The Case of Barter Trade

Barter trade: a new and ancient way of trade In the financial industry is highly developed, the currency as a general equivalent of today's widespread use of barter trade, this ancient way of trade in Egypt to be a newborn, which is closely related to the current economic situation faced by Egypt, foreign exchange management system, the characteristics of the economic structure and the government's implementation of the limitations of incoming and outgoing prizes of the foreign trade policy and other factors.

1. The status of economic development.

Services in the Egyptian national economy plays a pivotal role. In recent years, the income from the service sector accounts for more than 50% of Egypt's GDP, of which the proportion of tourism alone reaches 11.2%. In foreign trade activities, Egypt's trade in goods has an annual deficit of about 10 billion U.S. dollars. Its balance of payments relies mainly on revenues earned from trade in services such as tourism, Suez Canal transit fees, and remittances. In the late last century, due to Egypt's real estate investment projects on too much, large projects cost too much, the bank lending irregularities, etc., some structural contradictions in the development of the economy and the financial pitfalls gradually exposed, the economy appeared to decline momentum. In the ensuing Middle East turmoil, the 911 incident, the war on terrorism, the U.S. war on Iraq and a series of events, Egypt's tourism industry and related services suffered a heavy blow to the development of the national economy has a serious impact on the foreign exchange earnings fell sharply, the balance of payments imbalance, the unemployment rate rose, the market demand for shrinkage, the downturn in the trend of the economy has further aggravated.

2. Foreign exchange management system and changes.

Since the beginning of the 1990s, Egypt, with the help of the International Monetary Fund on the financial system to implement bold reforms: current and capital items to achieve the free exchange of foreign exchange; economic organizations, residents are free to open foreign exchange accounts; foreign exchange earnings can be freely remitted abroad. Commercial banks and foreign exchange bureaux carry out foreign currency exchange operations in accordance with the exchange rate determined by the Central Bank. The implementation of this measure once became an important symbol of Egypt's open economic policy and favorable investment environment. However, since 9/11, due to the decline in foreign exchange earnings and the imbalance in the supply of foreign exchange, banks and foreign exchange offices surrendered the foreign currencies they had bought from the market, and the sale of foreign currencies was frozen, creating a situation in which foreign currencies were available in the market but not in the market, only in but not out of the market. Since the beginning of 2002, the system of free exchange of foreign currencies for the EGP has existed in name only. At the same time, the black market for foreign exchange (mainly the black market for the dollar) was active, forming a pattern of coexistence between the black market and the official price. The government is directly involved in the allocation of foreign exchange resources to ensure that key commodities are imported and key enterprises use foreign exchange. For general enterprises and residents, they can only buy foreign exchange on the black market.

3. Industrial structure characteristics.

Egypt's industrial structure determines that it must maintain the necessary imports. Due to the rapid growth of Egypt's population and limited arable land, is currently a food can not be self-sufficient country, every year to spend a lot of foreign exchange imports of food in order to protect the people's basic needs of life. Such as the annual import of 4-5 million tons of wheat, 1 million tons of edible oil, 400,000 tons of sugar, respectively, accounting for 55% of the total domestic consumption, 90%, 40% or so. In the Arab countries, Egypt's industrial manufacturing level in the forefront, petrochemicals, transportation, electricity, textiles, clothing, pharmaceuticals, food, steel, cement and other industries in recent years has achieved relatively rapid development in automobile assembly, household appliances, information technology industry, such as the establishment of a number of assembly plants. But in general, Egypt's processing industry level is not high, the industrial system is not sound, the production of raw materials, parts and components required mainly rely on imports. Egypt's production of industrial equipment, instruments, meters, etc. are also basically dependent on imports. At present, Egypt has more than 14 billion U.S. dollars in foreign exchange reserves, but the situation in the Middle East for a long time in the case of instability, for long-term strategy and national economic security considerations and to cope with possible crises, generally do not easily use this part of the foreign exchange. The main measures taken by the Egyptian government to safeguard people's lives and develop the economy in the face of hard currency shortage include: actively seeking foreign aid; strictly controlling imports of general consumer goods; and actively expanding commodity exports to increase the sources of foreign exchange earnings.

Out of Egypt's strategic position, regional political powers and other factors, the United States, Europe, Japan and other countries to Egypt every year a large amount of aid. 2002, the beginning of the donor conference held in Sharm el-Sheikh, the United States, Europe, Japan and other countries and international and regional financial institutions committed to the next few years, to provide more than 10 billion U.S. dollars to Egypt's aid support. However, there is a limit to the amount of aid that can be provided by donor countries in a given period of time. Some grants and loans come with certain conditions attached. For example, in 2002, the Egyptian government rejected a $1 billion loan from the World Bank because its reform requirements were beyond its capacity. After the U.S. war with Iraq, the two sides conducted many rounds of negotiations for this loan, but no agreement was ever reached. In order to build up the image of a great power, the Egyptian government maintains a certain scale on the use of foreign debt and prioritizes the use of soft loans with low interest rates and relatively long repayment periods.

In terms of restricting imports, the Egyptian government has taken measures to restrict imports, including administrative means, financial means, tariff measures, anti-dumping measures, technical barriers to trade, etc., especially restricting imports of general consumer goods, for example, the Egyptian government transfers the allocation of foreign exchange resources through the bank to guarantee the imports of basic necessities, industrial raw materials and spare parts, and the imports of general merchandise basically cannot obtain foreign exchange from the bank; the Bank of Egypt requires that Consumer importers are required by the Bank of Egypt to provide a 100% guarantee in foreign currency when opening letters of credit; the tariffs on garments have been raised significantly; and general consumer goods are subjected to strict inspections, sometimes with deliberate delays in customs clearance, overvaluation of goods, and unreasonable difficulties, resulting in increased costs. The sharp devaluation of the Egyptian pound was a forced measure taken by the Government, and the implementation of this policy has objectively discouraged imports. Since January 29, 2003, the Egyptian government abandoned the exchange rate system of floating up and down around the central price in the past, and implemented a free-floating exchange rate system. At the same time, foreign exchange controls were tightened, requiring enterprises to sell 75 percent of their foreign exchange earnings to banks; hotels were allowed to collect foreign currency directly from foreign tourists for settlement without prior conversion of foreign currency into Egyptian pounds. Nonetheless, foreign currency transactions at banks and bureaux de change remain inward-only.

Increasing export support while restricting imports. In addition to simplifying export procedures, the Egyptian government also passed legislation in 2002 to establish an export incentive fund to subsidize exports, which increased from 400 million Egyptian pounds the previous year to 650 million Egyptian pounds this year. However, the scale of export growth is limited for a certain period of time due to the slowdown in the growth of world trade and the constraints imposed by the country's own resource situation and level of output. Under these circumstances, barter trade has become a realistic option for sustaining the development of the national economy. The biggest advantage of this approach is to obtain the country's scarce resources without paying foreign exchange at the same time, but also to expand Egyptian exports.

From the above, it is clear that the Egyptian government advocates barter trade for two reasons: first, in the case of foreign exchange shortages, in order to meet the needs of the people's lives and the development of production and imports, i.e., demand-pulling; and secondly, in the case of demand for imports exists in order to expand exports to the terms of an exchange market, i.e., the market swap type. Therefore, even if Egypt's foreign exchange earnings increase in the future, the government will still use barter trade to conduct trade in order to expand exports.

In practice, barter trade arises in the following three cases:

One is the government to ensure the supply of basic domestic goods, on the key projects, in the shortage of foreign exchange, loans are unavailable, through the search for barter solutions. For example, the government imports wheat, imported railroad cars. In this case, the government will take the initiative to help solve the barter items.

The second is that under the current Egyptian foreign exchange management system, some entities in Egypt have the ability to invest and are willing to take on the project, through the import of equipment for technological transformation, the project can be approved by the government, but the government is not responsible for resolving foreign exchange resources. These units have considerable annual income of EGP, the project unit is willing to pay EGP. In this case, it is necessary for the exporters to solve the barter items problem by themselves.

Thirdly, there are some transactions where part of the payment is made in the form of installments. For example, in one transaction, the two sides agreed to pay 40% of the purchase price in US dollars first, and the remaining part, the revenue sharing system, and payment in Egyptian pounds. In such cases, small transactions are transferred between the exporter (or exchanged on the black market, which is illegal and carries a high risk) and other enterprises, and trade in this way is possible only for those who have established an economic entity in Egypt. Some larger transactions will ultimately need to be bartered. There are five stakeholders directly involved in the completion of a barter transaction:

The supplier of the goods or engineering or technical services, i.e., the exporting enterprise;

The recipient of the goods or engineering or technical services, i.e., the importing enterprise;

Economic entities that provide bartered goods and receive payment from B in the currency of the country in which B is located;

Economic entities that receive bartered goods and pay A in the currency of the country in which A is located;

Economic entities that receive bartered goods and pay A in the currency of the country in which A is located. economic entity that receives barter items and makes payment to A in the currency of the country in which enterprise A is located;

an intermediary that represents the interests of party A, receives payment from B in the currency of the country in which B is located, makes payment to C, and supervises C's performance of the transaction. According to the degree of difficulty of the transaction and the number of participating subjects, barter trade is manifested in two basic modes, namely, incidental barter trade mode and expanded barter trade mode

1. Incidental barter trade mode.

In the course of the transaction, the two sides agreed that A, after providing goods or services to B, B will provide the corresponding goods as a means of payment (B's own goods or goods obtained from any third party); A directly imported barter goods as raw materials for their own enterprises or affiliates, or sold by their own enterprises or affiliates in the domestic market to realize the value of their own.

The transaction process can be described as follows: A → B → A

Such as a Chinese enterprise, A, supplies steel-making equipment to an Egyptian enterprise, B, which pays for the goods with its product, steel. A is an integrated conglomerate, and its subsidiary, a real estate company, happens to need steel to build houses.

This pattern of transactions is an accidental cross-border barter. The transaction occurs on the premise that both parties need each other's goods or services, and the transaction process is completed directly by both parties under the use-value form without involving any third party.

2. Expanded barter mode.

In practice, more often than not, it is the mode of transaction involving multiple parties. In the course of the transaction both sides agreed, A in the provision of goods or services to B, B to C in national currency to pay the corresponding payment, C to D to provide goods, and ultimately by D to A payment.

The transaction process can be described as: A → B → C → D → A

such as a Chinese enterprise A to the Egyptian enterprise B to provide 200 railroad cars, the two sides agreed to pay 50% of the purchase price in U.S. dollars; the other 50% of the purchase price to the Egyptian enterprise C production of 250 cars for the barter, A commissioned a specializing in the operation of the automobile business of the Chinese enterprise D imported cars from C and is responsible for the sale, to pay the goods in RMB to A. A commissions D, a Chinese enterprise specializing in the automobile business, to import cars from C and to be responsible for their sale, and pays A in RMB.

This mode of transaction is an extended form of cross-border barter. The selection and value realization of the bartered goods need to be completed with the help of a third party, a fourth party or even a fifth party. It is characterized by: many transaction links, large transaction costs, delivery time, the interval between the recovery of payment, the quality of the goods and other aspects of the risk is difficult to control. In practice, this transaction may evolve into the following modes:

M1 mode: A → B → D → A . In the course of the transaction, the two sides agreed that A in the provision of goods or services to the B side, B to provide the corresponding goods for payment, A looking for D to help it realize the value of the goods in the form of D, and then D will be paid to A.

M2 mode: A → B → C → A . In the course of the transaction, the two sides agreed that after A provides goods or services to B, B will look for C according to A's requirements, who will provide A with the required goods.

M3 mode: A→B→A→C→A or A→B→Z→C→A. In the course of the transaction, the two parties agree that, after A provides goods or services to B, B pays the corresponding national currency to A (or Z), and then A (or through Z) buys the goods it needs from C, and then imports them into the country for use by itself or its affiliates as raw materials or for realizing their value in the domestic market. That is, B provides the equivalent and A (or Z) seeks out C to be able to better provide the goods that meet A's needs easily.

M4 mode: A→B→A→C→D→A or A→B→Z→C→D→A . The first stages of the transaction are similar to the M3 model, and in the later stages of the transaction, A needs to look for D to convert the barter goods into value forms, and finally D pays A for the goods. Turning to the history of bilateral economic and trade exchanges between China and Egypt, we can see that in the 30 years since 1956, China and Egypt have been practicing book-keeping trade under the domination of the government: the trade is executed by the state-run companies of both sides, and the trade is cleared through book-keeping every year. In this way, China imported large quantities of cotton (not just long-staple cotton) from Egypt. It was not until January 1, 1985 that the two countries introduced cash trade.

The current barter trade mode is a single contract to negotiate the terms of barter, which is very different from the past book-entry trade, but the government still plays an important role in the transaction process, performance:

1. The government can promote the completion of the transaction in a wider range. There are many barter trade contracts, especially some large trade contracts are proposed by the government, by the two governments *** with consultations and assistance in finding barter parties. In the selection of barter goods and value realization, the importing government can help in a wider scope to find the other party's easy to accept the barter of goods; the exporting government can help in a wider scope to find the realization of the value of the goods as a payment object.

2. Commodities available for barter are generally bulk commodities, some of which are subject to government control, requiring the government to provide appropriate policies. Egypt is a relatively lack of resources in the country, the current oil self-sufficiency slightly export, although large reserves of natural gas, but is still in the early stages of development; marble, granite, although the reserves are large, but they are decentralized private business, and product quality is difficult to control, to the barter difficulties. At present, the main commodities available for barter are: long-staple cotton, flax, a small amount of petroleum and petrochemical products, iron and steel, assembling cars, gypsum, phosphates, citrus and so on. Most of these products are subject to strict government control of commodities, bartering requires government policy support.

3. In terms of payment, there are a lot of practices and spot trade there are big differences, and some even with the existing laws are not coordinated, which requires the two sides of the government consultation on this to make the appropriate institutional arrangements. For example, in the M3, M4 mode, if B to pay the national currency of A, and A in country B has no office, there is no account, the collection of goods, or to pay the goods to C, will be very difficult. Problems that will be encountered in China's trade and financial management system include: export collection problems, export tax rebates, and so on. These all need the government to formulate the corresponding management methods, especially to establish the corresponding transaction mechanism, including the establishment of Z and the positioning of functions; the establishment of the dispute handling mechanism.

4. Especially in the expanded barter mode, due to the more subjects involved in the transaction, which will inevitably lead to an increase in transaction costs, transaction cycle lengthening, and increased risk. The government can provide subsidies for some key businesses, or the establishment of an insurance mechanism, the transaction process may inflate the currency of the exchange risk, performance guarantee to provide support.