Abstract
From one perspective, the past decade — since the first oil-shock of 1972 — has witnessed the steady erosion of the high hopes for East-West trade engendered during the 1960s and the early 1970s by its growth at faster rates than output or world trade. Between 1960 and 1973 the volume of OECD exports to the world as a whole grew at 9 per cent a year, while those to East Europe and the Soviet Union were rising by 11–12 per cent annually, a rate which would yield a doubling of trade volume every 6 or 7 years. The dynamism of the reverse flow was not so great, but growth in Western imports from the East was nonetheless about 8–9 per cent in real terms. Since this trade was growing more strongly than output, mutual trade dependence was increasing and trade shares were rising. There followed, from 1973–74, a stretch of years when the growth rates of trade slipped back to approximately those of output growth. The earlier gains were by and large maintained, but trade shares stabilised. Then, in 1981 and 1982, there occurred an unmistakeable contraction in the value and volume of East-West exchanges — of over 10 per cent in value and 3–4 per cent in volume. In the course of 1983 this downward tendency — which affected the East-West trade of the smaller East European countries rather than that of the Soviet Union — was arrested and there was an upturn in the volume of East-West exchanges which was particularly strong for Western imports.
The views expressed in this paper are not necessarily those of the ECE Secretariat.
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References
For brevity these two broad categories are sometimes referred to as “industrial” and “commercial” compensation respectively.
In 1976 the following definition was provided by the Deputy Chief of the Treaty and Law Department of the USSR Ministry of Foreign Trade: “By large and long-term compensatory agreements we understand contracts, involving large sums, that cover lengthy periods and that are signed with a firm or a group of firms in the capitalist countries for the purchase, usually on long-term credits (bank or company), of machinery, equipment, materials and other commodities employed for the development or construction of a project (natural resources or industrial enterprises). Credits are reimbursed by the delivery of products turned out by such projects. These products not only help extend the Soviet Union’s export base, but are also used at home.” (A. Belov, Foreign Trade, No. 3, 1976, p. 49). See also the presentation of buy-back arrangements contained in Institut gosudarstva i grave, 1980, pp.93–123 in which a similar definition is provided.
In intra-CMEA trade the nearest equivalent to product buy-back arrangements is the joint investment projects carried out by CMEA member countries since 1975 in a number of key industrial sectors such as fuel, power, raw materials extraction and processing. These projects, which have been defined by the Concerted Plan for Multilateral Integration Measures adopted by the CMEA in 1975, involve the granting of credits for the financing of specific projects to be subsequently reimbursed, when the project comes on stream, by deliveries of resultant products. The grant of credits usually serves to finance deliveries of machinery, materials and equipment for the construction of production facilities.
These various types of arrangements are often difficult to distinguish in practice. Thus, depening on the criteria of classification employed, the same type of arrangement may be referred to as a “co-production” or a “product buy-back” contract. Confusion in this respect is often compounded by the fact that for reasons of business confidentiality most provisions of industrial cooperation contracts are not in the public domain and are therefore wide open to interpretation. It has been observed by legal experts that “industrial cooperation assumes complex forms which do not correspond to any of the known forms of commercial contracts but incorporate many different elements of such contract” (ECE, Guide on International Contracts on Industrial Co-operation, ECE/TRADE 124, 1976, p. 11.
Article II of the agreement on economic cooperation during the period 1980–1985, concluded between France and the USSR on 28 April 1979, is a case in point. This article reads as follows: “The two Parties undertake to facilitate, by all the means at their disposal and in accordance with their legislation in force, the implementation of large-scale projects of common interest, including projects which may be executed with the help of compensatory arrangements”. Another example is contained in paragraph 9 of the long-term programme of economic collaboration and industrial and technological cooperation between Romania and the United Kingdom, signed on 28 January 1977, which reads as follows: “Payment for the cost of purchased equipment, technical documentation, licences, know-how, materials and credit expenses may be made in full or in part by deliveries of the products of the enterprises established as the result of such cooperation. Such deliveries might continue after completion of repayment of the credits with the mutual agreement of the competent firms, organisations and enterprises of the two countries”.
A kind of balanced ambivalence about the desirability of compensation transactions is reflected in the Concluding Document of the Madrid Meeting of representatives of the participating States of the Conference on Security and Cooperation in Europe, held on the basis of the provisions of the Final Act relating to the follow-up of the Conference. “The participating States note the increasing frequency in their economic relations of compensation transactions in all their forms. They recognise that a useful role can be played by such transactions, concluded on a mutually acceptable basis. At the same time they recognise that problems can be created by the linkage in such transactions between purchases and sales.”
The nearest equivalent to counter-purchases in trade between developed market-economy countries is constituted by so-called “offset” arrangement used in connection with sales of armaments, aircraft, and more generally sales of large-scale equipment to public sector entities. A typical clause in a Western offset arrangement would read as follows: “Products of the [buyer’s country] purchases by public or private entities in the [seller’s country], including municipalities and other public bodies, and products of the [buyer’s country] purchased by third country sources as a result of the efforts of the seller and its affiliated companies, will be recognised in any computation of offset amounts. The primary test will be a mutual accord as to whether or not a given sale occurred as a result of efforts arising from the offset arrangements.” In some contracts, detailed provisions are made with respect to (i) the procedures used for computing offset transactions carried out in the framework of the agreement, and (ii) the marketing areas eligible for such arrangements. In all cases, however, commitments under offset arrangements (including ensuing penalties) are less stringently defined than in counter-purchase contracts.
For details of contractual provisions and problems, see ECE, Economic Bulletin for Europe, Vol. 34, No. 2, June 1982, pp 201–207 and 214.
When advance purchases are carried out by a trading house, the transaction is sometimes referred to as a “junktim” deal, at least in central European countries. For more details, see Economic Bulletin for Europe, vol. 34, No. 2, June 1982, pp. 200–201, and TRADE/R. 444, para. 34–35.
Depending on the proportion of the sales contract which is subject to direct compensation, two types of compensation are usually distinguished. In total compensation contracts, goods of the same nominal value as the imported products are made available by the importing organisations and delivered to the exporter. In partial compensation contracts, the sales contract specifies which share of the contract will be paid in cash (or through appropriate credit arrangements) and which share is subject to direct deliveries.
In 1981 the ECE Secretariat estimated, on the basis of published data, that the volume of all counterdeliveries by Eastern enterprises under buy-back arrangements in the automotive sector amounted to $ 500 million annually during the late 1970s and would probably rise to 4 to 6 times that value in the early 1980s when several large-scale cooperation projects would come into production. In fact, some of these projects have since been scaled down or postponed.
Data for Hungary illustrate this point. In the ECE sample Hungary accounts for just over onethird(33.8 per cent) of the total number of contracts recorded — which would give some 250 contracts for the country. However, Hungarian official sources (quoted in Business Eastern Europe, 2 September 1983) put the number of registered cooperation agreements which are active at 508 at the end of 1982 (out of a total of some 750 registered agreements). The same sources estimate that the contribution of these agreements to Hungary’s total trade with the West is only 4 per cent, but indicate that Hungary’s surplus on these transactions doubled from about 863 million Forints in 1981 to 1.6 billion Forints (or about $ 40 billion) in 1982.
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© 1985 Wiener Institut für Internationale Wirtschaftsvergleiche (WIIW) / The Vienna Institute for Comparative Economic Studies
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Scott, N. (1985). From Non-Conventional to New Instruments of Trade Promotion?. In: Saunders, C.T. (eds) East-West Trade and Finance in the World Economy. East-West European Economic Interaction. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-06074-0_14
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