Discussion Exercises
Discussion Assignments and Mini-cases
Chapter 17 Pricing Strategies: Countertrade and Terms of Sale/Payment
- Given that countertrade is a fact of life which is not going to go away, is there any valid argument from a theoretical standpoint for this method of doing business?
From a theoretical standpoint, there is probably no valid argument for countertrade. This method is cumbersome and costly, making additional and unnecessary costs inevitable. As explained by Bruce Fitzgerald (‘Countertrade Reconsidered’ Finance & Development (June 1987): 46–49), “countertrade requirements, like any trade restrictions, increase the cost of doing business. These costs cannot be passed into the international market but must be borne within the country imposing the requirements.”
- Assume that you are a U.S. manufacturer being asked to submit a quotation to a potential buyer. How are you going to prepare your quotation in terms of a) terms of sale and b) terms of payment?
To prepare a quotation for a potential buyer, a U.S. manufacturer should use CIF as the terms of sale. This quote is meaningful, making it easy for the buyer to know the cost, insurance, and freight. Since the buyer can compare this quote with other suppliers' quotes, the quote should receive serious consideration from the buyer.
The terms of payment which offer maximum protection to both the buyer and the seller should involve a letter of credit. If possible, it should be irrevocable and confirmed. This is critical when the buyer is far away and unknown and an order is large. It is too risky to offer an open account and the like until the buyer becomes known and its credit references are sound.