Intermediaries and Countertrade in Procurement
After an organization decides to source goods from the international market, it needs to determine which supply channel it should use for optimizing time and costs. The organization may procure goods using two methods. One is to import goods directly from an international supplier. This method allows for the import of goods at the lowest possible price.
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However, in such cases, the total landed cost may become unreasonable for the organization. The second method of procuring goods involves the use of intermediaries. There are certain organizations that act as global trade intermediaries.
New traders usually trade through intermediaries and gradually start trading themselves after they have practiced the trade for some time. You will study intermediaries along with the related concept of counter-trade in the forthcoming sections.
Global Trade Intermediaries or International Trade Intermediaries (ITIs) are hired by importing organizations or individuals. These intermediaries charge a fee for their services and deal with a lot of unforeseen problems that could crop up mid-way.
ITIs are involved in the distribution of goods across national borders. They are also known as trading companies, export management companies, or importer-exporter. Major types of ITIs are shown in Figure:
The functions of various types of ITIs are described as follows:
These are individuals and organizations that import certain goods on their own and sell them in their own outlets. All expenses involved in importing goods and getting them cleared from customs and other activities are undertaken by the importer.
When customers purchase these items, they are purchased as imported goods but the purchase process and experience are similar to a domestic purchase.
These are the organizations that sell in a particular country on the behalf of other countries’ sellers and they receive a commission from foreign sellers on the sales generated by them.
Agents or Representatives
These are individuals or organizations that represent a foreign seller in a particular country. Agents handle all customs clearance and shipping work but do not assume the responsibility of any principal.
These individuals and organizations act as brokers or mediators between international buyers and sellers. They are paid commissions by buyers to locate sellers or by sellers to locate buyers for their products. However, these brokers are responsible for the shipment and clearance of products.
These are large organizations that perform myriad functions, such as the functions performed by import merchants, commission houses, agents or representatives, and import brokers. These are large organizations and have worldwide operations.
They possess the know-how of all trade practices. Most national and international trade directories list their names, capabilities, and areas of operation.
A subsidiary refers to an organization that is established in a foreign country by a parent organization that belongs to another country. The subsidiary produces products domestically using local raw materials. For example, PepsiCo Inc. is an MNC based in the US. However, it has subsidiaries in various countries including India (PepsiCo India). Some of the divisions of PepsiCo are shown in Figure:
India belongs to the AMENA division of PepsiCo. In India, all subsidiaries of PepsiCo are listed under AMENA. For example, Ahmedabad Advertising & Marketing Consultants Company Private Limited, Aradhana Convenience Foods Private Limited, and Aradhana Drinks, and Beverages Private Limited.
Aradhana Foods and Juices Private Limited, Aradhana Snack Food Company Private Limited, Aradhana Soft Drinks Company, Panagarh Marketing Private Limited, Pepsi Foods Private Limited, PepsiCo India Holdings Private Limited, etc. are some of PepsiCo’s subsidiaries in India.
Counter-trade is a type of trade transaction in which the whole or a part of the payment is made by providing goods in place of money. Counter-trade links an import transaction with another export transaction of a country.
Governments usually impose counter-trade requirements to somehow balance the inflow and outflow of foreign exchange. Different types of counter-trades are described as follows:
Countries have been trading with each other even before the development of the concept of money, the introduction of the gold standard, and the creation of the Bretton Woods system. However, in that era, countries used to purchase one commodity from each other and pay in the form of another commodity.
Commodities included a number of items, such as grains, oil, natural gas, metals, spices, electricity, foreign currencies, bandwidth, and certain other financial instruments.
In this form of trade transaction, all or more than 100% of the value of the offset contract of the sale is offset by purchasing items produced by the buyer country. The offset can be categorized as direct and indirect. Offset agreements are usually done between two organizations belonging to different countries.
However, in these agreements government agencies of both nations are involved. A direct offset involves the export (immediately or after some time lapse) of related goods or services that are to be provided by the purchasing country to the buyer country according to their sale agreement.
For example, direct offset agreements are used extensively in defense purchases. On the other hand, an indirect offset is similar to a direct offset except that the goods or services bought and sold are unrelated. For example, a country purchases onions and in lieu of onions it sells pulses.
In this type of counter-trade, an exporter enters into an agreement with an importer/importer’s country to purchase a particular quantity of certain unrelated goods produced by the importing country. The value of the purchase made by the exporter (who will now be the importer) should be approximately the same as the value of the goods exported.
In this type of counter-trade, an exporter usually exports turnkey plants, machinery, and other capital equipment to a buyer in another country. The exporter usually agrees to accept a part or the entire payment in the form of products produced using the plant/machinery/capital equipment.