Risk-Sharing in International Trade: An Analysis of Countertrade.

Countertrade agreements in international trade refer to a trade practice in which an exporter agrees to purchase back commodities proportional to his original export sale in the future. This paper provides a rationale for why such an agreement might be efficient. More specifically, the paper argues that countertrade represents a rational response to market incompleteness by allowing the forward selling of commodities where no organized future market exists. This way countertrade helps to reduce risk by providing information on future market conditions and by offering insurance against random fluctuations in market conditions. Copyright 1994 by Blackwell Publishing Ltd.