If you thought barter system was passé, you’re probably mistaken. Because, it’s been here for quite a long time, rather it never vanished. The trade of exchanging mutually acceptable goods and services, without any involvement of money is referred to as the barter system.
It had been the only way of procuring goods required by people in the early civilizations. They could go about looking for someone who would want to exchange, say crop, for fish; thus leading to a mutual agreement between the two parties and hence effective trade. This practice, which we often talk about in relation to the earlier civilisations, is not actually extinct. Things may change their form but do not cease to be what they originally were!
One of the very first examples of countertrade in the early 1990s is the deal between USA’s Pepsi Cola International and Soviet Union (now Russia). The finalized deal aimed at increasing Stolichnaya Russian vodka in the US while Pepsi Cola International would set up more bottling plants and also launch its Pizza Hut restaurants in big cities across Russia. Pepsico also agreed to sell and lease Soviet-built ships abroad. This mutual consent led to huge profits to both the parties – Cola and Vodka sales were at about $3 billion and ship sales at about $300 million in an estimate made in the early 1990s. Another instance of countertrade was seen between Saudi Arabia agreeing to buy ten 747 jets from Boeing with payment made in crude oil.
Countertrade agreements are mainly seen in sales of military equipments (weaponry, vehicles and installations). It was estimated by General Agreement on Tariffs and Trade (GATT) that countertrade accounted for about 5% of total world trade. Another estimate by British Department of Trade and Industry puts this estimate to about 15%. Though, some scholars argue it to be not less than 30%. It is believed that countertrade contributes to about 50% of trade between West-East countries. Hence, on the whole, it is argued that not less than 25-30% of world trade depends on the countertrade arrangement.
“It is actually a way to steer clear of the world debt crisis. It is quite beneficial for the countries with less foreign exchange reserves. The method also promises to reduce trade imbalances.”
Countertrade policies of India with other countries are also reaping benefits. Public sector agencies like State Trading Corporation (STC) and Metals and Minerals Trading Corporation (MMTC) actively work towards establishing countertrade ties with other countries. It was decided that India would construct railway line worth US $120 million in 30 months in Malaysia in exchange of palm oil of equal value. Owing to a large market for edible oil in India, this is a good step towards meeting mutual needs, the BARTER way.
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Another success lies in the case of Pepsico International. When US based Beverage Company wanted to enter Indian markets, the Indian Government stipulated that local benefits of the company should be used to buy tomatoes from the Indian markets. This led to mutual benefits, where the Indian agricultural sector (tomatoes) got a boost and at the same time PIZZA HUT procured its raw material and sanctioned it’s entry in the country.
Another significant contract with Malaysia, Bharat Heavy Electricals Limited (BHEL) in association with MMTC. BHEL agreed to build mega hydropower plant in Malaysia in exchange for palm oil worth US $1 billion. India has several times bartered wheat, tobacco, tea, coffee, jute, engineering and electronic goods, as well as minerals like iron ore in return for crude oil, petroleum products, chemicals, steel and machinery. MMTC had undertaken one such initiative with Yugoslavia where structures and rail were imported in exchange for iron ore.
“It is interesting to note that Mercedes Benz once, bartered buses for bananas, a deal worth $65 million!”
The barter system may have been a thing of the past but it’s not yet over. Still it contributes to a fair portion of the world trade. Not only does this ‘age-old system’ help in preserving foreign exchange but also makes the involved parties immune to the price movement or currency exchange fluctuations and inflation risk.