1. Module 5 INTERNATIONAL TRADE IN SERVICES SPECIAL CASES
François RENARD
MEDSTAT STE
Prague 4-6 December 2012

2. Structure of the course
Module 1: Characteristics of the services sector, an overview
Module2: Classifications
Module3: Services transactions between residents and non-residents
Module 4: SITS data collection
Module 5: trade in services special cases
Module 6: Foreign affiliates statistics

3. Introduction
BOP compilers need to find the appropriate approach to compile data which fit with the concepts and definitions relating to international trade in services.
Whatever the collection system used (either a banks ITRS or a direct reporting or a survey system) the estimate of several services items need a further elaboration through the use of modelling or imputed values.
Among these special cases are: (1) transportation services, (2) construction services, (3) manufacturing services, (4) merchanting, (5) financial services and (6) insurance services.

4. 1.Transportation services

5. Transport EBOPS 3.1 Sea transport 3.2 Air transport
ESCWA Workshop on Compilation of Statistics on International Trade in Services
Transport EBOPS
3.1 Sea transport
3.1.1 Passenger
3.1.2 Freight
3.1.3 Other
3.2 Air transport
3.2.1 Passenger
3.2.2 Freight
3.3.3 Other
3.3 Other modes of transport
3.3.1 Passenger
3.3.2 Freight
3.4 Postal and courier services 5

6. Conventions for freight recording
Freight closely linked to the goods component
Measurement of freight affected by the convention that goods are valued FOB at the customs frontier of the exporting economy.
All freight costs up to the customs frontier to be treated as incurred by the exporter; all freight costs beyond that point to be treated as incurred by the importer.
Amount recorded under service import should be that paid by resident importers to non-residents carriers; amount recorded under service export should be that paid to resident carriers by non- resident importers.

7. Conventions for freight recording
Freight cost may be paid directly or indirectly by the importer, depending of the terms of delivery
A direct payment correspond to an invoice of transport
An indirect payment (rerouting) consists in separating the transport cost from the CIF price of the merchandise
Terms of delivery
Ex-works,
FOB
CIF
DDP …

8. Freight provided by the compiling economy (1)
Freight services provided in connection with exports
On behalf of the exporter (CIF contract)
Goods sold all-inclusive; transport paid by exporter (R/R)
The transportation cost is reallocated to the importer
Indirect payment
Producer ® Exporter ® Importer (NR)
On behalf of the importer (FOB contract)
The importer pays the transport (R/NR)
Producer ® Importer (NR)
Direct payment

9. Freight provided by the compiling economy (2)
Freight services provided in connection with imports
On behalf of the non-resident exporter (CIF contract)
Goods sold all-inclusive; transport paid by exporter (R/NR)
The transportation cost is reallocated to the importer
Producer ® Exporter (NR) Importer (R)
Indirect payment
On behalf of the resident importer (FOB contract)
R/R
Not a BOP transaction

10. Freight acquired by the compiling economy (1)
Freight services acquired in connection with exports
On behalf of the exporter (CIF contract)
Goods sold all-inclusive; transport paid by exporter (NR/R)
The transportation cost is reallocated to the importer
Producer (NR) Exporter ® Importer (NR)
Indirect payment
On behalf of the non-resident importer (FOB contract)
The non-resident importer pays the transport (NR/NR)
Service producer (NR) Importer (NR)

11. Freight acquired by the compiling economy(2)
Freight services acquired in connection with imports
On behalf of the non-resident exporter (CIF contract)
Goods sold all-inclusive; transport paid by exporter (NR/NR)
The transportation cost is reallocated to the importer
Producer (NR) Exporter (NR) Importer (R)
Indirect payment
On behalf of the resident importer (FOB contract)
The importer pays the transport (R/NR)
Direct payment

12. Freight transactions 12

13. Example
An amount of goods exports of with a share of CIF contracts of 50% and a CIF/FOB rate of 4%: means that there is 20 (500x0.04) of transportation services in the invoice of 1000.
We suppose that 8 has been pre-paid by the exporter to a non-resident carrier and 12 corresponds to a transport receipt with a resident carrier; the amount of 8 which should not be recorded in the BOP (NR/NR) is offset by part of the FOB/CIF conversion (8).

14. Use of an ITRS for data collection
With an ITRS data collection system, the reporting is done mainly by the direct reporting companies and by the banks on behalf of their clients.
Reports represent the amounts paid directly between a resident transportation enterprise and a non-resident importer and vice-versa.
The adjustment to the FOB-FOB value is done using the foreign trade data and the customs data relating to the CIF-FOB ratio. This adjustment is added to the amount paid directly

15. Goods transactions: from CIF to FOB
Goods transactions compiled on an invoice basis include a part of ancillary costs which has to be estimated and allocated to the services account.
The amount of transportation included in the invoice value exports and imports results of the following equation:
Imputed transportation= invoice value of goods (1) x share of CIF contracts (2)x CIF-FOB ratio (3)
(see the example : slide 12)
Customs reporting
From terms of delivery
Calculation by the customs administration

16. Transportation surveys
Surveys of transport enterprises may be a good choice when as it is often the case, a large share of transactions is concentrated on a small number of companies.
Resident operators can provide freight data on exports
Branch offices or agents of non-residents operators can provide freight data on imports
Questionnaires need to include information on M, X and other transportation as these transactions must be treated differently in the BOP:
Transportation of imports by resident operators not recorded but may be used indirectly to compile freight earned by non- resident operators (debit).
Transportation of exports (credit).

17. Freight rates
Selection of a set of appropriate freight rates to be combined with the exports and imports volume data obtained from foreign trade statistics.
This approach mainly based on administrative data is very demanding:
Needs detailed data on effective freight rates (not listed prices) per tonnage, in national currency
For the appropriate group of merchandises
By mode of transport
By region of origin and destination
Matching the freight rates with the corresponding trade volumes may be very difficult.

18. 2.Construction services

19. Coverage
Construction services cover « the work performed on construction projects and installation, by employees of an enterprise in locations outside the economic territory of the enterprise ».
A clear distinction to be done between:
Construction abroad: construction works for non- residents by resident enterprises in the compiling economy.
Construction in the reporting economy: construction works for residents by non-resident enterprises.

20. BOP recording
Recording on a gross basis inclusive of all goods and services as inputs to the work, other costs of production (including wages and salaries), and the operating surplus.
Construction abroad
Construction services provided to non-residents by enterprises in the compiling economy (credits).
Offset by goods and services purchased in the host country/abroad (debits).
Construction in the reporting economy
Construction services provided to residents in the compiling economy (debits)
Offset by goods and services purchased in the host country/compiling economy (credits).

21. Construction abroad as a service
A resident construction company wins a contract to renovate an office building abroad (value =100).
It purchases goods and services abroad of 60 as part of the works involved.
The credit (an export of service for the compiling economy) is 100 and the debit is 60 all classified to “Construction Abroad”.
If the 60 were local labour costs they would not be part of services, but recorded under “compensation of employees, debits”.
Construction abroad as a service

22. The central office of the contractor usually keeps the record of all transactions linked to a specific project, with all the information needed for BOP purpose.
Contractors are often big engineering or architectural companies and their number is generally limited. They can be easily surveyed through a trade in services survey or/and a FDI survey
The number of customers may be larger. They can be companies in all the sectors of the economy.
Data collection

23. Construction: services or FDI?
Construction as trade in services
Construction abroad: transactions made by a resident enterprise without a center of economic interest in the host economy.
The resident construction company ensures itself the planning and the supervision of the work to be done.
Usually under one year but not always.

24. Construction: services or FDI?
Construction as FDI
The construction enterprise operates in the host economy for a year or more (but not always).
Creation of a subsidiary or a branch.
The central office retains normally all general functions (planning, contracting, financing, choice of the local suppliers…).
Maintenance of a complete and separate set of accounts of the activity (income statement, balance sheet).
Payment of income tax in the host economy
The BOP records the flows between a mother company and its affiliate.

25. Construction abroad as FDI
The office building takes 2 years to renovate and the company sets up a local office abroad. The local office is an FDI enterprise (branch) in the host economy and 100% foreign owned.
There are no construction services.
Outward investment is 60 to the foreign branch (provision of funds to purchase local goods and services).
Profits are 40 flowing back to the home country (recorded as investment income).

26. Construction stage payments
The transfer of ownership of construction under a contract may be deemed to occur in stages as value is put in place.
In such cases, stage payments made by the owner can often be used to approximate the goss value of construction,
But stage payments mat sometime be made in advance or in arrears of the completion of the stage.

27. 3. Manufacturing services

28. Definition
“Manufacturing services on physical inputs owned by others cover processing, assembly, labeling, packing… undertaken by enterprises that do not own the goods concerned” (MSITS 2010).
“The manufacturing is undertaken by an entity that does not own the goods and that is paid a fee by the owner. In these cases, the ownership of the goods does not change so no general merchandise transaction is recorded between the processor and the owner”.

29. Definition
Examples: production process of chemicals, assembly of clothing and electronics, car and computer manufacturing, liquefaction of natural gas…
Increasing importance of the phenomenon, especially for economies like China or Mexico, East Asia and Eastern Europe .

30. Goods processing Country A Country B Company X Company Y
Goods for processing
Service included in finished goods
Cash value of service
Company X
Company Y

31. Goods or services? Previously recorded as trade in goods (gross basis)
An export of raw material, followed by an import of finished products.
A change of ownership was imputed: exception to the change of ownership principle applying to transactions in goods.
Increases the value of trade.
No longer recorded in the goods account
Payment of the processing fees is recorded as imports of services (net recording or value added).
No longer an imputed change of economic ownership.
Analytical value: who owns the goods and who may be delivering services under contract to process the goods.

32. Processing fee and net value of goods flows
The net value of goods flows for processing may differ from processing fee:
Problem of assessing values of goods sent or returned (no sale or purchase)
Cross-period movement of the goods
Holding gains and losses
Inclusion of overheads (research, patents, marketing…)
Processed goods sold to the country of the processor or to a third economy.

33. Processing country (B)
Different scenarios
Case 1: goods return to the country of origin
Case 2: goods enter the domestic economy of the country of processing
Case 3: goods are shipped to a third country via the country of processing
Case 1
Case2
Case 3
Client
Country (A)
Processing country (B)
Third country

34. Accounting for the three scenarios
In all three cases there is a record of processing services. In addition in case 2 there is an export of finished goods to B and in case 3 an export of finished goods to C.

35. Data collection issues
Goods for processing to be removed in merchandise trade figures
Data should be available from Customs.
Identification of goods subject to processing arrangements.
A specific customs procedure, generally highly regulated: « inward or outward processing ».
Goods subject to exemption from particular taxes (import duties).

36. Data collection issues
Measurement of the processing fee (options)
Use of an ITRS: a new code for processing fee.
Use of an enterprise survey: how to define the sample (the owner and the contractor: enterprises involved in outward and inward processing).
Use of Customs data (net figures, but subject to timing problems).
Needs a cooperation between BOP compilers, national accountants and trade statisticians.
Bilateral cooperation when possible to avoid asymetries.

37. The Maquiladora industry in Mexico
Enterprises authorized to make temporary imports of goods for manufacturing, assembly or repair.
Exempt of the payments of duties and taxes if finish products are sold abroad.
Control of the industry defined by customs and foreign trade laws.
The authorization defines the HS codes for the M and X.
Transactions identified with specific records in customs declaration
The value of the goods temporary imported must be declared by enterprises when exporting manufactured products.
3000 enterprises monthly surveyed through internet
Employment and salaries
Purchase and consumption of goods and services
Value added of exports (wages and salaries, domestic expenses and profits), corresponding to the processing fee.

38. 4. Merchanting: goods or services?

39. Merchanting definition
The purchase of goods by a resident (of the compiling economy) from a non- resident combined with the subsequent resale of the same goods to another non- resident without the goods being present in the compiling economy.
There is a change of ownership.
Merchanting may relate to global manufacturing, global wholesale or retail trade, commodity trading

40. Country A Merchant (compiling economy)
Merchanting of goods
Merchant in country A purchases goods from country B and sells to country C (From the Handbook on Globalisation)
Country B Seller
Country C Purchaser 80
100
Country A Merchant (compiling economy)
Physical movement of goods
Ownership of goods
Cash flow

41. BPM5 recording as a service
4141

42. BPM6 recording
Recording of merchanting transactions as goods under a sub-item “goods under merchanting”
Acquisition of goods by the merchant: negative export.
Sales of goods by the merchant: positive export.
Difference: “net exports of goods under merchanting”.
As a consequence merchanting appears only as exports.
Merits of the new treatment
Avoids exceptional treatment in relation to “change of ownership” principle.
Recording of goods under merchanting becomes symmetrical.

43. BPM6

44. Problems A consistency problem with trade data
Merchanting is not of a same nature as there is no cross border transaction with the merchant’s country
A new item « goods under merchanting »
Inflation of trade data
A negative export and a positive export
A data collection problem
Goods bought and sold under merchanting not covered by the customs system
The use of surveys: links with business registers
The use of mirror data

45. 5. FISIM calculation

46. Financial services
Covers all financial institutions other than insurance, including financial auxiliaries.
Data on both explicit and implicit charges are needed to get a complete picture of financial services.
Services explicitly charged and other financial services, fees and commissions plus imputations for hidden services charge between buying and selling (securities and foreign exchange): require no special calculation but only an appropriate data collection.
Financial intermediation servicee charges indirectly measured (FISIM): this is new. FISIM needs to be calculated

47. Explicit charges
An enumerative list is provided in the BPM6 and in the Manual. Explicit charges include among others:
Deposit taking and lending (account management) charges
Money transfer
Foreign exchange transactions
Credit card services
Commission and charges related to financial leasing
Financial advisory services
Financial assets management,
Liquidity provision services
Stock exchange services….

48. Implicit charges The rationale Transactions involved
« Actual interest can be seen as including both an income element and a charge for a service. 
Lenders and deposit takers operate by offering rates of interest to their depositors that are lower than the rates they charge to their borrowers.
The resulting interest margins are used by the financial corporations to defray expenses and to provide an operating surplus » (BPM6 § ).
Transactions involved
By convention these indirect charges apply only to loans and deposits and only relate to financial corporations.

49. Implicit charges calculation
FISIM may be payable by each of the depositors and borrowers: they may be R or NR.
There is an export of FISIM for the one generated by resident banks with their non-resident clients.
There is an import of FISIM for the one generated by NR banks with the R clients of the compiling economy.
Calculated by using an appropriate « reference rate » of interest the risk and maturity structure of deposits and loans: in practice the interbank borrowing and lending rate may be used.
A single reference rate should be used for transactions in domestic currency and several reference rates may be used in case of the calculation of FISIM with NR banks, as different currencies may be involved.

50. Calculation in practice
What kind of information do we need?
Data on the international investment position
Or data on deposits and loans from financial corporations available monthly from monetary statistics
The amounts of actual interest payable and receivable (available from the primary income account)
The «reference rates» for each currency.
Calculation to be done for resident banks (exports of FISIM) and for non-resident banks (imports of FISIM).
The FISIM equation
FISIM = FISIM on deposits (FD) + FISIM on loans (FL)
FD = (deposits x reference rate) – interest paid on deposits
FL = interest receivable on loans - (loans x reference rate)

51. Calculation in practice
a: interest on loans
FL=(interest receivable on loans)-(loans x reference rate)
Services to borrowers
r: reference rate
i: interest on deposits
FD=(deposits x reference
rate)-(interest paid on deposits
Services to depositors

52. Numerical example
We concentrate on resident banks operating with non-resident clients
The data are:
Average value of deposits: 500
Actual interest paid on deposits: 10
Average value of loans: 1000
Actual interest received on loans: 70
Reference rate : 5%
FISIM on deposits
(500 x 5%) – 10 = 15
FISIM on loans
70 – (1000 x 5%) = 20
Total FISIM exports: = 35

53. FISIM and institutional units
Deposits at domestic banks
Households
Businesses
Government
ROW
Actual interest rate 0% 1%
Reference rate 2%
Stock of deposits
100 50 10
Actual interest
0.1
Reference interest
2.0
1.0
0.2
FISIM (ref – actual)
Thus exports FISIM = 0.1

54. FISIM and investment income
Identification of FISIM as the financial service implicitly included in interest requires corresponding adjustments to interest as recorded in the primary income account.
A reallocation from BOP investment income to the BOP services account:
No change in the total current account.
BUT: GDP is increased by exports of FISIM and reduced by imports of FISIM.
In national accounting interest is normally excluded from value added (which adds to GDP); but banks make most of their profits from net interest received, and not from fees and charges.

55. 6. Insurance service charge

56. Insurance in EBOPS 6. Insurance and pension services
6.1 Direct insurance
6.2 Reinsurance
6.3 auxiliary insurance services
6.4 Pension and standardized guarantee services

57. Insurance service THUS
Insurance companies provide financial protection against the consequences of the occurrence of specified events faced by policy holders: charging premiums and facing claims.
In addition, insurers often act as financial intermediaries who invest funds collected in financial or other assets to meet future claims.
THUS
Insurance companies set up technical reserves funded from premiums to meet future claims.
Life insurance and pensions funds invest some of their premiums in special reserves which earn income.
These funds deemed to belong to the policy holders.

58. Insurance service charge
Premiums and claims do not directly represent insurance service
Service charges (to cover operating costs and profits) are one of the two premiums components.
The difference between premiums and services charges needs to be recorded as a current transfer, as all claims due.
Insurance services need to include the income earned on technical reserves
The income generated from funds held as invested reserves influences the premium.
Deemed to belong to policy holder…
…And paid back as premium supplement.

59. Insurance service charge
The calculation of insurance service charge should take into account claims volatility
Observed claims can be volatile: case of major catastrophes.
Insurance services can be negative.
Need of an adjusted measure of claims based on a longer perspective.
Statistically, expectations calculated by averaging actual premiums and claims over recent years
We thus avoid recording negative services earnings in years of large scale claims (disasters)

60. Insurance service charge
The transactions used in estimating values of the insurance services are:
Gross premiums earned.
Plus premium supplements.
Less claims due.
Less adjustments for claims volatility if necessary.

61. Exports of insurance services
For resident insurers with separate data on NR policy holders, the calculation is straightforward
Gross premiums earned from abroad = 100
Claims payable abroad = 95
Income attributable to policy holders from investment income (premium supplements) = 20
Imputed service charge is 25: ( – 95)

62. Exports of insurance services
For resident insurers with separate data on NR policy holders for premiums only, use domestic information
Total insurance services (R and NR) = 50
Total premiums = 200
Of which premiums from residents = 120
Premiums from non-residents = 80
Ratio of services charge to premiums: 50/200 = 20%
Imputed service charge is 20: (80 x 20%)
With averaging
Premiums earned from abroad =100
3 year ratio of service charge to total premiums = 20% (based on national accounts: domestic insurance data)
Imputed service charge earned from abroad = 20.

63. Imports of insurance service
More complicated because available information less complete than that for exports (relate to non-resident insurers).
Could use ratios of large international insurance companies from other economies or ratios from the resident insurance industry (assuming strong competition between domestic and international companies).

64. Imports of insurance service
Could also use ratios based on premiums payable abroad and claims payable from abroad over a medium term period plus an adjustment for the premium supplement.
Premiums from residents to NR insurance companies =40
Ratio of service charge to premiums (average from data on insurers abroad) = 25%
Estimated insurance services from non-residents = 10: (40*0.25)

65. Reinsurance service
A policy between an insurer and another insurer. Used to offset risks and minimise losses in the event of large numbers of claims.
Exports (credits) represent the service provided by R reinsurers to NR insurers, i.e. reinsurance services abroad provided by domestic insurers.
Imports (debits) represent the service provided by NR reinsurers to R insurers, i.e. reinsurance services provided from abroad.
Reinsurance services should be estimated separately, but using the same principles as direct insurance (expected claims, removing volatility…).

66. Reinsurance service

67. Collection practice
Calculation of service charge needs data on premiums, claims, technical reserves, and investment income.
Most countries currently derive the data from payments reported by the transactors (directly or indirectly): premiums and claims actually paid and payments of auxiliary services.
Premiums supplements and changes in technical reserves do not appear in the payments statistics and must be derived from other sources (insurance companies balance sheet).
Consider the use of: (1) Administrative data collected by insurance regulators, (2) statistical surveys designed for insurance companies.