According to the United States International Trade Commission, the United States Countertrade Association and the general international interpretation, barter refers to the direct exchange of goods or services between the two parties according to their respective needs and the value of the goods to be exchanged agreed upon by the two parties, without the use of currency for payment.
It should be noted that in this way, although there is no cash change, it does not exclude the use of currency by the two parties to express the value of the goods exchanged. In this case, the role of currency is only to compare the value of the goods or services exchanged.
The above-mentioned barter form is usually called pure barter or simple barter internationally. Its characteristics are that the value of the goods exchanged is equal or similar. A transaction usually only signs a contract that stipulates the obligations of both parties to perform the exchange, including the quantity, quality, specifications, etc. of the goods to be exchanged. Generally, there is no third party involved, and it is a one-time spot transaction. This traditional barter trade is an ancient trade method that often requires imports and exports to be traded at the same time. It has great limitations and is rarely used in modern international trade. In actual business, many countries have adopted some flexible workarounds, the most common of which is to conduct barter trade through opening letters of credit.
When barter is conducted by opening letters of credit, the two parties first sign a barter contract. The goods exported by each party are denominated in the agreed currency, and the amount is equal or substantially equal. The payment is settled by opening letters of credit, that is, both parties open letters of credit with the other party as the beneficiary. Due to the difference in delivery time, the two parties open letters of credit at different times. In order to ensure that the party that opens the letter of credit later can fulfill its obligation to open the letter of credit according to the contract, the party that opens the letter of credit first usually stipulates in the letter of credit that the letter of credit is subject to the other party opening the letter of credit in accordance with the regulations as a condition for effectiveness; or adopts the method of retaining a deposit, that is, the letter of credit opened first becomes effective first, but after the settlement of the exchange, the bank withholds the money and keeps it as a deposit for the beneficiary to open a return letter of credit, thereby controlling the other party.
It should be pointed out that under this practice, the two parties are still engaged in a barter transaction, not a spot transaction. The party that exports first does not receive the payment in a certain currency in the letter of credit, but only obtains the agreed goods or services promised by the other party as compensation, and then uses these goods or resells them. Therefore, the party that exports first often requires the other party’s bank to issue a guarantee that the later exporter will perform the contract on time, so as to ensure that its economic interests are realized on time.