Copyright 2010, The World Bank Group. All Rights Reserved. International trade in services Demarcation of the domain 1 Business Statistics and Registers

Copyright 2010, The World Bank Group. All Rights Reserved. Change effecting services Change effecting services include:  Changes in the condition of the consumer’s goods (e.g. by transporting, cleaning, or repairing)  Changes in the physical condition of persons (e.g. by transport, medical care etc.)  Changes in the mental condition of persons (e.g. by education, information, advice, etc.) Changes may be permanent or temporary Services may be provided individually or collectively 2

Copyright 2010, The World Bank Group. All Rights Reserved. Margin services Margin services are about facilitating e.g.:  Change of ownership of goods  Various kinds of intermediation  Transfer of financial assets 3

Copyright 2010, The World Bank Group. All Rights Reserved. Knowledge capturing products The borderline between goods and services is sometimes difficult to draw One example are knowledge-capturing products The industries producing these products are generally classified as service industries They are concerned with the provision, storage, communication and dissemination of information, advice and entertainment etc. The outputs of these industries are often physical objects that can be traded like ordinary goods 4

Copyright 2010, The World Bank Group. All Rights Reserved. Classification to be used for services G - Wholesale and retail trade; repair of motor vehicles and motorcycles H - Transportation and storage I - Accommodation and food service activities J - Information and communication K - Financial and insurance activities L - Real estate activities M - Professional, scientific and technical activities N - Administrative and support service activities O - Public administration and defense; compulsory social security P - Education Q - Human health and social work activities R - Arts, entertainment and recreation S - Other service activities 5

Copyright 2010, The World Bank Group. All Rights Reserved. General Agreement on Trade in Services (GATS) The World Trade Organization (WTO)provides a common institutional framework for the conduct of trade relations among its member countries The three principal WTO agreements are:  General Agreement on Tariffs and Trade (GATT)  General Agreement on Trade in Services (GATS)  Agreement on Trade-Related Aspects of Intellectual Property Rights  GATS covers international trade in services 6

Copyright 2010, The World Bank Group. All Rights Reserved. Foreign Affiliates Trade in Services (FATS) In principle, international trade in services takes place between residents and non-residents of an economy This corresponds with the concept of trade in services in the “rest of the world” account of the SNA Services sometimes require immediacy of the relationship between supplier and consumer Many services are non-transportable, i.e. they require the physical proximity of supplier and customer, e.g. the provision of a hotel service, a cleaning service, etc. 7

Copyright 2010, The World Bank Group. All Rights Reserved. Foreign Affiliates Trade in Services (FATS) For non-transportable services, either the consumer must go the supplier or the supplier must go to the consumer GATS makes provision for agreement on suppliers moving to the country of the consumer The definition of international trade in services includes the value of services provided through foreign affiliates established abroad This is foreign affiliates trade in services, or FATS for short 8

Copyright 2010, The World Bank Group. All Rights Reserved. Modes of supply Four modes of supply of international trade in services are distinguished:  Mode 1: from the territory of one country into the territory of any other country: cross-border supply  Mode 2: In the territory of one country to the service consumer of any other country: consumption abroad  Mode 3: By a service supplier of one country through commercial presence in the territory of another country: commercial presence  Mode 4: By a service supplier of one country through presence of natural persons of a country in the territory of another country: presence of natural persons 9

Copyright 2010, The World Bank Group. All Rights Reserved. Mode 1 Consumer remains in home country Service crosses national borders Delivery of the service can be effected, for example, by telephone, fax, Internet or other computer links, television or the sending of documents, disks, tapes, etc. This mode is similar to trade in goods Freight transport services are themselves examples of cross-border supply of services 10

Copyright 2010, The World Bank Group. All Rights Reserved. Mode 2 Consumer moves outside home country and consumes services in another country Examples: tourist visits to museums and theatres abroad, medical treatment of non- resident persons, language courses taken abroad Also ship or vehicle repair abroad is covered by Mode 2 11

Copyright 2010, The World Bank Group. All Rights Reserved. Mode 3 It is often necessary for services to establish a commercial presence abroad to ensure a close contact with the consumers in their own home country Commercial presence may be through representative offices and branches “Supply of a service” includes production, distribution, marketing, sale and delivery Examples are medical services provided by a foreign-owned hospital, courses in a foreign- owned school, and bank services 12

Copyright 2010, The World Bank Group. All Rights Reserved. Mode 4 An individual moves into the territory of the consumer to provide a service Mode 4 applies to two areas:  Trade in services  Temporary employment GATS provides no definition of temporary employment The temporary status generally covers two to five years Short-term employment of foreign staff in foreign affiliates is an example Other examples are short term employment of construction workers or paid domestic helpers 13

Copyright 2010, The World Bank Group. All Rights Reserved. Categories of services in BPM  1. Transportation.  2. Travel.  3. Communications services.  4. Construction services.  5. Insurance services.  6. Financial services.  7. Computer and information services.  8. Royalties and license fees.  9. Other business services.  10. Personal, cultural, and recreational services.  11. Government services, not included elsewhere. GATS uses different categories 14

Copyright 2010, The World Bank Group. All Rights Reserved. Simplified approach Comprehensive statistical treatment of modes of supply is too difficult International recommendations are to use a simplified approach The simplified criteria are based on the following considerations: FATS statistics provide information of services supplied through mode 3 (commercial presence) Service transactions between residents and nonresidents, as captured in the balance of payments broadly cover mode 1, mode 2, and part of mode 4 Mode 4 (presence of natural persons) goes beyond the notion of the balance of payments and is therefore difficult to measure 15

Copyright 2010, The World Bank Group. All Rights Reserved. GATS modes and balance of payments Balance of payments service transactions correspond to mode 1, mode 2, and part of mode 4 However, many balance of payments service categories include transactions corresponding to several modes Moreover, several modes of supply may be used for a single service transaction If the major part of a service category corresponds to services supplied under one mode, this mode may be fully allocated to that service category If a transaction is made by different modes, it may be allocated to the most important mode in terms of time and resources associated with it 16

Copyright 2010, The World Bank Group. All Rights Reserved. Balance of payments mode 1 Mode 1 applies when a service is delivered from a supplier abroad This is the case for most balance of payments transactions recorded under transportation, communication services, insurance services, financial services, and royalties and license fees Non-mode 1 transactions may happen when part of the service is provided through mode 4 (presence of natural persons) As the share of mode 4 is usually small, such transactions may be allocated to mode 1 17

Copyright 2010, The World Bank Group. All Rights Reserved. Balance of payments modes 1 and 4 Mode 1 also applies to part of transactions in computer and information services, other business services, and personal, cultural, and recreational services They often also include mode 4 situations, when the supplier travels to the territory of the consumer Further information is needed for estimates of the share of modes 1 and 4 18

Copyright 2010, The World Bank Group. All Rights Reserved. Balance of payments mode 2 The travel category of the balance of payments broadly corresponds to mode 2 (consumption abroad) Adjustment would be needed to exclude any goods purchased by travelers Repairs and supporting and auxiliary services to carriers in foreign ports also belong to mode 2 Repairs are included in goods in BPM, supporting and auxiliary services are included in transportation 19

Copyright 2010, The World Bank Group. All Rights Reserved. Mode 3 – construction services Mode 3 transactions in construction services are a special case Commercial presence (mode 3) concerns mostly domestic sales of foreign affiliates (i.e., transactions between residents), to be covered in FATS statistics Some commercial presence is not considered as being resident in its host country, such as an unincorporated site office carrying out a short-term construction project The services provided in the host country by this type of commercial presence are transactions between residents and nonresidents, and they are recorded in the balance of payments accounts under construction services and not in FATS statistics However, under GATS rules these services are to be considered as supplied through mode 3 The balance of payments component ‘construction services’ also includes transactions resulting from mode 4 20

Copyright 2010, The World Bank Group. All Rights Reserved. Balance of payments mode 4 Some transactions in BPM service components belong to mode 4 Supplementary information on other mode 4 activities may be provided by the compensation of employees component of income in BPM Identification of the part of compensation of employees arising from production of services is encouraged 21

Copyright 2010, The World Bank Group. All Rights Reserved. Valuation of transactions Market price should be used as the basis for valuation of transactions in international trade in services Problems may arise in valuing international transactions between related enterprises integrated under the same management but situated in different economies Transactions may not be market transactions Such transactions in the books of the enterprises (called transfer prices) may or may not be against market prices Where distortions between market and transfer prices are large, replacement of book values with market value equivalents is in principle recommended 22

Copyright 2010, The World Bank Group. All Rights Reserved. Data collection Data collection for BPM statistics is a shared responsibility of National Statistical Offices (NSOs) and Central Banks NSOs compile international commodity trade statistics NSOs collect data about international trade in services from enterprises, including FATS statistics Some NSOs collect data about labor income from abroad NSOs should also cover international trade in services transactions by governments Central Banks compile statistics about international trade in services through analysis of international financial transactions 23

Copyright 2010, The World Bank Group. All Rights Reserved. Enterprise surveys Enterprises are often involved in providing or using international services Questionnaires should be sent to enterprises known (or are believed) to have significant international trade in services activity The most important enterprises can be surveyed annually Smaller ones may be surveyed according to a rotation scheme Specialized questionnaires should be used for different types of companies 24