In dealing with the barter system; one has to understand four principle factors. Counterpurchase, Compensation Arrangement, Offset and Debt-For-Nature Swap.
In counterpurchase, the participant parties sign two separate contracts that specify the goods and services to be exchanged. In this way one transaction can go forward even though the second transaction needs time. Whereas in Compensation Arrangement, One party agrees to supply technology or equipment that enables the other party to produce goods with which the price of the supplied products or technology is repaid. Offset arrangements are designed to offset the negative effects of large purchases from abroad on the current account of a country. Ex: a country buying an air-place may demand that parts and components be acquired in the local economy. Debt-For-Nature Swaps are when firms or entities buy what are otherwise considered to be nonperforming loans at substantial discounts and return the debt to the country in exchange for the preservation of natural resources.
The Cons1. Transactions are purely bilateral in nature and are not competitive since they squeeze out competition from a third market or specify the export market.
2. Countertrade is a second-best solution
3. Concerns regarding the valuation of countertrade transactions and with ensuring that appropriate tax payments are made.
4. “Instead of there being a double coincidence of wants, there is likely to be a want of coincidence.â€
5. The ability of countries and their industries to adjust structurally to more efficient production may be restricted.
6. The 'less productive' nation states would become inherently enslaved to the 'more productive' states.
7. Escalations of regional, border, and intercontinental wars would erupt for access to key precious resources in the inter-continental barter/countertrade system.
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