I. Introduction
16.01
Until the last decade or so, there could be little doubt that the letter of credit was the pre-eminent financing tool for the international sale of goods.
More recently, this dominance has been challenged by the availability of cheaper financing mechanisms, the advent of more rapid technological solutions and the increase of banking regulation that undermines the fundamental tenets of letter of credit law.[1774] Beyond these modern challenges, there have always been two significant limitations upon the letter of credit's utility and reach. First, using a letter of credit assumes that a seller is content to receive monetary consideration in return for its goods. A seller may have compelling economic reasons for preferring to receive nonmonetary consideration. Those reasons may result from national or international economic pressures, such as ‘[h]ard currency shortages, dramatic changes in the world energy situation and ever-present pressures to reduce trade deficits',[1775] or from a desire by developing countries to acquire goods, services, or technology from developed countries that would not otherwise be possible.[1776] Secondly, using a letter of credit assumes that the trade parties to the underlying sale are based in a jurisdiction that is economically and politically stable, such that it has a sufficiently well-developed banking or financial system to support the issue of letters of credit.[1777] Where a jurisdiction lacks a minimum level of financial, economic, or political infrastructure, using a letter of credit may simply not be feasible. Even when the letter of credit is an option, any weakness or instability in the domestic banking system may make a letter of credit's use undesirable in the circumstances; such a payment instrument can only operate as an effective proxy for trust between trade parties if it constitutes a reliable source of payment.[1778] It is when the letter of credit is unavailable, inappropriate, or undesirable that trade parties might use one of the established forms of ‘countertrade’ as the mechanism for financing their respective sales.[1779] In essence, ‘counter-trade products can take on the guise of a payment method’ that provides a rapid and cost-effective way of gaining entry to new markets or dominance in existing ones,[1780] since countertrade is ‘a viable financing alternative in international transactions... [and] a way of supplementing traditional finance in trade’.[1781]16.02 According to the United Nations Commission on International Trade Law (‘UNCITRAL’),[1782] a countertrade transaction is one ‘in which one party supplies goods, services, technology or other economic value to the second party, and, in return, the first party purchases from the second party an agreed amount of goods, services, technology or other economic value’. Accordingly, the hallmark of countertrade operations is that trade parties enter into matching and opposite trade transactions with the result that goods and services are effectively supplied in return for other goods or services.
16.03 Although countertrade is not new, it has always been the poor relation, since economic or political upheavals have been the usual driver for countertrade activity.[1783] Accordingly, the economic crises in the 1920s and the Great Depression in the 1930s saw a growth in international countertrade activity, as domestic currencies suffered from exchange weakness or volatility; Lyperinflationary pressures (as in Austria, Germany, Poland, and Russia) eroded the value of money; and domestic currency exchange regulations limited cross-border capital flows.[1784] Certainly, between the two World Wars and in the aftermath of the Second World War, countertrade became the conventional method for conducting international trade in Germany, with Central and Eastern European countries following suit during the 1950s and 1960s in relation to East-West trade.[1785] That growth continued during the 1970s (as a result of the oil crisis) and 1980s (as a result of the ‘Cold War’), with estimates being that countertrade accounted for between 10%[1786] and 15%[1787] of global trade
at that time (and potentially even as much as one third),[1788] although official statistics are difficult to obtain.New Roman">[1789] Whilst countertrade’s popularity continued in the immediate aftermath of the Soviet Union’s collapse in the 1990s due to the ensuing currency-exchange and inflationary challenges,[1790] this gradually changed as the former Eastern bloc countries developed more liberal economies.[1791] That said, countertrade has never really gone away:[1792] it continues to be used in South American countries faced with currency devaluations;[1793] in countries, such as India, China,[1794] and Indonesia, to fire their development;[1795] and is commonplace in the oil market. Indeed, countertrade has had something of a renaissance in recent years as a result of the economic, financial, and banking instability engendered by the Global Financial Crisis[1796] and has increasingly been viewed as an effective vehicle for Islamic trade finance.[1797]
16.04
Countertrade (like gold) has traditionally operated as a safe port in times of crisis.
Accordingly, some level of resurgence is likely in a global pandemic that has seen global trade collapse,[1798] especially when there was already a rise in nationalist and protectionist tendencies and higher levels of international financial regulation that make bank-based financing options increasingly expensive and cumbersome. Whilst some of these problems might be alleviated by developing new trade-finance techniques (such as the Bank Payment Obligation (‘BPO’)), or by the inexorable march of technology, the aim of this chapter is to examine an old trading technique that might be re-purposed into a straightforward and cost-effective trade-finance mechanism. Indeed, the ‘self-help’ nature of countertrade and its freedom from bank oversight is certainly consistent with the growth of open-account and prepayment transactions, as well as the increasing popularity of blockchain technology as a solution to the paper-based problems of trade finance.16.05
That said, countertrade will only flourish to the extent that its legal consequences are reliable and secure. In this regard, section II will consider the different forms of countertrade transaction, before section III considers some of the potential legal difficulties associated with such operations. Some concluding remarks will be offered in section IV.
II.