Working Paper: CEPR ID: DP609
Authors: Dalia Marin
Abstract: This paper sees countertrade as a means by which the PCPEs (previously centrally planned economies) and LDCs extract some of the monopoly profits from firms in OECD countries to subsidize their exports. Viewed in this way, countertrade is an exchange of market entry for marketing assistance in which the PCPEs and LDCs effectively shift the terms of trade in their favour. Based on a new sample of 230 countertrade contracts, which have been signed between firms in OECD countries and PCPEs and LDCs in the period between 1984 and 1988, the paper estimates the likelihood of such terms-of-trade change as a function of the market power of OECD firms, the extent to which goods offered by the PCPEs/LDCs in the contract reflect comparative advantage, and the information available in the bargaining over the terms of the contract. The data are consistent with the view that countertrade is used by the PCPEs/LDCs as a vehicle to reduce the effective price of their imports. Since it is equivalent to an import tax cum export subsidy in the presence of foreign market power, countertrade raises the welfare of the PCPEs/LDCs by allowing them to recapture some of the monopoly rents the OECD firms are extracting from their consumers in PCPEs/LDCs.
Keywords: countertrade; reciprocity; strategic trade policy; eastern europe
JEL Codes: F12; F13; P42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| market power of OECD firms (L19) | terms of trade (F14) |
| countertrade enables PCPEs and LDCs to extract monopoly rents from OECD firms (F16) | subsidizing their exports (F14) |
| countertrade acts as an import tax cum export subsidy (F10) | raising the welfare of PCPEs and LDCs (D69) |
| countertrade lowers the effective price of imports for PCPEs and LDCs (F14) | enhancing their welfare (I30) |
| countertrade circumvents collusive agreements (F13) | allowing PCPEs and LDCs to secure more favorable terms in international trade (F13) |
| information asymmetry in bargaining situations (D82) | impacts the ability of PCPEs and LDCs to negotiate effectively (F69) |