Why is compensation trading also called a "buyback?" How does it differ from switch trading?
What will be an ideal response?
Compensation trading is a form of countertrade that involves two separate and parallel contracts. In one contract, the supplier agrees to build a plant or provide plant equipment, patents or licenses, or technical, managerial, or distribution expertise. A hard currency down payment is paid at the time of delivery. In the other contract, the supplier company agrees to take payment in the form of the plant's output equal to its investment for a period of as many as 20 years. Interest is subtracted from the investment. The success of compensation trading rests on the willingness of each firm to be both a buyer and a seller. Hence, this method is referred to as "buyback." On the other hand, switch trading is a mechanism that can be applied to barter or countertrade. In this arrangement, a third party steps into a simple barter or other countertrade arrangement. When one of the two parties in barter system is not willing to accept all the goods received in a transaction, the third party may be a professional switch trader, switch trading house, or a bank. The switching mechanism provides a "secondary market" for countertraded or bartered goods and reduces the inflexibility inherent in barter and countertrade. Fees charged by switch traders range from 5% of market value for commodities to 30% for high-technology items. Switch traders develop their own network of firms and personal contacts.
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