Commercial activities and types of contracts. Other Forms of Basic Activities. Steps to Conclude a Contract

Commercial activities and types of contracts.

Main Commercial Activities.

Foreign trade comprises four main activities: importing, exporting, re-exporting (re-exports are goods that have been imported and then exported in the same form, i.e. not put through any manufacturing or finishing process) and re-importing (i.e. bringing back into a country an article or commodity that has earlier been exported from the same country, such as a motor car being re-imported after temporary export).

All commercial activities in foreign trade may be divided into basic and auxiliary.

 Basic ones are associated with import/export transactions, i.e. with the conclusion of foreign trade contracts for the exchange of goods. Such activities cover selling goods for money that is usually reflected in a contract of sale, countertrade deals that are reflected in other types of contracts, the main being framework agreements, and such activities as leasing, tolling, consignation and futures.

Auxiliary activities ensure the successful performance of the basic ones, i.e. they are associated with carriage of goods, insurance, banking operations (financing the deals, settlement of payments between sellers and buyers, and guaranteeing the strict observance of their mutual liabilities), as well as customs and other activities. Conclusion of agency agreements, agreements with the suppliers for the export of goods and with importers for the  purchase of goods, agreements with advertising agencies and firms dealing with the market research and with other organizations helping to achieve the targets of for­eign trade also refer to auxiliary activities. There may be about 10 or more auxiliary operations to one basic.

Countertrade is exchanging goods or services that are paid for, in whole or part, with other goods or services. Under a countertrade transaction a seller agrees to take full or partial payment in kind, i.e. it is a form of trading in which an exporter of goods undertakes to accept goods or services (rather than money) from an importer in exchange.

Types of Countertrade Transactions

        The forms which countertrade transactions assume are infinite and vary from country to country and from case to case. However, some types of countertrade transactions can be discerned, e.g. reciprocal sales, barter, buyback deals, offset and switch trading.

1) Reciprocal Sales are a common form of countertrade, especially with the former Comecon (Council for Mutual Economic Assistance) countries and with developing countries. It refers to short and medium-term transactions and denotes sales of goods and services to a country by a company that promises to make a future purchase of a specific product from the country. Under the reciprocal sales transaction the seller assumes responsibility to purchase an agreed value of the buyer’s products to help finance the original sale. The exporter agrees, as a condition of obtaining the order, to arrange for purchase of goods or services from the importer's country. The sequence of events is as follows:

a)  The exporter obtains an order subject to arranging for the disposal of goods or services from the importing country.

b)  Two parallel but separate contracts of sale are set up, the export contract and the reciprocal Sales i.e. one for the sale of goods to the importing country, and one for the reciprocal Sales of goods from the importing country.

      2) Barter is an exchange of goods or services directly for other goods or services of equal value, without the use of money as means of purchase or payment, e.g. sugar from Cuba is exchanged for screws produced in Britain. As a rule, little or no currency is involved. The greatest disadvantage of barter is the fact that it depends upon a double coincidence of wants. Despite all disadvantages, barter still exists but nowadays it is only used when the monetary system of a country has broken down, in countries subject to civil disorder or hyperinflation, or internationally by countries with inadequate supplies of foreign exchange.  Barter involves a single contract for the simultaneous exchange of goods for goods between two parties. Two types of barter can be distinguished. In the true barter, there is a simple exchange and no value is placed on the goods exchanged. In the valued barter, some value is put on the exchanged goods. It is obvious that in commercial transactions only the valued barter is used.

A valued barter is not the same as a reciprocal sales contract. The essential difference is that a valued barter, like an unvalued one, is a one-contract transaction in which obligations of the parties are made dependent on each other, whereas the reciprocal sales agreement is always a two-contract arrangement, even if the contracts are linked together in the manner indicated earlier.