COVID-19 Challenges And Economics Of Bartering

Vinay Dutta May 16, 2020

The surge of COVID-19 cases from a relatively minute number of cases in China to a global pandemic has transformed every sector and all aspects of our lives with alarming velocity.

As a result of the onslaught of COVID-19 pandemic, many businesses are saddled with inventories, excess capacities, and are short of cash or access to credit. Businesses are finding it challenging to increase cash-flow and reinforce its predictability. Likewise, the general public too is facing an acute shortage of goods and services. So how are people responding? Experts opine that by nature, humans always had a sort of quid-pro-quo exchange-based mentality. Accordingly, businesses and individuals are thinking beyond cash and embracing bartering.

These are few extracts from the “559 COVID-19 BARTER Public Group | Facebook”, which shows how people are reaching each other for exchanging goods and services to overcome Corona Virus pandemic.

Nancy Tor22 March at 18:29

I have a 3 pack huggies wipes I’d like to trade for some Lysol spray and some cleaning wipes.

Stephanie Fields 22 March at 20:29

Does anyone have alcohol wipes? Asking for a friend who needs them for insulin shots. I have food items to trade.

It is evident that bartering can play a vital role in situations like COVID-19 and recessionary environments when the world yearns for a return to normal. 

But what is bartering and how can it benefits individuals and businesses, let's see:

Need to think of bartering again

Barter was the charter before the advent of the cash economy wherein individuals and businesses use cash as a medium of exchange. Simply put, bartering also referred to as reciprocal trade. It is the method of payment in the form of products and services, not in cash. It is a trade where parties try to exchange products or services of equivalent values. Obviously, the bartering arrangement requires businesses to incur substantial search costs in terms of timing, and energy to find a mutual coincidence of needs. Each party should have what the other wants, and whatever is being bartered must be the identical value. Also, timing has to match and both parties should agree on the value of each other’s products. Assigning value is essentially a big challenge in barter deals. Apparently, such deals are not easy to come upon and makes barter unrealistic. Perhaps, for this reason, Adam Smith, the great economist, called a man a “bartering savage”, as if each word was apt for the other.

Barter exchange- a substitute to cash transactions

Inferable to constraints of direct barter, a unique type of barter system, the barter exchange, evolved. Barter exchange provides a creative multiparty and multilateral trading platform and is a cashless business proposition. Unlike traditional one to one barter, the exchange maintains a database of businesses willing to barter and allows for a great deal of barter flexibility. Here, members can contact any other member on a database of the Exchange to buy or sell products and services they require. Take, for example, B-School might want ad-space in a newspaper. The newspaper needs gift hampers for running a promotional campaign. In turn, the gift supplier is interested in training its executives in a financial management program floated by the B-School. Using barter network, these parties can fulfil each other’s requirements without using cash. 

In a way, bartering is taking business beyond “money mentality” and placing value on human resources and commodities instead of money. Bartering cannot substitute all cash transactions. But it can definitely complement cash business, amid the deadly COVID-19.

Multilateral barter system

A barter exchange is an association of businesses that agree to barter products and services among themselves, without one-to-one restriction, using accounting units called trade credits, equivalent to rupee value of goods and services offered. Trade rupees are a unique currency only accessible to reciprocal traders. The exchange operates the multi-party and multilateral trading program, acts as a third-party record-keeper of trade transactions, develops member-network, facilitate marketing of product and services, and provide support in deal structuring. It manages and controls bartering among members. Moreover, it’s a combination of the ancient practice of trading goods and services and modern accounting technology with the power of networking. The arrival of online bartering sites and leveraging of technology has made multilateral bartering more common. 

What does IRTA have to say?

US-based International Reciprocal Trade Association’s (IRTA), President and CEO Ron Whitney says, participation in a barter exchange can provide an important jumpstart for new businesses. IRTA, a non-profit organization, pro-actively advocates preserving, protecting and enhancing the global barter industry. IRTA members exemplify the exchanges that have and continue to positively outline the barter industry by successfully delivering the trade's values throughout the world. As per IRTA, the key to the growth of the barter industry results from the shift from one-on-one trading to third-party trading and the subsequent development of sophisticated internet-based software. It not only maximizes trading opportunities but also provides quality accounting and reporting functionality.

But why opt for bartering?

To overcome the Corona Virus Challenge-COVID-19, going back to the barter system can offer a solution. The modern bartering process makes it possible for businesses to optimally utilize production capacity and facilitate disposal of non-performing and illiquid assets, especially during adverse economic conditions, to regain lost revenues.

Barter is particularly recommended for companies dealing in time-sensitive inventories and perishable assets with a limited shelf-life, such as media, airtime, ad-space, and hotel room etc. It suits businesses with high margins, spare capacity and those saddled with the slow-moving inventory. Businesses can use barter to achieve specific business goals, including conserving cash, increasing sales, moving inventory, seeking new distribution channel, utilizing excess production capacity and thereby increasing profitability, and gaining a competitive edge.

In India, barter trade gained momentum following the credit crunch, recession and demonetization. Therefore, individuals and businesses can reconsider the possibility of bartering to exchange goods and services during COVID-19 to help each other. Acknowledging the importance of barter, Albert Einstein, said “If I had my life over again, I would elect to be a trader of goods, rather than a student of science. I think barter is a noble thing."