21st Century Counter Trade
21st Century Counter Trade
By
William Cate
The U.S. Department of Commerce hates it. The World Bank questions its long-term economic impact. However, an estimated 130 countries are doing almost US$500 billion worth of global trade under counter-trade-related schemes.
If the world relied solely upon Counter Trade, the U. S. wouldn't have a $278,000,000,000.00 trade deficit. The world debt crisis and growing weakness in the American Dollar has made trade financing very risky and thus increasingly costly. Western countries, watching jobs flee overseas, are slowly returning to the idea of bi-lateralism as a way to reduce trade imbalances.
There are five basic types of Counter Trade: barter; buy-back, counter-purchase; tolling and offset. We're going to compare a simple multi-country barter model against the traditional export model. We'll assume that the exporter can get ninety day net terms from the American manufacturer. And, we'll presume that air cargo shipments take two days and surface shipments take forty days. We'll assume that the pre-tax profit at each step will be 33% and that the exporter will structure their company to minimize their legal tax obligations. Keep in mind that there are tens of thousands of potential products, two hundred countries in the world and nearly an infinite number of ways to put counter trade deals together.
The Traditional Export Model
The Exporter will move to Reno and incorporate the export business in Nevada. Their business is to export American-made computer microchips. They have a buyer in Singapore offering a 90 Irrevocable Letter of Credit (ILC) and their manufacturer is willing to defer payment for 90 days. They buy $200,000 worth of microchips, airship them and sell them in Singapore for $275,000. Ninety days later, they have a gross profit of $75,000 and a pretax profit of $66,000. After paying U.S. Federal income tax, they earn about $44,800. Since they can repeat the microchip export four times each year, their after tax profit is nearly $100,000. This is more money than the majority of people earn living in Nevada. Not bad.
The Counter Trade Model
The Exporter incorporates their Counter Trade business in Belize. Their business office is in Barbados. They have the same relationship with an American computer microchip manufacturer. They have a buyer in Singapore offering to barter their computers for the American microchips. They have an importer in Senegal willing to take the computers and pay for them in high quality textiles that a buyer in London wants and will pay for in 75-year-old scotch. And, they have a gem broker in South Africa who wants the scotch against a payment in uncut diamonds. The counter trader has a deal with a diamond dealer in Toronto. The Canadian wholesaler has retail buyers in the States, who want the diamond rough.
The Counter Trader buys $200,000 worth of American microchips and trades them in Singapore for $275,000 in computers. He ships the computers to Senegal as the Senegal buyer surface ships the textiles to France (no import duty on Senegal exports to France) and from La Harve, the textiles are surface shipped to Portsmouth. The London textile buyer air ships the scotch to Cape Town as the South African liquor buyer air ships the uncut diamonds to Toronto. The Canadian gem dealer distributes the stones to his American retail buyers. The Counter Trader starts with a $200,000 purchase. In Singapore, he's paid $275,000 in computers. In Senegal, he collects $352,000 in textiles. In England, he gets $450,000 in Scotch. In South Africa, he acquires $576,000 in uncut gems. In Canada, he is paid $738,000 for the uncut diamonds in cash. His pretax profit is $243,000. Since Canada has a double taxation treaty with Barbados, he pays the Barbados 8% income tax on his profit. Our Counter Trader's after-tax profit is about $224,000. He or she can repeat this series of barter trades four times each year. The Counter Trader's annual after tax income will be nearly a million dollars.
Conclusion
Counter Trades are potentially ten times more profitable than the traditional export model. However, it takes ten times more effort to setup a series of successful barter trades. If you have the initial contact for an export business consider operating a Counter Trade business rather than an export business. If you are seeking advice or a partner for a Counter Trade business, contact me at: Beowulftrading@Earthlink.net
About the Author
Mr. Cate has decades of import and export experience. He can be contacted at:http://home.earthlink.net/~beowulfinvestments/beowulftrading/