1. Goods for processing and merchanting
Agenda item 6b
Goods for processing and merchanting
Presentation by UNECE
Workshop on Implementation of the 2008 SNA
Kiev, 29 November - 2 December 2011

2. Outline Background Goods for processing Merchanting Global production
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3. Background
The Guide “The Impact of Globalization on National Accounts” available from:
Chapter 5: Goods for processing
Chapter 6: Merchanting
Russian translations of the April 2010 versions of these chapters are available as papers 3 and 4 from:
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4. Main characteristics Goods for processing Merchanting
Physical flow but no change in ownership
Merchanting
Change in ownership without receipt of goods
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5. Goods for processing
Sending materials or partly-finished goods to another enterprise for (significant) processing
It has become more common with
low transport costs
specialization among enterprises
the emergence of new production sources
The enterprise processing the items may be resident in the same country as its client, or it may be abroad
In most cases no actual change of ownership takes place and goods remain in the books of the principal
Minor transformation (packing, labeling) that does not change the physical form of the goods is not processing
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6. SNA 1993 & BPM5
A change of ownership is imputed in all cases when sending goods for further processing abroad and to affiliated domestic establishments
Even if the related financial transactions cover only processing fees, national accounts compilers need to impute transactions for the value of the goods when they are sent and subsequently returned to the legal owner
Anomaly: No imputation for transactions between non-affiliated domestic establishments
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7. SNA 2008 & BPM6
Sending of goods for processing without imputing a change in ownership
Only a service fee for the processing work is to be recorded in the accounts
Complies with the principle of recording trade flows only where actual ownership of the goods changes
Will be at odds with the gross recording of goods shown in the International Merchandise Trade Statistics (IMTS)
Removes an anomaly related to the treatment of goods sent for processing within the same economy (non-affiliated firms) and goods sent for processing abroad
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8. 1993 SNA recording (‘gross’)
Country A
Country B
Intermediate Goods 100
Principal
Processor
Processed Goods 160
Semi-processed goods from country A to country B for significant transformation and back to country A as final products
Flows are recorded in the accounts as imports and exports of goods, but the only real financial flow is a processing fee of 30  Inconsistency with financial flows and company accounts
No actual change in ownership  Requires imputing a change of ownership  Increases the value of the IMTS
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9. 2008 SNA recording (‘net’) Processor Principal Services 60
(Processing fee 60)
Processor
Principal
Services 60
Semi-processed goods from country A to country B for significant transformation and back to country A as final products
Flows are recorded in the accounts as imports and exports of services
More consistent with financial actions
No actual change in ownership  No imputing a change of ownership  Inconsistency with IMTS
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10. Industry account under the 1993 SNA and 2008 SNA
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11. Commodity accounts under the 1993 SNA and 2008 SNA: country of the contractor
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12. How the accounts will be affected?
The new treatment should in principle not affect value added, GDP and total trade balance (the change of the trade balance in goods should be off-set by a change in services balance), but a different way of measurement may change the outcome:
If the imputed value of goods (notably when sent back to their owner after processing) was wrongly capturing part of the profit of the owner
If double counting of the service fees in both goods and services occurred
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13. How the accounts will be affected?
Effect on trade in goods and services may be sizeable  Shouldn’t affect GDP and total trade balance
 Implications for the import intensity of GDP
The production account ratios, SU and IO coefficients will change and compilers should be careful when using them for adjustments and analysis
Productivity measures – contribution of an industry to GDP growth will be unaffected, but the output and intermediate input structure will change and hence multifactor productivity models
There could be changes in the balance sheet and capital account (the processing unfinished in the end of the period should be moved from the accounts of the processor to the accounts of the owner)
Implications for environmental accounting

14. Other issues Matching with IMTS data (principle of ownership)
Price deflators
Different output and IC deflators will be needed for traditional and processor type producers
Price of the final product and the “price” of the processing service are unlikely to move in line
Sampling
If a processor is chosen in the sample and its production ratios are used to be make estimates for the whole industry and vice versa – volatility of time series due to over or under estimation in different periods
Processors will have less chances or will not be selected if the sampling is based on turnover instead of VA
Inventories abroad
The principals will hold substantial amounts of unfinished goods and raw materials abroad
Difficult to value and treat correctly holding gains and losses
Sampling
- mix of traditional producers and processors within an industry
- particular issue for intra-annual surveys
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15. 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.” (BPM5)
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16. 1993 SNA & BPM5
Merchanting is calculated as the value of the goods sold (estimated at basic prices) less the cost of purchasing them
Merchanting margin is classified as an export of merchanting services
The detection and regular recording of these activities is extremely challenging for the country where the merchant is resident
The goods in question never cross the frontier of the country where the merchant is resident and are therefore not covered by the official trade statistics there
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17. Shortcomings in 1993 SNA & BPM5
Merchanting margin is recorded under services (merchant), related gross transactions are recorded in the goods account (counterparties)  Global imbalance in the goods account
Treatment is inconsistent with inventories and balance sheets for both merchant and supplier
Valuation principles are not consistent with Supply and Use tables
Only the margin is recorded in the balance of payments of the country of merchant
No clear definitions are provided for "merchanting" and "merchant" in the 1993 SNA and BPM5
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18. 2008 SNA & BPM6
The concept is the same, but an important change in treatment appears (the principle of change of ownership)
Merchanting will be recorded in the country of the merchant as a negative export of goods when acquiring them, and as a positive export when they are sold on
Merchanting margin is the difference between the two entries and is called “Net exports of goods under merchanting”
Merchanting entries are valued at transaction prices as agreed by the parties, not at "free on board“ prices
In the SU tables the difference between sales and purchases of merchanted goods is production of a service in the merchant's economy, consistently with the treatment of margins applied to domestically produced goods
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19. Impact of 2008 SNA & BPM6
All merchanting transactions are in the goods account  help to remove the discrepancy between global exports and imports
“Net exports of goods under merchanting” includes merchants' margins, holding gains and losses and changes in inventories of goods under merchanting
However, holding gains and losses should be excluded from trade margins in national accounts  Data sources may not allow it
Treatment of the wholesale/retail margin and the holding gains/losses is consistent with the measurement in SU tables
In individual country level drawback remains in the balance of payments recording of merchanting margin
The BPM6 contains a discussion of the economic nature of merchanting
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20. Identification and recording of merchanting activities
An entity solely involved in merchanting normally employs a relatively small staff while having substantial turnover
MNEs sometimes engage in merchanting in conjunction with the production of other goods or services  Capturing through a specific question on sales and purchases of merchanted goods
Analysis of administrative data:
Large taxable profits but no substantial physical presence
Large profits without having exports of goods
Awareness of MNE practices and recording conventions
Term "merchanting" is generally not used by MNEs  More difficult to detect the activity
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21. Merchanting 100 Country B producer Country C purchaser Country A80
Physical movement of
goods/services
Ownership of goods
Cash flow
Merchant in country A purchases goods from country B and sells to country C
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22. Treatment under the 1993 SNA and BPM5 and recording in the 2008 SNA and BPM6
*Merchanting is recorded only in country A (the exporter of merchanting services). This causes global imbalances in goods and services as no debit entry in merchanting is recorded.
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23. MNEs engage in operations with characteristics of both
Global production
Cross-border processing and merchanting operations have been long conducted by traditional producers and trading companies
MNEs engage in operations with characteristics of both
Such practices are a feature of global production
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24. Global production Principal Processor Country A Country B Materials
Processing fee
Country A
Country B
Knowhow
Final products
Payment for
final products
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