Defense offset agreements are legal trade practices in the aerospace and military industries.

These
commercial practices do not need state regulation but, since the purchasers are mostly military
departments in sovereign nations. Many countries have offset laws, public regulations or, alternatively,
formal internal offset policies. The international names for these commercial practices or parties
connected to weapons trade are various; industrial compensations, industrial cooperation, offsets,
industrial and regional benefits, balance, equilibrium, to define mechanisms are complex than counter
trade, offset agreement are protectionist and distort competition. Counter trade can also be considered
one of the many forms of defense offset. Generally, the seller is a government that stipulates that the
seller must then agree to buy products from companies within their country. Often, the aim of this
process is to even-up a country’s balance of trade. This is frequently an integral part of internaonal
defense contract.

A defense offset agreement is a way of compensating a country that buys weapons or military
equipment from another country. For example, if Country A buys fighter jets from Country B, Country B
may agree to buy some products or services from Country A in return. This can help Country A balance
its trade and create jobs for its people. Defense offset agreements are not regulated by international
law, but by the policies of each country involved. Some countries have strict rules about how much
offset they require, while others have more flexible policies. Defense offset agreements are different
from counter trade, which is a simpler form of exchanging goods or services without using money.
Defense offset agreements are more complex and may involve multiple parties, contracts, and projects.
Defense offset agreements can also have political and strategic implications, as they can affect the
relations and alliances between countries.

THE CONSISTENCY OF COUNTER TRADE TOWARDS INTERNATIONAL

TRADE FRAMEWORK.

Counter trade is controversial because it is a trade management practice. However, trade management
is widespread, the United Nations estimates that fully 50% of present world trade is managed trade,
with counter trade accounting for half of that or 25% of total world trade.The slow response of
government and academia to the instutionalization of counter trade has left most international business
students and managers to learn the hard way how to use a trade management mechanism to their own
advantage.

Managers who would never hear of putting the company into a new market without extensive research
and strategy formulation innocently put the company unprepared into a whole new trading
environment. They had to stumble through their early countertrade transactions--learning on the job by
trial and error.

It is not surprising then, that many U.S. companies have no specific policy or strategy concerning
countertrade. Some deliberately downplay countertrade, feeling that it is only a small part of their
international operations and thus is not worth the trouble of special policy and strategy formulation.
Others are interested in countertrade, perhaps even enthusiastic about its possibilities as a marketing
tool, but have not been able to develop an effective strategy due to inexperience, confusion,
intercompany conflict, or lack of intercompany coordination.

The basic policies and strategies outlined here represent and attempt to classify and compare the
countertrade practices of selected American companies, and might be used by other companies to
evaluate their own countertrade practices.

Frameworks for strategy formulation and the strategic process in countertrade are also provided. The
terms "policy" and "strategy" are often used interchangeably, although distinctions can be made
between the two terms.

Countertrade policy is defined here as the company's attitude toward countertrade. While countertrade
strategy is defined as the approach the company takes to countertrade planning and transactions. There
are two basic types of countertrade policies: company advantage and mutual advantage.

Under a company advantage policy, countertrade/offset is used primarily for the company's benefit (to
make a sale, to maintain market share, etc.), with the needs of the buyer country being met at the
minimum possible levels. Most companies follow this policy.

The effectiveness of the company advantage policy varies. At best, it results in a satisfactory
arrangement for both seller and buyer. At worst, it can be a disaster; companies may try to get out of
their obligations once the sales contract is signed--on the theory that it will be easier to pay the penalty
than carry out the offset--and then get into a lot of trouble with the buyer country.

In contrast, companies with a mutual advantage policy give the needs of the buyer country equal weight
with their own. Under this policy, the company is concerned with the goals of the buyer country (i.e.,
modernization, industrialization, balancing trade, increasing living standards, etc.), and how the
countertrade transaction will help achieve these goals. These companies are willing to meet the
challenge of achieving mutual benefit through countertrade, and in most cases their efforts are
successful.

Counter trade is a form of international trade that involves the exchange of goods or services for other
goods or services, rather than for hard currency. It is often used by countries with limited foreign
exchange or credit facilities, or by countries that want to promote their domestic industries or political
ties. Counter trade can be seen as a way of managing trade, rather than following the free market
principles of international trade.

One example of counter trade is barter, which is the direct exchange of goods or services with an
equivalent value, without any cash settlement. For instance, a country that produces oil might exchange
it for food or machinery from another country. Barter is the simplest and oldest form of counter trade,
but it has some drawbacks, such as the difficulty of finding a suitable match of needs and values, and the
lack of standardization and quality control.
Another example of counter trade is counter purchase, which is a type of offset agreement. In this case,
the exporter sells goods or services to an importer and agrees to also purchase other goods from the
importer within a specified period. The exporter then sells the purchased goods to a third party, usually
through a trading firm. For example, a country that sells aircraft to another country might agree to buy
agricultural products or textiles from the same country, and then sell them to other markets. Counter
purchase allows the exporter to earn some cash from the deal, and the importer to reduce its trade
deficit and support its domestic industries.

Counter trade can have some advantages and disadvantages for the countries involved. Some of the
advantages are:

- It can help countries overcome the shortage of foreign exchange or credit, and avoid the fluctuations
of currency exchange rates.

- It can help countries find new markets and customers for their products or services, and diversify their
trade portfolio.

- It can help countries strengthen their political and economic ties, and foster cooperation and trust.

- It can help countries transfer technology and skills, and stimulate economic development and
innovation.

Some of the disadvantages are:

- It can distort the market prices and values of the goods or services exchanged, and create inefficiencies
and losses.

- It can increase the transaction costs and risks, and complicate the negotiation and contract terms.

- It can create trade barriers and restrictions, and violate the rules of the World Trade Organization
(WTO) or other trade agreements.

- It can reduce the transparency and accountability of the trade transactions, and facilitate corruption
and fraud.

It is not surprising that companies have no specific policy or strategy concerning counter trade. Some
deliberately downplay counter trade feeling, that is only a small part of their international operations
and thus is not worth the trouble of species policy and strategy formulation.Others are interested in
counter trade perhaps even enthusiastic about its possibilities as a marketing tool, but have not been
able to develop an effective strategy due to inexperience, confusion, intercompany conflict, or lack of
intercompany coordinaon.

Some companies may have no specific policy or strategy concerning counter trade because they think it
is not a significant part of their international operations, or because they do not want to deal with the
challenges and complexities of counter trade. For example, a company that has a strong market position
and a high demand for its products or services may not need to resort to counter trade, as it can sell its
products or services for cash or credit in the international market. Alternatively, a company that has a
negative attitude towards counter trade may feel that it is a sign of weakness or desperation, or that it is
too risky or costly to engage in counter trade. For instance, a company that values its brand image and
quality standards may not want to accept inferior or unwanted goods or services in exchange for its
products or services, or to incur additional expenses or liabilities in managing the counter trade
transactions.

Other companies may be interested in counter trade, or even enthusiastic about its possibilities as a
marketing tool, but have not been able to develop an effective strategy due to various factors. For
example, a company that wants to enter new markets or expand its customer base may use counter
trade as a way of overcoming trade barriers, such as tariffs, quotas, or sanctions, or of creating goodwill
and loyalty among its trading partners. However, such a company may lack the experience, knowledge,
or skills to negotiate and execute counter trade deals, or to deal with the legal, financial, or logistical
issues involved. Alternatively, a company that has a clear vision and goal for counter trade may face
internal conflicts or coordination problems among its different departments, such as sales, marketing,
finance, or operations, or among its different subsidiaries or branches, as they may have different
incentives, preferences, or expectations regarding counter trade. For instance, a company that has a
centralized decision-making structure may impose counter trade policies or strategies that are not
suitable or acceptable for its local or regional units, or vice versa.

One example of a company that has no specific policy or strategy concerning counter trade is
**Apple**. Apple is a global leader in the technology industry, with a strong brand image and a loyal
customer base. Apple sells its products and services for cash or credit in most of the international
markets, and does not rely on counter trade as a major source of revenue or market share. Apple also
has a high standard of quality and innovation for its products and services, and does not want to
compromise or dilute its brand value by accepting lower-quality or irrelevant goods or services in
exchange for its products or services. Apple may also face legal or regulatory challenges or risks if it
engages in counter trade, especially in countries that have strict rules or sanctions on trade or
technology transfer. Therefore, Apple does not have a specific policy or strategy concerning counter
trade, and may even avoid or reject counter trade offers from its potential or existing trading partners.

One example of a company that is interested in counter trade, but has not been able to develop an
effective strategy is **Boeing**. Boeing is a global leader in the aerospace industry, with a diversified
portfolio of products and services, such as commercial airplanes, military aircraft, satellites, rockets, and
space systems. Boeing uses counter trade as a way of securing or expanding its market share, especially
in emerging or developing countries that have limited foreign exchange or credit facilities, or that want
to promote their domestic industries or political ties. Boeing also uses counter trade as a way of
transferring technology and skills, and stimulating economic development and innovation in its trading
partners. However, Boeing faces many challenges and difficulties in developing and implementing an
effective counter trade strategy, such as:

- Finding suitable and reliable trading partners that can offer goods or services that are of equal or
higher value, quality, or relevance to Boeing's products or services, or that can be resold or utilized by
Boeing or its affiliates or customers.

- Negotiating and executing complex and long-term counter trade contracts that involve multiple
parties, products, services, and transactions, and that comply with the legal, financial, and ethical
standards and regulations of the countries involved.

- Managing and monitoring the counter trade transactions and relationships, and ensuring the delivery,
performance, and satisfaction of the goods or services exchanged, as well as the payment, settlement,
and accounting of the counter trade deals.

- Resolving or preventing any disputes, conflicts, or problems that may arise during or after the counter
trade transactions, such as delays, defaults, frauds, or breaches of contract, and that may affect the
reputation, profitability, or competitiveness of Boeing or its trading partners.

Therefore, Boeing is interested in counter trade, but has not been able to develop an effective strategy
that can maximize its benefits and minimize its costs and risks.

PREPARING FIRMS FOR COUNTER TRADE

Preparing firms for countertrade involves strategic considerations to navigate the complexities of
international trade arrangements. Companies engaging in countertrade should:

• Understand Countertrade Mechanisms: Firms need a comprehensive understanding of countertrade

- Understand Counter trade Mechanisms: Firms need a comprehensive understanding of counter trade
mechanisms, such as barter, counter purchase, and buy-back. These are different ways of arranging the
exchange of goods or services, with varying degrees of complexity, flexibility, and risk. For example,
barter is the direct exchange of goods or services with an equivalent value, without any cash settlement.
Counter purchase is a type of offset agreement, where the exporter sells goods or services to an
importer and agrees to also purchase other goods from the importer within a specified period. Buy-back
is a type of counter purchase, where the exporter sells a plant, equipment, or technology to an importer
and agrees to buy back a portion of the output produced by the importer using the exported item. Firms
should also be aware of direct and indirect offsets in transactions, which are additional benefits or
obligations that the exporter or importer may offer or demand, such as technology transfer, local
content, or employment. Firms should evaluate the pros and cons of each counter trade mechanism,
and choose the one that best suits their needs and goals.

Compliance with Government Mandates: Since one of the main reasons for engaging in countertrade is
to satisfy foreign government mandates, firms must ensure compliance with regulations imposed by the
involved governments.

Compliance with government mandates is a strategic consideration for firms that engage in counter
trade, which is a form of international trade that involves the exchange of goods or services for other
goods or services, rather than for hard currency. Some governments may require or encourage counter
trade as a way of promoting their domestic industries, protecting their foreign exchange reserves, or
enhancing their political or economic ties with other countries. Firms that want to do business in such
countries must ensure compliance with the regulations imposed by the involved governments, or face
the risk of losing their market access, reputation, or competitiveness.

One example of compliance with government mandates in counter trade is the case of **Airbus**, a
European aerospace company that sells commercial aircraft to various countries around the world.
Airbus often uses counter trade as a way of securing or expanding its market share, especially in
emerging or developing countries that have limited foreign exchange or credit facilities, or that want to
support their domestic industries or political ties. Airbus complies with the government mandates of its
customers by offering various counter trade mechanisms, such as counter purchase, buy-back, or offset
agreements. For example, Airbus sold 150 aircraft to China in 2005, and agreed to buy back $1.3 billion
worth of Chinese-made components and materials for its aircraft production, as well as to transfer some
technology and skills to Chinese aerospace firms. Airbus also sold 43 aircraft to India in 2005, and agreed
to offset 30% of the contract value by sourcing components and services from Indian suppliers, as well
as by investing in research and development, training, and infrastructure projects in India. Airbus
complied with the government mandates of China and India by using counter trade as a way of creating
mutual benefits and trust, and enhancing its long-term relationships and competitiveness in these
markets.

Risk Management: Countertrade often serves as a hedge against price and currency fluctuations. Firms
should implement effective risk management strategies to mitigate potential financial risks associated
with countertrade transactions.

Risk management is a strategic consideration for firms that engage in counter trade, which is a form of
international trade that involves the exchange of goods or services for other goods or services, rather
than for hard currency. Counter trade can have some advantages and disadvantages for the firms
involved, depending on their situation and objectives. One of the advantages of counter trade is that it
can serve as a hedge against price and currency fluctuations, which are common and unpredictable in
the international market. However, counter trade can also involve some potential financial risks that
firms should implement effective risk management strategies to mitigate.

One example of risk management in counter trade is the case of **Caterpillar**, a US-based
manufacturer of construction and mining equipment, engines, turbines, and locomotives. Caterpillar
uses counter trade as a way of expanding its market share and customer base, especially in emerging or
developing countries that have limited foreign exchange or credit facilities, or that want to promote
their domestic industries or political ties. Caterpillar implements effective risk management strategies to
mitigate the potential financial risks associated with counter trade transactions, such as:

- Diversifying its counter trade portfolio: Caterpillar does not rely on a single counter trade mechanism,
but uses a variety of counter trade mechanisms, such as barter, counter purchase, buy-back, or offset
agreements, depending on the needs and preferences of its customers and the market and regulatory
conditions of the countries involved. Caterpillar also diversifies its counter trade goods or services, and
does not accept only one type of good or service, but a range of goods or services that are of equal or
higher value, quality, or relevance to its products or services, or that can be resold or utilized by
Caterpillar or its affiliates or customers.

- Valuing and pricing its counter trade goods or services: Caterpillar uses objective and transparent
methods to value and price its counter trade goods or services, and ensures that they reflect the fair
market value and the current exchange rates. Caterpillar also adjusts its counter trade prices according
to the supply and demand conditions, the competitive landscape, and the customer preferences in the
target market. Caterpillar also negotiates and agrees on the payment and settlement terms with its
customers, and ensures that they are clear, fair, and enforceable.

- Managing and monitoring its counter trade transactions and relationships: Caterpillar manages and
monitors its counter trade transactions and relationships, and ensures the delivery, performance, and
satisfaction of the goods or services exchanged, as well as the payment, settlement, and accounting of
the counter trade deals. Caterpillar also resolves or prevents any disputes, conflicts, or problems that
may arise during or after the counter trade transactions, such as delays, defaults, frauds, or breaches of
contract, and that may affect the reputation, profitability, or competitiveness of Caterpillar or its
customers.

Adaptability and Flexibility: Given the dynamic nature of countertrade, firms need to be adaptable and
flexible in their approach. They should be prepared to negotiate and adjust their strategies based on the
specific requirements of each transaction.

Countertrade can be useful for countries or companies that have limited access to money or credit. It
can also help them find new markets or customers, or protect their own industries. However,
countertrade can also be complicated and risky. Sometimes, the goods or services that are exchanged
are not of equal value or quality. Sometimes, the parties involved do not trust each other or follow the
rules. Sometimes, the market conditions change and affect the trade.

Therefore, firms that use countertrade need to be adaptable and flexible. This means that they need to
be ready to change their plans or strategies based on the situation. They need to be able to negotiate
and agree on the terms and conditions of each trade. They need to be aware of the risks and benefits of
countertrade, and how to deal with them. They need to be creative and innovative in finding solutions
or opportunities for countertrade.

- Romania and Philippine Sugar Trade: In the late 1990s, Romania faced severe sugar shortages. They
proposed a countertrade transaction with the Philippines. They exchanged Daewoo-made televisions,
radios and other items manufactured in Romania for Philippine sugar⁴.

Legal and Contractual Expertise: Engaging in countertrade requires a solid understanding of

Countertrade can be useful for countries that have limited money or credit to buy things from other
countries. However, it can also be complicated and risky. Different countries have different rules and
laws about trade, and they might not agree on how to value the goods or services they exchange.
Therefore, firms that want to do countertrade should have good knowledge of international trade laws
and contracts. They should also get help from lawyers who can make sure their contracts are clear and
fair.

An example of countertrade involving the Philippines is the Countertrade Program of the Philippine
government. This program applies to transactions where the government buys foreign products or
services worth at least US$1 million¹. The foreign seller must agree to do something that benefits the
Philippines, such as:

- Buying Philippine products or services in return (counterpurchase)

- Investing in Philippine industries or projects (offset)

- Sharing technology or skills with Philippine firms (industrial cooperation)

- Giving grants, donations, or training to the Philippines (other forms of offset)

ATTITUDES OF INTERNATIONAL ORGANIZATIONS TOWARD COUNTER TRADE

Association or corporations are increasingly using counter trade as a competitive tool to maintain or
increase market share. The complexity of the transactions requires careful planning in order to avoid
major corporate loses. Management must consider how he acquiredmerchandise will be disposed of,
what the potential for market disruption is, and to what extent counter trade goods fit in with the
corporate mission. There is a positive atitude toward counter trade among the sample of firms surveyed.
Most who took part in the survey believe that counter trade is a permanent feature in the world trading
scene, and many also thought that it would spread even further. The responses to questions regarding
atitudes to counter trade were:

75% -counter trade is here to stay.

62% -counter trade will grow and spread into the future.

56% -counter trade is an innovative response

53% -firms should in counter trade only if necessary.

41% -counter trade is a powerful marketing tool.

41% -firms should take the initiative in counter trade deals.

30% -counter trade is an inefficient form of international trade. 19% -counter trade conflicts with GATT
principles.

16% -counter trade should be discouraged.

3% -counter trade is a temporary phenomenon

Counter trade is often used by countries or companies that have difficulty getting money or credit from
other sources. It can also help them find new markets, build relationships, and avoid trade barriers.
However, counter trade can also be complicated, risky, and inefficient. It can be hard to find a good
match of goods or services, to agree on the value of the exchange, and to deal with quality issues or
legal problems.

According to a survey of some international organizations, most of them have a positive attitude toward
counter trade. They think that counter trade is here to stay and that it will grow and spread in the
future. They also think that counter trade is an innovative way of doing business and that it can be a
powerful marketing tool. However, some of them also think that counter trade should only be used if
necessary and that it can be inefficient and conflict with some trade rules.