COMPENSATORY TRADE
COMPENSATORY TRADE
Sometimes countries have so much difficulty generating enough foreign exchange to pay for imports that even licensing doesn't work; they need to come up with creative ways to get the products they want. Although this shortage of foreign exchange is associated primarily with the historically planned economies and developing countries, it can also impact industrial countries. Canada and Australia, for example, found that they had to enter into special agreements with McDonnell-Douglas to pay for the military aircraft that it wanted to purchase. As a result, firms and governments are often forced to resort to creative ways of settling payment, many of which involve trading goods for goods as part of the transaction. The term compensatory trade refers to any one of a number of different arrangements in which goods and services are traded for each other, either on a bilateral or multilateral basis. More specifically, it is defined as "any contractual commitment imposed as a condition of purchase, by the importer on the exporter, with the intention of creating quid pro quo benefits for the former."8 Although it is nearly impossible to determine the extent of compensatory trade arrangements, an estimated 20 to 30 percent of international trade is tied in some form of compensatory trade.
Sometimes countries have so much difficulty generating enough foreign exchange to pay for imports that even licensing doesn't work; they need to come up with creative ways to get the products they want. Although this shortage of foreign exchange is associated primarily with the historically planned economies and developing countries, it can also impact industrial countries. Canada and Australia, for example, found that they had to enter into special agreements with McDonnell-Douglas to pay for the military aircraft that it wanted to purchase. As a result, firms and governments are often forced to resort to creative ways of settling payment, many of which involve trading goods for goods as part of the transaction. The term compensatory trade refers to any one of a number of different arrangements in which goods and services are traded for each other, either on a bilateral or multilateral basis. More specifically, it is defined as "any contractual commitment imposed as a condition of purchase, by the importer on the exporter, with the intention of creating quid pro quo benefits for the former."8 Although it is nearly impossible to determine the extent of compensatory trade arrangements, an estimated 20 to 30 percent of international trade is tied in some form of compensatory trade.
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