Unasked questions in Sukhoi countertrade controversy

Unasked questions in Sukhoi countertrade controversy

Mari Pangestu
Center for Strategic
and International Studies
(CSIS)

Countertrade, as its name suggests, is the international
exchange of goods and services based on barter or some form of
reciprocity. Countertrade undertaken in the private sector is
easily understood as taking place directly between buyers and
sellers, or more usually through a third party, which earns
margins as the intermediary between buyers and sellers. The third
party is often a trading company specializing in countertrade and
in markets of countries with limited foreign exchange.

The buyers could be from countries with limited foreign
exchange and thus pay for the goods purchased with other goods.
The third party could use its own funds or borrow from the bank
for bridging funds. Countertrade practice is also accepted for
exporting companies.

For instance, in Indonesia, foreign investment companies in
bonded areas or export-processing zones can use countertrade
arrangements (with their parent companies) for the duty- or tax-
free importation of equipment or inputs for production against
the exportation of their final product (World Trade Organization,
Trade Policy Review of Indonesia, 2003).

The usual rationale for governments to enter into a
countertrade agreement is to leverage against importation of
goods and services from a foreign supplier as direct purchase or
as part of government projects.

There are several types of common countertrade agreements,
such as counterpurchase or counterexport, whereby foreign
suppliers commit to purchasing goods and/or services from the
country to which they are supplying goods or services.
Conversely, foreign suppliers can commit to invest, undertake
technology transfer or skills training, or research and
development in the buying country. Product buyback involves the
foreign supplier of machinery or equipment buying back the final
goods manufactured from the machinery or equipment. Some
countries have also paid their debt with goods or services.

The main motivations for governments to use countertrade as an
instrument are to save foreign exchange, to obtain higher prices
for products that are in surplus (often primary products) and as
an instrument to promote or market their products.

On paper, Indonesia's current policy (introduced in 1982) is
to link imports related to purchase by government institutions
and state-owned enterprises to the purchase of non-oil exports.
The foreign supplier is required to import a certain percentage
of any import of goods or services by the government greater than
Rp 500 million in value.

The trade is to be undertaken through one of the approved
Indonesian trading companies. There are exceptions to this rule
such as imports through a soft loan from one of the international
financial institutions or imports for a joint venture between a
foreign company and a state-owned company.

There appears to be no explicit percentage requirement set and
it is not clear how much of the policy has been implemented,
given that such countertrade does not seem to have been
significant in value. In 1997 the value of countertrade was
US$379 million and in 1998 it was $195 million. Since then,
amounts dropped off to only $3.2 million in 2000 and $17 million
in 2001 (U.S. Commercial Service, 2002).

Therefore, countertrade has not been an important element of
Indonesian trade policy and also not important in most other
countries, as only an estimated 4 percent to 5 percent of world
trade is accounted for by countertrade (including that conducted
by the private sector). Obviously, it is important for a subset
of countries that face large foreign exchange constraints.

In the light of this information, what can be said about the
current interest in countertrade policy related to the purchase
of Sukhoi aircraft from Russia, from a purely economic
perspective? Two main economic arguments have been put forward
regarding the use of countertrade, although some of the detail
has not been clearly articulated.

First, it appears to have been intended to save the government
foreign exchange and outlay. However, the government still had to
purchase the goods to be exchanged for the purchase of the
aircraft. Therefore, budgetary funds were still needed by the
State Logistics Agency (Bulog) to purchase the goods.

As for saving foreign exchange, whilst the countertrade
arrangement meant that there was no foreign exchange outlay
related to the purchase, it is not known whether there were other
foreign exchange requirements, such as the need to have spare
parts and servicing contracts, which may not necessarily have
been offset by purchase of goods from Indonesia. Rather than a
one-off saving of foreign exchange, would not a better strategy
have been to earn foreign exchange in a more sustained way?

The second argument was the promotion of Indonesian exports in
nontraditional markets such as Russia and to market products that
were in surplus, which seems to have been part of the rationale
for the inclusion of palm oil as one of the products for the
countertrade. This approach was only efficient and beneficial if
the foreign supplier in question was a sufficiently large or
diversified company so that it was in a position to effectively
find markets for our goods. This would normally be large,
specialized trading agencies, and it was possible that the
Russian government would have subcontracted the sale of our goods
in Russia to such a company.

If, indeed, the objective was to promote sales of our goods in
the most effective way, then would it not have been more
efficient for Indonesia to directly contract such a company for
more market-based countertrade arrangements, rather than go
through a countertrade arrangement? The effort could then have
been supplemented with a concerted trade promotion program.

A final problem is the lack of transparency in the pricing and
margins on both sides, as the deals were neither subject to
market pricing, nor the selection of products to be sold under
the agreement based on market demand and pricing.

In conclusion, while countertrade is a valid instrument, if
indeed our objective is to promote our exports in a sustained
way, does countertrade deserve the resources and attention it has
now? Would not limited resources be better used to specifically
focus on the issues of marketing and promoting our products in
these nontraditional markets in a sustained way, or even using
the services of specialized trading companies, rather than a one-
off sale under countertrade?

The focus has been on saving foreign exchange -- instead of
earning foreign exchange, through a longer-term strategy of
addressing the structural weaknesses and problems of a high-cost
economy, which are affecting the competitiveness of our exports.