Agenda item 6b
United Nations Economic Commission for Europe
Statistical Division
Goods for processing and merchanting
Presentation by UNECE
Workshop on Implementation of the 2008 SNA
Kiev, 29 November - 2 December 2011
Outline

Background

Goods for processing

Merchanting

Global production
23 July 2016
- UNECE Statistical Division
Slide 2
Background

The Guide “The Impact of Globalization on National
Accounts” available from:
http://www.unece.org/stats/groups/wggna.e.html

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:
http://www.unece.org/stats/documents/2010.04.sna.html
23 July 2016
- UNECE Statistical Division
Slide 3
Main characteristics

Goods for processing
 Physical

flow but no change in ownership
Merchanting
 Change
23 July 2016
in ownership without receipt of goods
- UNECE Statistical Division
Slide 4
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
23 July 2016
- UNECE Statistical Division
Slide 5
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
23 July 2016
- UNECE Statistical Division
Slide 6
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 (nonaffiliated firms) and goods sent for processing abroad
23 July 2016
- UNECE Statistical Division
Slide 7
1993 SNA recording (‘gross’)
Country A
Intermediate Goods 100
Principal
Country B
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
23 July 2016
- UNECE Statistical Division
Slide 8
2008 SNA recording (‘net’)
(Processing fee 60)
Principal
Processor
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
23 July 2016
- UNECE Statistical Division
Slide 9
Industry account under the 1993 SNA and
2008 SNA
Processor (Country B)
Principal (Country A)
1993 SNA 2008 SNA 1993 SNA 2008 SNA
Gross output
Goods
(manufacturing)
Services
(wholesaling)
Intermediate inputs
Goods for processing
All other goods
Processing fees
(services)
All other services
Value added
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160
100
20
10
30
100
180
60
20
20
50
50
20
50
60
20
50
10
30
- UNECE Statistical Division
Slide 10
Commodity accounts under the 1993 SNA
and 2008 SNA: country of the contractor
Country B
1993 SNA
Goods for
processing
Goods
processed
Processing
fees
2008 SNA
Goods for
processing
Goods
processed
Processing
fees
23 July 2016
Supply
Production Imports
100
Intermediate
inputs
Use
Exports Inventories
Other
final
demand
100
160
160
NA
NA
60
60
- UNECE Statistical Division
Slide 11
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
23 July 2016
- UNECE Statistical Division
Slide 12
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
- UNECE Statistical Division
Slide 13
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
23 July 2016
- UNECE Statistical Division
Slide 14
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 nonresident; during this process the good
does not enter or leave the compiling
economy.” (BPM5)
23 July 2016
- UNECE Statistical Division
Slide 15
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

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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
- UNECE Statistical Division
Slide 16
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
23 July 2016
- UNECE Statistical Division
Slide 17
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
23 July 2016
- UNECE Statistical Division
Slide 18
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
23 July 2016
- UNECE Statistical Division
Slide 19
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
23 July 2016
- UNECE Statistical Division
Slide 20
Merchanting
Merchant in country A purchases goods from country B and sells to country C
Country B
producer
Country C
purchaser
80
100
Physical movement of
goods/services
Ownership of goods
Country A
merchant
23 July 2016
Cash flow
- UNECE Statistical Division
Slide 21
Treatment under the 1993 SNA and BPM5 and
recording in the 2008 SNA and BPM6
1993 SNA / BPM5 treatment
Credit
Debit
Country A
Services: merchanting
Bank deposits
Country B
Goods
Bank deposits
Country C
Goods
Bank deposits
Global balance*
Goods
Services: merchanting
Bank deposits
2008 SNA / BPM6 treatment
Credit
20
20
80
80
100
100
80
20
100
100
100
Country A
Goods under merchanting
Goods under merchanting
Bank deposits
Country B
Goods
Bank deposits
Country C
Goods
Bank deposits
Global balance
Goods
Incl. goods under merchanting
Bank deposits
Debit
100
-80
20
80
80
100
100
100
20
100
100
0
100
*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.
23 July 2016
- UNECE Statistical Division
Slide 22
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
23 July 2016
- UNECE Statistical Division
Slide 23
Global production
Materials
Materials
Principal
Processing fee
Country A
Knowhow
Processor
Country B
Payment for
final products
23 July 2016
- UNECE Statistical Division
Final products
Slide 24