Ryco Chemical Company produces a wide variety of chemical products that are sold to manufacturing firms. Some of the chemicals used in its production process are imported from Concellos Chemical Company in Brazil. Concellos uses some chemicals in its production process that are produced by Ryco (although Concellos has historically purchased these chemicals from another U.S. chemical company rather than from Ryco). The Brazilian currency, the real, has been depreciating continuously against the dollar, so Concellos’s cost of obtaining chemicals is always rising. In fact, the company will probably pay twice as much for these chemicals this year because of the weak real. It probably will attempt to pass on most of its higher costs to its customers in the form of higher prices. However, it may not always be able to pass on higher costs from a weak real; its competitors make all of their chemicals locally, and their costs are directly tied to Brazil’s inflation. Its competitors sell all their goods locally. This year, Concellos planned to charge Ryco a price in real that was substantially higher than last year’s price.
Representatives from Ryco are flying to Brazil to discuss their company’s trade problems with Concellos. Specifically, Ryco wants to avoid its exposure to the high inflation rate in Brazil. This adverse effect is somewhat offset by the consistent decline in the value of the real, which allows Ryco to obtain more real with a given amount of dollars every year. However, the offset is not perfect, and Ryco wants to create a better hedge against Brazilian inflation.
Case Study Questions:
- Describe a countertrade strategy that could reduce Ryco’s exposure to Brazilian inflation.
- Would Concellos be willing to consider this strategy? Is there any favorable effect on Concellos that may motivate it to accept the strategy?
- Assume that both parties agree on the countertrade terms. Why would the cost of obtaining imports still rise over time for Concellos? Would Concellos earn lower profits as a result?