Unasked questions in Sukhoi countertrade controversy<\/p>\n
Mari Pangestu
\nCenter for Strategic
\nand International Studies
\n(CSIS)<\/p>\n
Countertrade, as its name suggests, is the international
\nexchange of goods and services based on barter or some form of
\nreciprocity. Countertrade undertaken in the private sector is
\neasily understood as taking place directly between buyers and
\nsellers, or more usually through a third party, which earns
\nmargins as the intermediary between buyers and sellers. The third
\nparty is often a trading company specializing in countertrade and
\nin markets of countries with limited foreign exchange.<\/p>\n
The buyers could be from countries with limited foreign
\nexchange and thus pay for the goods purchased with other goods.
\nThe third party could use its own funds or borrow from the bank
\nfor bridging funds. Countertrade practice is also accepted for
\nexporting companies.<\/p>\n
For instance, in Indonesia, foreign investment companies in
\nbonded areas or export-processing zones can use countertrade
\narrangements (with their parent companies) for the duty- or tax-
\nfree importation of equipment or inputs for production against
\nthe exportation of their final product (World Trade Organization,
\nTrade Policy Review of Indonesia, 2003).<\/p>\n
The usual rationale for governments to enter into a
\ncountertrade agreement is to leverage against importation of
\ngoods and services from a foreign supplier as direct purchase or
\nas part of government projects.<\/p>\n
There are several types of common countertrade agreements,
\nsuch as counterpurchase or counterexport, whereby foreign
\nsuppliers commit to purchasing goods and\/or services from the
\ncountry to which they are supplying goods or services.
\nConversely, foreign suppliers can commit to invest, undertake
\ntechnology transfer or skills training, or research and
\ndevelopment in the buying country. Product buyback involves the
\nforeign supplier of machinery or equipment buying back the final
\ngoods manufactured from the machinery or equipment. Some
\ncountries have also paid their debt with goods or services.<\/p>\n
The main motivations for governments to use countertrade as an
\ninstrument are to save foreign exchange, to obtain higher prices
\nfor products that are in surplus (often primary products) and as
\nan instrument to promote or market their products.<\/p>\n
On paper, Indonesia's current policy (introduced in 1982) is
\nto link imports related to purchase by government institutions
\nand state-owned enterprises to the purchase of non-oil exports.
\nThe foreign supplier is required to import a certain percentage
\nof any import of goods or services by the government greater than
\nRp 500 million in value.<\/p>\n
The trade is to be undertaken through one of the approved
\nIndonesian trading companies. There are exceptions to this rule
\nsuch as imports through a soft loan from one of the international
\nfinancial institutions or imports for a joint venture between a
\nforeign company and a state-owned company.<\/p>\n
There appears to be no explicit percentage requirement set and
\nit is not clear how much of the policy has been implemented,
\ngiven that such countertrade does not seem to have been
\nsignificant in value. In 1997 the value of countertrade was
\nUS$379 million and in 1998 it was $195 million. Since then,
\namounts dropped off to only $3.2 million in 2000 and $17 million
\nin 2001 (U.S. Commercial Service, 2002).<\/p>\n
Therefore, countertrade has not been an important element of
\nIndonesian trade policy and also not important in most other
\ncountries, as only an estimated 4 percent to 5 percent of world
\ntrade is accounted for by countertrade (including that conducted
\nby the private sector). Obviously, it is important for a subset
\nof countries that face large foreign exchange constraints.<\/p>\n
In the light of this information, what can be said about the
\ncurrent interest in countertrade policy related to the purchase
\nof Sukhoi aircraft from Russia, from a purely economic
\nperspective? Two main economic arguments have been put forward
\nregarding the use of countertrade, although some of the detail
\nhas not been clearly articulated.<\/p>\n
First, it appears to have been intended to save the government
\nforeign exchange and outlay. However, the government still had to
\npurchase the goods to be exchanged for the purchase of the
\naircraft. Therefore, budgetary funds were still needed by the
\nState Logistics Agency (Bulog) to purchase the goods.<\/p>\n
As for saving foreign exchange, whilst the countertrade
\narrangement meant that there was no foreign exchange outlay
\nrelated to the purchase, it is not known whether there were other
\nforeign exchange requirements, such as the need to have spare
\nparts and servicing contracts, which may not necessarily have
\nbeen offset by purchase of goods from Indonesia. Rather than a
\none-off saving of foreign exchange, would not a better strategy
\nhave been to earn foreign exchange in a more sustained way?<\/p>\n
The second argument was the promotion of Indonesian exports in
\nnontraditional markets such as Russia and to market products that
\nwere in surplus, which seems to have been part of the rationale
\nfor the inclusion of palm oil as one of the products for the
\ncountertrade. This approach was only efficient and beneficial if
\nthe foreign supplier in question was a sufficiently large or
\ndiversified company so that it was in a position to effectively
\nfind markets for our goods. This would normally be large,
\nspecialized trading agencies, and it was possible that the
\nRussian government would have subcontracted the sale of our goods
\nin Russia to such a company.<\/p>\n
If, indeed, the objective was to promote sales of our goods in
\nthe most effective way, then would it not have been more
\nefficient for Indonesia to directly contract such a company for
\nmore market-based countertrade arrangements, rather than go
\nthrough a countertrade arrangement? The effort could then have
\nbeen supplemented with a concerted trade promotion program.<\/p>\n
A final problem is the lack of transparency in the pricing and
\nmargins on both sides, as the deals were neither subject to
\nmarket pricing, nor the selection of products to be sold under
\nthe agreement based on market demand and pricing.<\/p>\n
In conclusion, while countertrade is a valid instrument, if
\nindeed our objective is to promote our exports in a sustained
\nway, does countertrade deserve the resources and attention it has
\nnow? Would not limited resources be better used to specifically
\nfocus on the issues of marketing and promoting our products in
\nthese nontraditional markets in a sustained way, or even using
\nthe services of specialized trading companies, rather than a one-
\noff sale under countertrade?<\/p>\n
The focus has been on saving foreign exchange -- instead of
\nearning foreign exchange, through a longer-term strategy of
\naddressing the structural weaknesses and problems of a high-cost
\neconomy, which are affecting the competitiveness of our exports.<\/p>",
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