Item 8a: Globalisation, Goods for processing and Quasi-transit trade ESTP course on National Accounts ESA 2010 Luxembourg, 15 May - 19 May 2017 Eurostat

Globalisation (1) Economic globalisation Rising international economic integration Interconnectedness/Interdependence Not new but last 30-40 years major developments

Globalisation (2) Has increased the challenges to countries of recording their domestic economies in the national accounts Especially due to the increasing share of international transactions undertaken by multinational companies, where the transactions across borders are between parents, subsidiaries and affiliates

Important work published in 2011

Globalisation (3) Challenges: transfer pricing the increase in processing deals, where goods are traded across international borders with no change in ownership international trading via the internet the trade of intellectual property assets across the world workers' remittances multinational corporations organising their business across national boundaries amongst other things to minimise the global tax burden the use of off-shore financing vehicles re-exports of goods, and in the EU the transport of goods between Member States after entry into the Union increase in foreign direct investment relationships

Important work published in 2015

Merchanting

Merchanting (1) B Goods NA/BoP goods A Money C

Merchanting (2) Change of economic ownership with non-resident No cross border flows No physical transformation Acquisition as negative exports of goods Sale as positive exports of goods Preferred source: Enterprise survey of merchants in the compiling economy Summarising: --- Three issues: Issue 1: Physical flow from country B to country C. According to NA/BoP: Exports of B should be changed from C to A. Imports of C should be changed from B to A. Issue2: grey area. 'No physical transformation'. Minor processing like labelling, simply repacking: ok In case of physical transformation: general merchandise instead of merchanting. Issue3: Countries B and C could be the same ! Crucial is trade with non-resident. In that case no physical flows from B to C. Not 'automatically' included in exports/imports of B.

Goods sent abroad for processing

Goods sent abroad for processing (1) The term ‘goods sent abroad for processing’ refers to a situation where a client (the principal) sends goods it owns to another unit (contractor) abroad to be processed (outward processing) Once the goods are processed (inward processing), they are returned to the principal, where they may be further processed or sold The client pays a fee to the processor for the services provided

Goods sent abroad for processing (2) In the ESA 2010, the goods sent abroad for processing are not considered as exports when they leave the country and as imports when they come back since there is no change of ownership In the country of the processor, the goods are not considered as imports when they enter and not as exports when they leave the country The fee paid to the processor is an import in the country of the principal and an export in the country of the processor

Goods sent abroad for processing (3) Example:

Goods sent abroad for processing (4)

Goods sent abroad for processing (5)

Goods sent abroad for processing (6) Difficulties for the input/output analysis For example, physically the processor produces drugs and consumes chemicals, in national accounts it produces services and does not consume chemicals

Goods sent abroad for processing (7) If the two companies are affiliates of the same group, the recording in the accounts depends on legal arrangements. For example, if the group decides that the company in country B is now the principal, the accounts become:

Goods sent abroad for processing (8) In the case of goods sent abroad for processing, there is an inconsistency between national accounts/balance of payments and the International Merchandise Trade Statistics Concepts and Definitions 2010 (IMTS 2010) In the ESA 2010 and in BPM6, imports and exports are recorded on the basis of the change of ownership In the IMTS 2010 imports and exports are recorded on the basis of the crossing of borders

Goods sent abroad for processing (9) Besides standard case - goods sent abroad for processing and returned after processing - ; many possibilities, for instance: Final product sold in another country Processing with several suppliers Multi-country processing

One of the Eurostat manuals

Quasi-transit trade

Quasi-transit trade (1) Quasi-transit trade refers to goods which enter the European Union in Member State A, are cleared for free circulation (and submitted to import duties) in Member State A, are then dispatched to the EU Member State B The value of quasi-transit trade exports is substantially higher than the value of the quasi-transit trade imports, and the gap is much larger than can be attributed to storage, transport and insurance fees

Quasi-transit trade (2) In case of subcontracting, the increase in prices of goods in quasi-transit corresponds to a margin covering costs of research, planning, marketing and advertising provided by the principal Extrastat records imports in country A on the basis of the invoice of the processor Intrastat records exports in country A and imports in country B on the basis of the invoice of the principal

Quasi-transit trade (3) Example: The principal is an American company and the processor a Chinese company. The goods are delivered in Belgium and sold to a German company The custom clearance and the VAT clearance are made in Belgium by the American company via a fiscal representative Extrastat records an import of 60 in Belgium Intrastat records an export of 100 in Belgium and an import of 100 in Germany

Quasi-transit trade (4) Recording in national accounts: Imports and exports are based on the change of ownership Therefore there are neither imports nor exports in Belgium There are only imports of 100 in Germany

Quasi-transit trade (5) Not only from/to outside EU Non-residents registered for VAT only Sales/purchases of non-residents in the compiling economy Eurostat Methodological note on Foreign trade reported by non-residents available

Quasi-transit trade (6) ROW Compiling economy Non-resident unit

Quasi-transit trade (7) ROW Compiling economy Resident unit Non-resident unit

Quasi-transit trade (8) ROW Compiling economy Resident unit Non-resident unit

Thanks for your attention!