Parallel trade involves the execution of two separate contracts:one contract for the sale of goods by party A to party B and one contract for the sale of goods by party B to party A.Insurance carriers and financial institutions normally require that two contracts be used so that each can be enforced individually.
Counter-purchase is one of the terms used to describe a parallel-trade transaction that involves actual cash transfers. Under such an arrangement, exporter and customer each pay the other for the goods received,either with drafts, L/Cs,or wire transfers.These payments may both be in one currency,or they may be denominated in the home currency of each party.The governments of less-developed countries in Eastern Europe, Latin America,and Africa encourage counter-purchase arrangements as a way to balance imports and exports,as well as to stabilize their currencies and control inflationary pressures.When soft currency is part of a counter-purchase transaction, U.S. exporters face two hurdles.First,the currency itself must be used,disposed of,or converted to hard currency, and second, the purchased goods must be sold.
A soft currency is so defined for one or both of two reasons:

• It cannot be readily exchanged for U.S. dollars, British pounds sterling, Japanese yen, or other hard currency on the world’s currency exchanges.
• Its value is so far beneath hard-currency rates that accepting such currency for goods and services becomes uneconomical.

More complex parallel trade arrangements call for third or even fourth parties to enter a transaction. In this case, exchanged goods originate from a company other than the exporter’s customer, and frequently from a different country entirely.These arrangements are typically called offset transactions.Most offset transactions involve large corporate sellers and sovereign purchasers.Products typically include aircraft, military equipment, or large infrastructure equipment (turbines,boilers,smelting furnaces, and so on).In addition to receiving much-needed capital goods,sovereign purchasers use offsets to improve their foreign exchange position.The deal normally involves a package of transactions,carried out over a defined period of time, that-theoretically, at least-compensates the acquiring or importing country for loss of jobs,currency,and local development of technologies.This is how an offset transaction might be structured:

• Assume that you want to sell mining equipment to the Peruvian government, which doesn’t have enough hard currency to pay for it.

• Your company agrees to finance the building of a state-owned fertilizer plant in Peru in exchange for a 40% equity interest.

• Fertilizer is then exported to Argentina for pesos, which are used by the Peruvian government to pay you for the mining equipment.

• Your company, in turn,uses the pesos to pay operating expenses in your Argentine plant that produces components for mining equipment to be assembled in your U.S. plant.

Everyone wins!The Peruvian government creates jobs, foreign exchange,and a viable industry.Most of the funding for the building of the fertilizer plant comes from the U.S. Agency for International Development.As the fertilizer business grows,you should be able to reap profits from your 40% equity ownership.And, of course you succeed in closing the original export order.

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