Long Term Contracts in International Trade
Countertrade agreements in international trade refer to a practice in which an exporter agrees to purchase in the future, from the importer, commodities proportional to his original export sale. The paper analyzes why it might be efficient for agents to undertake trade through a reciprocal long-term transaction rather than a conventional spot transaction. More specifically, the paper argues that countertrade represents a rational response to market incompleteness because it allows the forward selling of commodities where no organized futures market exists. In this way countertrade helps reduce risk by providing information on future market conditions and by offering insurance against random fluctuations in these conditio.
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