and trade can only add depth and dimension to our existing relationship.

The TCP-TCB MoU envisaged US$ 50 million each way each year over a specified number of goods. At the fag end of the second year TCP and TCB or through their sister government corporations have done approximately US$ 100 million each way. The morale of this is that it can work; the requirement is to establish a framework.

The second tier of our trade policy must be the Middle East and that needs no explanation or elucidation except that the oil we purchase must be countertraded more evenly by our commodities.

The Middle East governments import some commodities or goods of par quality from USA, Europe or even South America, which can easily be done from Pakistan. A more coherent approach must be made towards them based on logic and reason. It must be explained to them that instead of outright grants and loans, the best help they can give us is to buy our products and commodities.

The USA, Europe and South America, can best be tackled through multi-national corporations as per the present plan being processed.

It will be quite some time before the quality of our products can hope to compete at par level in Europe and we have virtually no marketing effort for South or Latin America. As this exercise unfolds, a clearer picture may emerge for our planners to base the future projections for agriculture and industry. Even credit arrangements should be worked out in Countertrade deals. The major US banks such as Citibank, Bank of America and Chase Manhattan have actually set up trading companies to handle countertraded goods.

The barter arrangements with the Peoples Republic of China and the COMECON countries work quite well and must continue in the same manner.

We should, of course exercise more prudence in the goods to be exported vis-a-vis the COMECON countries given their penchant for off loading into third markets at discounted prices through Counter Purchase arrangements with trading companies.

We must strive for clear Countertrade agreements with Japan and the Four Tigers (S. Korea, Hong Kong, Taiwan and Singapore) as part of our Far East Policy.

The question of importing from these countries without a bilateral countertrade if not in total settlement at least a major part of it, should not arise. Our partners in this case may be consortiums of the multi-nationals of each country.

Our relations with the ASEAN countries should also be dictated out of the same interests. Wherever possible a balance be made.

After all, since 1982 the Indonesian government has introduced strict measures for Countertrade to boost non-oil exports. All public sector procurement has contracts worth more than US$ 500,000 and has to be matched by counter purchase from a list of commodities equal in value to the foreign content of the contract. Similarly Malaysia has established Countertrade with those countries with whom they have large trade deficits.

Pakistan’s main emphasis for Countertrade should be Africa. Africa is our traditional market, even if we do not perceive it as such.

For example, why should we buy tea from Kenya if Kenya does not accept our goods or commodities in return, more particularly it imports in the same goods or commodities from other sources at higher prices? A reasonable approach based on our good relations should certainly pay dividends. We must adopt a more positive diplomatic and trade policy towards Africa. It is pragmatic and in the long-term interests of Pakistan. We must realise that the quality of our goods and machinery would be easily acceptable in Africa.

Above all, we must put our house in order.
We must realise that though almost US$ 200 billion worth of trade annually is taking part in Countertrade in the world today, in some form or the other, there is still going to be inherent opposition to this from the conservative elements of our own bureaucracy, who shall in turn be ruthlessly exploited by vested interests. Why should Japan or its multi-national companies in Pakistan, selling everything from pins to turbines, allow Countertrade to happen?

If a person so single-minded in his Americanism as President Reagan finds it difficult to convince the Japanese to knock down their barriers to US goods, we would be fools to expect Japan to be favourably disposed towards our entreaties.

The tragedy is that vested interests in the form of many of the bigger Pakistani trading or industrial houses may also be forced to oppose this, because it will tie up their import sales to exports, and their Principals may not be at all interested in this aspect at this juncture. However we cannot imagine our business dynamos, like Rafiq Habib and Sadruddin Hashwani being opposed to Countertrade. And it is their thinking, young and unencumbered that should really matter. The young unfettered business leadership that they represent is definitely going to support this idea morally and physically for the good of the country. Countertrade will be opposed tooth and nail in Pakistan by entrenched vested interests and the identification and subsequent isolation of these elements would help the country to solve a lot of the inherent trade deficit problems.

However, the Government can and should take some positive action to ensure that the Countertrade idea is not hampered by bureaucratic wranglings encouraged by recalcitrant big business. But above all, the elected representatives must act as watchdogs to ensure that the inevitable sniping and rumour-mongering that the entrenched bureaucrats are going to indulge in, must be stamped out ruthlessly. Even as far down as Karachi, we can hear these stalwarts in Islamabad trying to, desperately sabotage an idea, which the whole world is getting attuned to, for their own selfish and singularly irrelevant interest. Out of sheer jealousy and frustrated ambition, it will be their endeavour to bring down the real professionals who are working night and day. The “great silent majority” is not represented by them and these few men must be put out to pasture.

The Countertrade idea will depend a lot on a proper “mix” between the public and private sectors. However, we must first try and streamline the public sector. Pakistan’s major cash earning exports are rice and cotton, followed by fertiliser, hard coke and pig iron, the first two under the Ministry of Commerce and the latter two under the Ministry of Production.

The whole idea of Countertrade should be to reduce dependence on our traditional exports and increase the share of our non-traditional export by utilising the under-used industrial capacity existing in the public sector under the Ministry of Production.

Lt. Gen. (Retd) Saeed Qadir, a superb technocrat, who was the previous Minister for Production, has been succeeded by Mr. Khaqan Abbasi, a successful businessman in his own right. Again this is a great advantage for Pakistan to have this highly capable and dynamic man in this crucial position at this time. He holds the key to exploiting Pakistan’s inherent industrial capacity. Dame Fortune has created an effective triumvirate for us in having very perceptive and intelligent people as heads of the Ministries of Finance, Commerce and Production. Now it is to be seen how Mahbubul Haq, Salim Saifullah and Khaqan Abbasi can combine together and function as a team to create an export base in Pakistan away from the traditional sector. Incidentally, the Ministry of Production should necessarily have the Defence Production Division under its aegis to combine the hard cash potential of this sector exploited for export purposes on an entrepreneurial basis.

In our minds, the first idea would be to have a Secretary General for Ministry of Commerce who should do the work that the present Federal Secretary is doing at the moment.

The Federal Secretary for Commerce, who should report to a Committee of the three aforementioned Ministers, should directly be in charge of Countertrade, the Trading Corporation of Pakistan, the Rice Export Corporation of Pakistan and the Cotton Export Corporation of Pakistan.

Further the Ministry of Production and the Defence Production Division must put their entire export marketing under his charge.

One has to put a known honest and dynamic man in charge, give him the relevant authority to put his mechanism in place and have effective control over it, then give him a time period before any assessment is made.

We cannot call this an experiment, in today’s world of economic woes, but a dire necessity if Pakistan is to overcome its perennial trade deficit. Above all, we must seriously endeavour to draw people into this process from the private sector, use their experience and knowledge so that a happy blend is made, both of the private and public sector. As the subject of Countertrade becomes more a part of our economic policy, practical steps have to be taken to involve the private sector in its actual ramifications, more particularly consortiums of importers and exporters, or may be even through the respective Chambers of Commerce and Industry. Instead of paying lip-service to slogans for export orientation, let us translate this into positive action by linking it directly to our exports of goods and services, through the whole spectrum of our economy.

We must clearly understand that the compulsion for Countertrade is increasing mainly due to the slumping prices of our commodities coupled with the global recession. Countries like Pakistan which are faced with deteriorating terms of trade and critical shortages of foreign exchange are unable to trade their low priced goods in exchange for high priced manufactured goods or hard currency area. This is leading us deeper and deeper into external debt.

The artificial barriers and protectionist quotas to trade that have been placed in different forms by the developed countries of the West and some from the East, show us that there is an alternative method for marketing our cheaper and more economically produced goods and commodities — COUNTERTRADE.

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