1. United Nations Economic Commission for Europe Statistical Division BPM6 and 2008 SNA recommendations on processing and merchanting – data requirements UNECE Workshop on the implementation 2008 SNA in EECCA countries and linkages with BPM6 and GFSM 2014 Istanbul, 6-8 May 2015

2. UNECE Statistical Division Slide 2 Overview I.Introduction II.Outward processing III.Inward processing IV.Merchanting V.Data validation VI.Conclusions May 2015

3. UNECE Statistical Division Slide 3 I. INTRODUCTION Based on the Guide to Measuring Global Production, Chapter 5 Focus on the measurement challenges related to goods sent abroad for processing and merchanting Measurement challenges become apparent when applying the new standards: 2008 SNA and BPM6 The change of ownership principle is challenging to apply: IMTS are based on physical movements → need to be adjusted Data collections need to be reviewed to properly measure processing and merchanting Not always straightforward Yet sometimes relatively small adjustments are helpful! May 2015

4. UNECE Statistical Division Slide 4 II. OUTWARD PROCESSING Definition: A resident company (principal) sends goods abroad for processing while retaining economic ownership of these goods After processing goods may be sent back to the principal or to its country, or be delivered to customers in other countries 1993 SNA and BPM5: imputed value for raw materials or semi-processed goods sent abroad as export of goods, after processing imputed import of goods 2008 SNA and BPM6: a fee paid for the delivery of processing services as import of services May 2015

5. UNECE Statistical Division Slide 5May 2015 Country B Processor Goods sent abroad for processing Goods sent back after processing Country A Principal OUTWARD PROCESSING: A principal sends goods abroad for processing while retaining economic ownership of these goods (until the transaction with final customer) Goods purchased abroad for processing - estimate imports Country X Customers Goods directly delivered to customers in the country of processor - estimate exports Goods directly delivered to customers in another country - estimate exports Inventories held abroad - estimate changes Goods delivered to customers in another country through country of the processor - as recorded in IMTS Goods delivered to resident customers - as domestic production - remove exports recorded in IMTS - remove imports recorded in IMTS - estimate imports of services (as processing fee)

6. UNECE Statistical Division Slide 6 Required data and adjustments for outward processing 1.Adjustments in IMTS to remove: exports of goods sent abroad for processing imports of goods returned (to domestic economy) after processing 2.Estimate imports of raw materials or semi-processed goods purchased abroad (for processing) 3.Estimate exports of processed goods if they do not physically return (to the country of principal) 4.Estimate imports of services associated with the purchase of processing services from abroad 5.Estimate (changes in) inventories held abroad in connection to outward processing May 2015

7. UNECE Statistical Division Slide 7 1. Adjustments in merchandise trade statistics - issues Main differences of IMTS which need be translated to NA and BoP concepts: coverage, timing, valuation and country of origin change of ownership principle Merchandise subject to processing may qualify for exemptions from normal customs duties May be identified in customs data with the nature of transactions code → important for identifying cases Customs data may include items not currently received or used by statisticians → may be important for adjustments Recommended: Negotiations with customs agencies for access to additional records on customs documents May 2015

8. UNECE Statistical Division Slide 8 1. Adjustments in merchandise trade statistics – new data The desired additional information includes: nature of transaction codes: to identify type of trade values and commodity codes of goods sent abroad for processing processing fees paid country of processing destination country of processed goods dates of departure and return of temporarily shipped goods These form the basis for change in ownership adjustment One-off survey to understand declaration practices May 2015

9. UNECE Statistical Division Slide 9 1. Adjustments in merchandise trade statistics – alternatives Business surveys: the value of goods sent abroad for processing and payments of processing fees to foreign processors → increasing response burden Adjustments: based on existing information on payments of processing fees from business surveys and international trade in services surveys Estimation: calculate ratios of processing fees to processed goods for similar firms in terms of ISIC etc. to estimate the gross flows Sometimes goods do not return after processing (to the country of principal) → disturbances in the trade balance One off survey to know the importance of those flows May 2015

10. UNECE Statistical Division Slide 10 2. Estimate imports of goods purchased abroad for processing Not recorded as imports in IMTS (as these do not cross the borders of the country of principal) Business surveys: separately domestic purchases of intermediate goods from purchases abroad in industries in which outward processing exists more widely Estimation: by subtracting the processing fee paid from the value of the imports (after processing) as reported in customs records Note: actual import value of the goods purchased abroad before processing need be added May 2015

11. UNECE Statistical Division Slide 11 3. Estimate exports of processed goods not returning Not recorded as exports in IMTS (as processed goods do not cross border of the principal) Use nature of transaction codes to detect goods sent for processing and not returning Match turnover from foreign sales (as reported by the principal in business surveys) with goods sent for processing that do not return back to the home country Estimation of the transaction value by adding the processing fee to the value of goods reported in customs records at the moment shipped abroad May 2015

12. UNECE Statistical Division Slide 12 3. Estimate exports of processed goods not returning - risks Caution: Without sufficiently detailed and good quality information on the nature of transactions, adjustments in IMTS cannot be made without risk Note: Removing shipments for outward processing from IMTS without replacement with the actual export value of the good after processing causes an error May 2015

13. UNECE Statistical Division Slide 13 4. Estimate imports of processing services Main data sources: business and international trade in services surveys Add variable on purchases of processing services from foreign suppliers Ensure good coverage of firms engaged in (outward) processing Business surveys usually cover total domestic activity International trade in services surveys often have a smaller scope in terms of coverage and sample size May 2015

14. UNECE Statistical Division Slide 14 4. Estimate imports of processing services – alternatives and risks Measure indirectly: the processing fee as difference in the values of the goods before and after processing (IMTS) Note: in addition to the processing fee, value differences may include holding gains and overhead costs Caution: Problematic if goods do not return to the home country Product classification may change before and after processing Recommended: to observe the processing fee directly May 2015

15. UNECE Statistical Division Slide 15 5. Estimate (changes in) inventories held abroad The data on inventories are usually collected in the business survey. It should: Capture also inventories held abroad Split between domestic and foreign held inventories Split between raw materials and processed goods Useful in providing a broader picture of the commodity flows subject to outward processing Would help to properly measure revaluations May 2015

16. UNECE Statistical Division Slide 16 III.INWARD PROCESSING Definition: A resident company (processor) is engaged in the physical transformation of goods that are owned by a foreign principal after processing, the goods may return to the country of principal, or be supplied to customers in other countries 1993 SNA and BPM5: imputed value for the raw materials or semi-processed goods received from abroad for processing as import of goods, after processing imputed export of manufactured goods 2008 SNA and BPM6: a fee received for the delivery of processing services as export of services May 2015

17. UNECE Statistical Division Slide 17May 2015 Country B Processor Goods received from abroad for processing Goods returned (or sent directly to another country) after processing Country A Principal INWARD PROCESSING: Processor is engaged in the physical transformation of goods that are owned by a foreign principal Goods purchased by principal in processing country - estimate exports Exclude inventories under ownership of the principal - remove imports recorded in IMTS - remove exports recorded in IMTS - estimate exports of services (as processing fee)

18. UNECE Statistical Division Slide 18 Required data and adjustments for inward processing 1.Adjustments in IMTS to remove imports of goods received from abroad for processing exports of goods returned (to domestic economy) or sent directly to another country after processing 2.Estimate exports of goods purchased on the domestic market by the principal abroad, and subsequently processed by the domestic processor 3.Estimate exports of services associated with the sale of processing services to abroad 4.Exclude inventories held in the premises of the processor, but under ownership of the principal May 2015

19. UNECE Statistical Division Slide 19 1. Adjustments in merchandise trade statistics Also here the nature of transaction codes are the best source to detect inward processing If not available or not of sufficient quality : Add variables to business surveys: the value of goods received for processing and receipts of processing fees from foreign principals → increasing response burden Note: processors may not have precise information on value of raw-materials and semi-processed goods sent to them for processing as they are not the owners May 2015

20. UNECE Statistical Division Slide 20 1. Adjustments in merchandise trade statistics - alternatives Estimation: calculate ratios of processing services to goods received for processing for a sample of similar firms in terms of ISIC etc. to estimate the gross flows If uncertainty about the amount of goods remaining in the country of the processor → disturbances in the trade balance One off survey could help: to know the relationship between processing fees received and the value of goods subject to inward processing to obtain a view on the significance of those flows that stay after processing in the domestic economy of the processor May 2015

21. UNECE Statistical Division Slide 21 2. Estimate purchases of goods for processing domestically as exports Not recorded as exports in IMTS (as no cross-border flow of goods is observed before processing) Surveying may not be helpful: Domestic processor is not directly involved in the purchase of raw materials → not reasonable to send questions about the country of origin of the materials it processes Estimation: subtract the processing fees from the value of the export flow after processing (as recorded in IMTS) Complication: only part of the processed goods are purchased by the principal in the economy of processor May 2015

22. UNECE Statistical Division Slide 22 3. Estimate exports of processing services Main data sources: business and international trade in services surveys Add variables on production and export of processing services Easier to observe in processor’s accounts than principal’s intermediate consumption of processing services Recommended to observe exports of processing services directly Not recommended to measure as difference in the values of the goods before and after processing May 2015

23. UNECE Statistical Division Slide 23 IV.MERCHANTING Definition: A trader purchases goods from a foreign supplier and sells them subsequently to customers abroad, the goods do not physically enter the domestic territory of the trader, and the trader does not carry out substantial transformation on the goods 1993 SNA and BPM5: difference between sale and purchase of goods under merchanting as export of merchanting services 2008 SNA and BPM6: net export of goods under merchanting shown in the accounts of the country in which the merchant is resident, output remains trade margin May 2015

24. UNECE Statistical Division Slide 24May 2015 Country B Supplier Country A Merchant MERCHANTING: A trader purchases goods from a foreign supplier and sells them subsequently to customers abroad, the goods do not physically enter the domestic territory of the trader, and the trader does not carry out substantial transformation on the goods Country X Customers Merchant purchases goods from supplier to be sold abroad Goods directly delivered to customers in another country Inventories held abroad - estimate changes - estimate imports (as negative exports) - estimate exports Trade service

25. UNECE Statistical Division Slide 25 Identifying merchanting Merchanting related imports (or negative exports) and exports remain unobserved in IMTS Business surveys, particularly in the wholesale industry Requires questionnaire adjustments Data comparisons: Analyse business data from different sources (particularly within ISIC G) that include international transactions Compare detailed banking data on transactions in foreign currency (classified as exports of goods) with customs data on exports for individual enterprises Compare data from business surveys with customs data May 2015

26. UNECE Statistical Division Slide 26 Required data and adjustments for merchanting 1.Trade service of the merchant 2.Imports (or negative exports) and exports under merchanting 3.Changes in inventories held abroad May 2015

27. UNECE Statistical Division Slide 27 1. Estimate of the trade service of the merchant A.Business surveys: turnover from distributive trade, purchases of goods subject to distributive trade Allow estimating trade margins as the difference between trade related purchases and sales Additional questions on the merchanting portion of trade related activities a)Goods purchased abroad, and sold: (i) domestically / (ii) abroad b)Goods sold abroad, and purchased: (i) domestically / (ii) abroad c)Changes in inventories as a result of timing differences between (a) and (b) May 2015

28. UNECE Statistical Division Slide 28 1. Estimate of the trade service of the merchant (cont.) B.International trade in services statistics survey: Trade in services survey may already include some revenues from merchanting (complementary information) Providing these information (excl. holding gains and losses) → more complete analysis of the international supply of services May 2015

29. UNECE Statistical Division Slide 29 2. Estimate of the net exports under merchanting Merchanting related flows remain unobserved in IMTS Adjust surveys: (business or international trade in services) to observe merchanting transactions Measure at least the trade margin from merchanting Estimation: The corresponding product values could roughly be derived by making assumptions Information on trade service alone provides a reasonable proxy of the contribution of merchanting to trade balance May 2015

30. UNECE Statistical Division Slide 30 3. Estimate of (changes in) inventories held abroad Adjust business survey of wholesale traders to observe : inventories held abroad as part of merchanting purchases and sales of goods under merchanting → provides a comprehensive view of merchanting → supports making the distinction between trade services and revaluations of related inventories May 2015

31. UNECE Statistical Division Slide 31 V.DATA VALIDATION Data validation must be part of the estimation procedure bringing together, and reconciling, the results from different data sources Based on business register and common identification codes ‘Importer-exporter’ register enhance data validation: associated with merchandise trade statistics alignment with the business register facilitate data confrontation with other surveys → e.g. product breakdown Custom-made analysis: an individual approach on the basis of all available information collected for a company May 2015

32. UNECE Statistical Division Slide 32 VI.CONCLUSIONS Different approaches developed in countries may hamper international comparability of NA and BOP Important to discuss data issues and sources, and reconcile data between NA and BOP Biggest practical challenge is adjustments in IMTS However: IMTS information is not always fully utilized Estimations needed when nature of transaction codes not available/reliable May 2015

33. UNECE Statistical Division Slide 33 VI.CONCLUSIONS (cont.) New variables to be surveyed vs. response burden Adjust at least annual surveys (trade services connected to merchanting, processing fees, exports of goods directly following processing, inventories held abroad…) Using the integrated business register for data validation important when data sources are incomplete/unreliable Data exchange among NSIs would help vs. legal constraints May 2015