Countertrade-2
Introduction
Countertrade (CT) is a refined form of Barter. Whereas Barter is sovereign between two entities, mostly countries, CT flows across many entities, countries, Multi-national companies (MNCs) and other companies. In the present world, where there are as many as 106 severely indebted countries, CT is used to offset this disadvantage. Whereas CT benefits the poorer countries, it has been successfully used previously by western countries, western companies and MNCs with profit centres in Europe and USA. With the changing face of the world, particularly the protectionist tendencies of the western countries, the Third World countries are increasingly looking to CT to keep the trade flow and profit accruing between themselves rather than give away the advantage to the developed nations.
Opportunities in the Region
A unique opportunity exists in the countries of South Asia and the former countries of the Soviet Union, particularly the Central Asian countries. Most of these countries have need to import commodities and items as well as sell commodities and items but there is little chance of balanced trade or Barter between any two sovereign nations as the items for sale may not be wanted by the countries from where imports are envisaged. It is necessary therefore to have a focus of trade, a centre of gravity that trade flows to and out from in the proportions desired. This focus must have a psychological dominance over its partners to cut across bureaucratic obstacles and it must have a financial credibility to sustain that dominance.
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, the COMECON group and some Scandinavian countries. 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 a semi-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 our need for Countertrade is that 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, some of the former COMECON countries and the Scandinavian countries (Sweden and Finland). 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 is a mutually beneficial agreement that envisages that Pakistan imports specified goods in exchange for full or partial payment in kind. However in all the other Barters, Pakistan’s partner in the trade transfers the purchasing commitment to a third party, a trading house or even the ultimate end user. Though officially not recognised as such by our Ministry of Commerce where officials have been turning a blind eye to this for reasons best known to them, this is exactly what is happening to our detriment in all our Barters with COMECON countries, most of whom have arrangements to transfer the commitments to trading companies. COMPENSATION is a sophisticated form of the Barter arrangement and operates on the same analogy.
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 but has almost never been used because the “kick-back” that our industrialist gets to come up with his “equity” was previously not adequately defined.
“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 first civilian government (in 1985) of Mr Junejo, had given an impetus to this by proposing US$ 500 million or more under Countertrade with various Multinational corporations. While it is fashionable to criticise the bastions of bureaucratic power for the many problems that they complicate further by sheer ignorance or crass insensitivity, it is clear that the decision to Countertrade represented a brilliantly outstanding attempt to break out of economic bondage imposed by the developed countries upon us and had to be congratulated. Unfortunately bureaucracy conceived it and later they also destroyed the idea.
Short History of CT in Pakistan
The Trading Corporation of Pakistan (TCP) is the official government trading company of Pakistan. It has run Barters for over two decades with Sukab (Sweden), Kemira Oy (Finland), Czechoslovakia, Poland, Bulgaria, etc. In 1985, it tried CT with Prudential Bache Trade Corporation (PBTC), USA, Mitsubishi (Japan), Sucden (France), Metallgesellschaft (or MGS of W.Germany) and Crescent Petroleum, Sharjah. These were of the value of US$ 50 million each way, a total of US $ 500 million for Barter and US $ 500 million for CT.
Significantly, at least two of the multinationals involved in the final negotiations were from the USA, and rightly so, because USA, right in the heart of IMF territory, did at least 15 to 20 per cent of its business in 1985 with the then COMECON countries under one or another form of Countertrade, and still does another about 20 percent in the same fashion with the rest of the world. One of the early ways for the developed countries like USA to help us would have been 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 so that we could have the liquidity to pay ready cost to pay for our requirements. However, our planners decided to go the easy route and thus put our grandchildren and in turn their grandchildren and so on in debt.
Pakistan stood to benefit from all this experience and it was manifest in the mechanism adopted by the Government to route all the Countertrade proposals through the Trading Corporation of Pakistan (TCP) instead of the Ministry of Commerce that ensued corruption crept in at the policy making stage. However this idea was stillborn at the altar of bureaucratic foot-dragging led by the then Commerce Secretary, Mr Mukhtar Masood, who eventually ensured its demise mainly because of his differences with the then Chairman TCP, Mr Muhammad Yousuf. This was an absurd decision in the face of Barter being run as CTs directly under the control of the Ministry of Commerce.
This was despite the fact that the SUKAB barter with Sweden and the BARTER with KEMIRA OY of Finland had been running for years quite successfully, controlled by the Ministry of Commerce directly. There were some major discrepancies in these Barters that were to the disadvantage of Pakistan and were continued by the officials of the Ministry of Commerce.
Disadvantages of CT
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 takes back in return. Are the goods that Japan has to offer not available in other countries who may be more than willing to taken back from us some of our goods and services? We do not mean to single out Japan, because South Korea, Hong Kong, 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 Countertrades awarded by the Government of Pakistan was Mitsubishi Corporation. If the Countertrade had been allowed to proceed this Company would have increased 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 had a Memorandum of Understanding (MoU) with its counterpart in Bangladesh, the Trading Corporation of Bangladesh (TCB), since December 1983. This MoU was converted into a more binding STA. However the STA fizzled out because of lack of interest in Pakistan’s Ministry of Commerce and the resulting mobility to coordinate with other Ministries. Since there was no money involved in DISAGIOs, there seemed to be no motivation to persist with the STA.
MANY OTHER COUNTRIES moved in to fill the resulting void of a trade boycott post-1971. Then, because of the natural phenomenon of “supply” and “demand’ a slow trickle developed through third countries, notably Singapore, into quite a trade volume, before good sense prevailed upon the two governments and a direct relationship was opted for.
COUNTRIES OF THE THIRD World like Pakistan and Bangladesh have a perennial problem about their exports. This is further complicated by the “protectionist” tendencies among the countries of the developed world which want to export out to you but take almost nothing in return. Our exports to them are rationed by quotas. At best they want to take out raw material rather than the finished goods, which in any case, for the most part, can compete in price but not in quality. Instead of narrowing the trade gap due to industrialisation, it is becoming an ever widening chasm, pulling the Third World countries, mired in foreign debt, inflation, into an economic abyss.
In such circumstances, it becomes increasingly important to further develop and augment trade on bilateral basis between developing countries. By finding markets for our finished goods and raw material amongst our Third World partners, Pakistan and Bangladesh would take the pressure off themselves to some degree. This is accomplished by Countertrade arrangements in order to force-feed some products of interest into our own relative economies from each other in order to develop an economical volume.
Because of the special nature of the economies of Pakistan and Bangladesh and a history of close cooperation already present, all factors are favourable for a very fair and desperately needed increase in the volume of trade between the two countries. However at this precise point, both the countries are standing at the crossroads of economic history because of various developments within and without their respective countries. We call it an economic crossroad because if some sort of special review is not done immediately, existing trade between Pakistan and Bangladesh will only be limited to the following:
a. From Pakistan — raw cotton, some finished textiles, rice (some times)
b. From Bangladesh — raw jute and tea.
This is a terrible state of affairs compared to what really was and is the potential between the two countries, in the private effective collaboration of both, where and when needed. The TCP-TCB STA (now deficit), has worked in fits and starts but significantly our trade with Iran had increased dramatically under a more widened MoU. We enjoy very good and fraternal relations with Iran and trade can only add depth and dimension to our existing relationship. The TCP-TCB STA 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 had 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 counter traded 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 (MNCs) as per the 1985 Countertrade Plan which was sabotaged by Mr Mukhtar Masood.
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 entities to handle countertraded goods.
The Barter arrangements with the Peoples Republic of China works quite well and could continue in the same manner. With these arrangements left with the former COMECON countries there must be some effective checks and balances, exercising more prudence in the goods to be exported vis-a-vis the former 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 must be made. 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.
House of Commerce 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 are being ruthlessly exploited by vested interests. Why should Japan or its Multi-national companies in Pakistan, who are selling everything from pins to turbines, allow Countertrade to happen ? One is encouraged by the action of the Federal Commerce Minister, Malik Naeem Khan, in stopping the Barter trade in its present form completely. That represents the first time someone at that level has recognized the malfeasance going on and this could only be possible if the minister concerned had no motivation except the national interest.
If a person so singleminded in his Americanism as President Reagan found 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. Earlier this year, President Bush’s visit to Japan was seen as that of a supplicant.
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 ties 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 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 to 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.
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.
Reorganisation
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 should report to a Committee of the three aforementioned Ministers and 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 as Chairman, with Managing Directors in each entity. 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 it is 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 even though 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.
Conclusion
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 — COUNTER TRADE. Whereas it is an accepted norm that what brings nations together are common interests, starting with religion, culture language etc, the glue that binds nations together must be economic. It is trade ties more than anything else which will increase the bonds between any two nations. See Europe after the establishment of the Common Market; true, there are disagreements but agreements are the rule and disagreements the exception. Every nation ultimately falls back on its own national interests but trade does give an opportunity to “give and take” and so it should be with Pakistan and other countries, particularly of the region. If our relations have to be built up realistically then it is important for us to re-adjust our “demands” to fit the other’s “supply” potential — and for the others to reciprocate similarly. The economic thread of reciprocity in trade i.e. Countertrade, must be the touchstone of all relationships.
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