Changing the Treatment of Goods Sent Abroad for Processing (GSAP) Practical and Analytical Impacts on Production Accounts Michel Girard - Statistics Canada Presented to the working Group on the Impact of Globalization on National Accounts Geneva, April 2008 Statistics Canada Statistique Canada Agenda item 8 Invited paper 18

Overview Background – Goods send for processing Current concept –Balancing the Canadian supply-use tables (SU) –Consequences on IO accounts New concept –Transportation margins –Analytical aspects –Surveys Statistics Canada Statistique Canada

Background Trend Companies moving away from only transforming their own material Companies now act as agent –Provide processing services to other companies –Receive processing fees Ownership of raw materials remains the property of the customer Statistics Canada Statistique Canada

Background Reasons Separate companies seeking advantages of specialized services Companies within the same group seeking tax minimization advantages For the processing company, a way to avoid the risk of holding stocks or finding customers For the client company, a way to avoid the risk of maintaining infrastructure of production Statistics Canada Statistique Canada

Background Measurement Treatment of material provided by the client company to the processing company –Sometimes a transaction is imputed; sometimes not Inconsistent treatment –A transaction is imputed when material cross the border or when material is exchanged between two parent companies in domestic economy –No imputation when transactions take place between two separate companies on domestic market Statistics Canada Statistique Canada

Production context Material is sent by a unit in country A (client) to another unit in country B (processor) Material is transformed in a substantive way and returned to country A The client unit maintains legal ownership of the semi-processed and processed goods Impact of having client and processor units on the SU tables Statistics Canada Statistique Canada

Balancing supply-use tables Measurement Data collection –Production-related surveys contain a mixture of producers that are traditional producers, offering processing services or users of processing services, making difficult “imputing” for GSAP –For administrative reasons, exports and imports are valued at a “market price equivalent” Statistics Canada Statistique Canada

Data available Annual Survey of Manufactures (ASM) Establishment-based survey Shipments and inventories Custom work Cost of own material Sub-contracts (expenses) No explicit questions about GSAP International Trade Imports and exports at a “market price equivalent” Anecdotal evidence of companies sending goods for processing services Statistics Canada Statistique Canada

Consequence – Industry account Traditional processing industry ProcessorTotal Gross output Intermediate inputs Value added IO coefficient 62.5%50.0% Currently difficult to assess quality if unaware of GSAP New proposal: Better relationship of labour and surplus to production

Balancing supply-use table Processor case with current surveys Step 1 – Material is sent to the processor Prod + M = inputs + final use + X + inventories 75 0 Fixing the imbalance? 75 0 Fixing the imbalance? Step 2 – A good is produced Prod + M = inputs + final use + X + inventories Fixing the imbalance? 100 Fixing the imbalance? 100 Step 3 – Payment stage (processing fee) Prod + M = inputs + final use + X + inventories 25 25? 25 25? If M/X were “net” of the value of goods: balancing would be easier End up with very little information about supply and use Statistics Canada Statistique Canada

Balancing supply-use table Client case with current surveys Step 1 – Material is sent to the processor Prod + M = inputs + final use + X + inventories Imbalance? Imbalance? Step 2 – A good is produced Prod + M = inputs + final use + X + inventories X1 X2 X3 Imbalance? X1 X2 X3 Imbalance? Step 3 – Payment stage Prod + M = inputs + final use + X + inventories 25 25? 25 25? If M/X were “net” of the value of goods: balancing would be easier Value of production ? Statistics Canada Statistique Canada

New concept Transportation margins By not imputing a value for goods sent for processing, the link between transport margins and commodities will no longer exist Will not associate transport margins with processing fees Transportation surveys will continue to collect revenues and the associated goods transported Transportation services will replace transportation margins (Imports/exports) Statistics Canada Statistique Canada

New concept Analytical issues IO coefficients Import intensity Productivity –Processor –Client IO Models Statistics Canada Statistique Canada

New concept IO – Industry Account Under current treatment Production function reflects full range of intermediate inputs Under new treatment Does not allow establishing a clear relationship of all intermediate inputs involved in the production process Requires an adjusting entry or split industries into processors, clients and traditional producers Prefer adjusting entry linked with either intermediate inputs or gross output – recreating production technology Statistics Canada Statistique Canada

New concept IO model Impact studies: Currently, the larger share of imports is compensated by an increased level of intermediate demand, leaving value added unaffected Concept of commodity of origin: –Commodity is mainly produced by one industry –If custom work cannot be associated with specific industries –Allocating the demand for custom work to the proper producing industries based on market shares will spread the output to all producers involved in custom work Will require adapting the IO commodity structure Statistics Canada Statistique Canada

New concept Labour productivity - Hypothesis Switching to a more “client type” industry Potentially a more efficient industry with lower value added Contributing less to overall productivity Switching to a more “processor type” industry An industry with less gross output but same value added An industry with less gross output but same value added Labour productivity not affected Labour productivity not affected Statistics Canada Statistique Canada

New concept Multifactor productivity - Hypothesis Impact depends on how multifactor productivity is derived Net approach: No impact in the case of the processing industry –∆GDP/hours=(∆MFP + S*∆(K/hours) + S l *∆Lc) –∆GDP/hours=(∆MFP + S k *∆(K/hours) + S l *∆Lc) Statistics Canada Statistique Canada

New concept Multifactor productivity - Hypothesis KLEMS – taking into accounts gross output and intermediate inputs –Processing economy Direction of the growth rate is not clear Output will play a larger role in the final result –Client economy Potentially a more efficient industry with lower value added Contributing less to overall productivity Statistics Canada Statistique Canada

New concept Imports and exports Not imputing a change of ownership Level of imports/exports often compared to value added –Misleading in terms of size –Exchange rate relationship with export and import is affected since established against a transaction that never took place However, lost of information about goods send for processing Statistics Canada Statistique Canada

Surveys Potential of new statistics Imports From Canadian Border Services Agency –Duties relief application –Statistics related to inward processing Goods entering country for processing –Inward goods –Must be recorded in order to avoid paying VAT Exports Under investigation Questions related to goods not sold Statistics Canada Statistique Canada

Surveys Switch to “client or processor types” will affect sampling strategy Could say the same for editing, imputation and estimation steps of a given survey Strategy related to the use of administrative data must be adjusted Data for contract processing could be recorded by another entity within the firm, such as head office. The plant may not have that information and is most likely not the one paying the processing fees Statistics Canada Statistique Canada

Preparing IO accounts and related products For accuracy and analytical reasons –Requires preparing IO accounts according to the imputation concept Preserving statistics for structural analysis While respecting SNA rules –Recognizing some goods send for processing on domestic market would remained not imputed unless changes are made to questionnaires (non affiliates) Statistics Canada Statistique Canada