Merchanting Michael Connolly CSO, Ireland Geneva April 2008 UNECE/EUROSTAT/OECD WGGNA Agenda item 9 Invited paper 15/Rev.1

Merchanting the purchase of a good by a resident (of the compiling economy) from a non-resident and the subsequent resale of the good to another non-resident; during this process the good does not enter or leave the compiling economy Source IMF BPM5

Merchanting CountryB exporter/seller Country C importer/buyer Country A Merchant Movement of goods/services Change in ownership Cash settlement

Merchanting l So what is the problem with merchanting? l In the trade data for countries B &C the exports and imports are included l How do we treat the transactions in the accounts of Country A?

Merchanting l The solution to this difficulty centred around the treatment for the change of ownership. l Change in ownership would normally require that we record exports from County B to Country A and record exports from Country A to country C

Merchanting l This difficulty was simplified by imputing no change in ownership involving the merchant and therefore l recording the merchant’s margin as the net export of a service in Country A and l record the exports /imports of goods between B and C

Merchanting l Solution agreed in BPM5/SNA’93 solved one problem and created others l Goods account does not add up l Difference between the value of imports and exports is the merchants surplus l Recorded under Services

Merchanting CountryB exporter/seller Country C importer/buyer Country A Merchant Value of exports = 60Value of imports =80 Value of services exports = 20

Merchanting l Commodity Trading l International Wholesale Retail l Global Manufacturing and l Interaffiliate transactions in Goods and Services l Outsourcing of Services (abroad)

Merchanting Global Manufacturing Country B owner of goods Country D importer/buyer Country A Group Company Movement of goods/services Change in ownership Cash settlement Country C Processor/exporter Goods for processing

Merchanting of Services l Not addressed in the current manuals l Was mentioned as far back as 1961 “ the compiling country’s residents may carry out international transactions in goods and services that are entered only on a net basis. Such transactions involve the purchase of goods or services in one foreign country and the sale or granting of them to another foreign country ”

Merchanting CSO Treatment l Impact of Globalisation on services »Inclusion of transactions in services »Potential for statistical distortion arising from large transactions in goods and services sourced and delivered abroad »Outsourced services »Third era of Globalisation

Merchanting Goods & Services Country IE owner of goods Country DE Producer Goods Market EMEA Many customers Country US Direct Investor Country FR Producer services 100%

Merchanting SNA Rev.1 and BPM 6

Merchanting SNA Rev.1 and BPM 6 l Current treatment causes assymetries in Goods account (no services) l Inconsistencies in recommended treatment and impact on inventories and balance sheets l Inconsistencies with Supply and Use tables l Valuation in Cross Border transactions

Merchanting Proposals BPM6 & SNA Rev1 l New proposals apply to the merchanting of goods only - no mention of merchanted services l Acquisition of goods by merchant to be recorded as negative exports of merchant’s economy l Similarly sale of goods by merchant recorded as a positive export l Difference between sales and purchases of merchanted goods is recorded under : “Net exports of goods under merchanting”

Merchanting Proposals BPM6 & SNA Rev1 l In Supply and Use Tables the difference between sales and purchases to be shown as production of a service In general Merchanting activities to be recorded in Goods account rather than the Services account

Merchanting CountryB exporter/seller Country C importer/buyer Country A Merchant Movement of goods/services Export 80 Import100 Change in ownership Cash settlement 100 Cash settlement 80 Goods under Merchanting 20 ( )

Merchanting Impact of New Proposals l Resolves the difficulty with asymmetric recording l Resolves the issues with inventories and holding gains l Valuation principles are consistent l Recording of transactions in BOP still an issue

Merchanting Difficulties with New Proposals l Does not consider or address the merchanting of services »major aspect of Globalisation »falls within the definition of merchanting

Merchanting Conclusions l Merchanting of services needs serious consideration l Revised treatment for Merchanting of goods is now adequate l Separate recommendations are required for Merchanting of Services similar to BPM5 i.e. separate item in Services Account

Any questions?