Barter is the trade of goods or services for other goods or services, instead of receiving cash in exchange. International barter involves a trade between people or organizations in different countries. International barter is an ancient invention that makes an exchange possible when one trader doesn't want to receive payment in the other trader's currency and does want to buy a good or service.
History
International barter is the original method of trade between countries. Before currencies such as paper money and gold and silver coins were invented, trade involved the exchange of specific items. International barter is still favored when currencies cannot be used, such as when one country's currency has experienced inflation and is extremely weak.
Trade Value
Cash values are recorded in international barter transactions. Although the trade itself may be something such as trading several cars for a house, each of these items has a monetary value. The businesses making the trade keep records of the cash value of each item. Barter exchanges, cooperatives that help people carry out barter transactions, may create an artificial currency to keep track of the value of the trade. The artificial currency is exchangeable for each of the traders' home currencies.
Taxes
Barter income is taxable. The Internal Revenue Service (IRS) requires merchants who perform an international barter transaction to report a gain or a loss. Gains create a tax liability, and losses provide a tax deduction. According to the IRS, barter participants must file form 1099-B to report barter income.
Quantity Contracts
A barter contract specifies payment in a certain quantity of goods. This removes the risk of receiving payment in a currency that is unreliable, especially if it is a currency of a developing country with large foreign debts. According to the University of Connecticut, barter contracts for a quantity of a product introduce a quality risk as the products may be poorly manufactured.
More Advantages
International barter transactions provide other advantages. According to the University of Michigan, barter allows deals to be made even when a company cannot make sure that it can legally enforce credit agreements with foreign suppliers. Many companies require outside financing to pay short-term bills, such as worker salaries and energy and water. In a situation where banks are not lending money, the company can promise goods to its debtors so that they continue to keep the power on. For Eastern European borrowers, the debt holders are often located in the much wealthier Western European countries, who prefer to be paid in euros, the common currency of the European Union. A barter agreement provides protection against a sharp drop in the borrower's currency, without requiring the borrower to pay additional fees to purchase euros.
