1. The Treatment of Merchanting in Balance of Payments Statistics
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The Treatment of Merchanting in Balance of Payments Statistics
April 2004
Bank of Japan
My name is Eika Yamaguchi, working for Bank of Japan. I am in charge of both planning and analysis of Current Account statistics, mainly responsible for Other Services.
I appreciate this opportunity to focus on merchanting issue, because I think more clarification is needed in this area. Another reason is that Japan’s merchanting on gross basis has so much volume that any change of methodology would considerably affect Japan’s BOP. Therefore I am going to spend 10 minutes from now, and I hope this could be a material to start a more meaningful discussion.
2018/12/8

2. BPM5 (Paragraph 262)
Merchanting is defined as the purchase of a good by a resident (of the compiling economy) from a nonresident and the subsequent resale of the good to another nonresident; during the process, the good does not enter or leave the compiling economy.
The IMF Balance of Payments Manual Fifth Edition defines merchanting as shown here.
Merchanting is defined as the purchase of a good by a resident (of the compiling economy) from a nonresident and the subsequent resale of the good to another nonresident; during the process, the good does not enter or leave the compiling economy.
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3. BPM5 (Paragraph 207)
When goods are acquired from one economy, relinquished again to that or some other economy, and do not cross the frontier of the economy in which the temporary owner is a resident, the activity is considered a merchanting transaction rather than an import and re-export of the goods.
Therefore, although ownership of the goods is temporarily transferred to the resident merchant providing the merchanting service, the transaction is not recorded in the balance of payments of the country of residence of the merchant on a gross basis as an import and re-export. Rather, IMF recommends that the difference between the value of goods when acquired and the value when sold be recorded under “Other Services.”
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4. How was it treated in BPM4?
Merchanting was to be recorded under the item “Other goods and services”.
The treatment was essentially the same as under BPM5, that is, the differential amounts for goods were accounted on net basis.
Looking back on the treatment of merchanting trade under Balance of Payments Manual Fourth Edition, the differential amounts for goods were accounted on net basis. Thus, the treatment was essentially the same as under BPM5.
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5. Typical Merchanting Trade
Movement of goods
A is considered to provide merchanting services of 20.
Typical merchanting trade is shown in this chart, when goods are imported from Country B to Country C directly. In this chart, a two-fold arrow represents movement of goods.
Suppose A purchases goods at the value of 80, and subsequently resells them at the value of Ownership of goods is moved from B to A at first, and A to C later.
In this case, Balance of Payments should be recorded as follows.
Country A records export of merchanting services of 20 as the difference between 80 and 100, while Country B reflects merchandise export of 80 and Country C merchandise import of 100.
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6. 2018/12/8 The whole transaction is reflected in this table.
Country A records merchanting services on credit side.
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7. How should the compiling methodology be reviewed?
The BPM5 treatment of Merchanting should be reviewed not as a service but as a component in the trade of goods, and BOP should account imports (= acquisitions) and exports (= resale) on a gross basis,
because the current treatment contains 4 major problems such as...
However, the current treatment of merchanting contains several significant problems. Therefore, it should be reviewed, with serious consideration given to treatment of merchanting, not as a service but as a component in the trade of goods. In this case, the balance of payments statistics should account imports and exports on a gross basis, rather than only recording the difference on a net basis.
Next I’d like to point out 4 major problems of the current treatment.
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8. Disadvantage of treating Merchanting as Services 1/4
The first problem is that it requires exception to the change of ownership principle to record goods.
Paragraph 207 says that “It is recommended that the country of the temporary owner exclude such goods from the goods component….”
The first disadvantage is that it requires exception to the change of ownership principle to record goods.
As a matter of fact, BPM5 accepts exceptional treatment regarding merchanting as follows: “It is recommended that the country of the temporary owner exclude such goods from the goods component….”
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9. Disadvantage of treating Merchanting as Services 1/4
However, the demarcation between “temporary” transactions and other transactions is not clear.
Thus, the rationale for changing the treatment is weak.
In fact, Paragraph 268 says that “Goods not crossing frontiers should be included in exports and imports if changes of ownership occur.”
However, the demarcation between “temporary” transactions and other transactions is not clear.
Given that it is clear that ownership has been transferred to a resident, the rationale for changing the treatment to that of the normal import and re-export of goods is somewhat weak.
The change of ownership principle constitutes one of the fundamental rules of BPM5 regarding treatment of goods.
Actually, BPM5 states: “Goods not crossing frontiers should be included in exports and imports if changes of ownership occur.”
If merchanting is treated not as a service but as goods, the treatment would follow the principle and the exception to the principle can be avoided.
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10. Disadvantage of treating Merchanting as Services 2/4
The second problem is that it could result in discrepancies in global totals.
The second disadvantage is that it results in discrepancies in global totals in a case where a resident of country A acquires goods from a nonresident and subsequently resells this to another nonresident; during the process the goods stay within the country B. In this case, trade in goods are not recorded because the goods never leave the country. On the other hand, merchanting services will be recorded on the credit side of country A. As shown in this chart, no countries would record this service on debit side. As a result, BOP statistics will generate global discrepancies, and Current Accounts would not reach zero due to this asymmetry.
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11. Disadvantage of treating Merchanting as Services 3/4
Difficulty in regional breakdowns of merchanting services will generate discrepancies in bilateral statistics.
Export of 20 merchanting services to B or to C ? At what ratio should it be assigned?
The third problem is difficulty in regional breakdowns.
Take a case in which a resident of country A acquires goods from a resident of country B and subsequently resells this to a resident of country C. In this case, it is difficult to determine at what ratio the services provided by the resident of country A should be assigned to countries B and C.
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12. Disadvantage of treating Merchanting as Services 3/4
For example, regional treatment in Japan’s merchanting is not thoroughly consistent.
Case A
Case B
　 Japan
For example, pertinent transactions are treated as follows by Japan.
In case A, where the goods are physically transferred from the country of acquisition to a third country, the transaction is registered as services to the country of resale.
In case B, where the goods remain in the same economy, the transaction is automatically recorded as a payment to the country of acquisition and a receipt from the country of resale. Consequently, when the residence of initial seller and final purchaser differ in case B, this results in negative receipts in regional breakdown statistics under merchanting services.
For example, Japanese residents frequently buy petroleum from the Middle East and subsequently resell this to another nonresidents. Such transactions are the primary reason why Japan’s “Other Business Services” via the Middle East shows very large negative receipts, as much as minus 121 billion yen in Not only is this confusing for users of the data, but it contradicts the concept of service as output.
Japan’s “Other Business Services” vis-à-vis the Middle East shows very large negative receipts
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13. Disadvantage of treating Merchanting as Services 4/4
Losses incurred at resale will generate negative service output, which may conflict with the concept of service as output.
The last disadvantage of treating merchanting as services is that, in merchanting transactions, it is not unusual for losses to be incurred at resale. Therefore, the problem of negative output cannot be eliminated.
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14. Treatment of Merchanting as Services on a net basis...
(1) Requires exception to change of ownership principle.
(2) Results in discrepancies in global totals due to asymmetry.
(3) Involves difficulty in regional breakdowns.
(4) Generates negative service output with losses incurred at resale.
To put it briefly, these are the major 4 problems of treating merchanting as services.
The first, the current treatment requires exception to change of ownership principle.
The second, it results in discrepancies in global totals due to asymmetry.
The third, it involves difficulty in regional breakdowns.
The last, it generates negative service output with losses incurred at resale.
If we shift the treatment to a gross basis, all of these problems could be avoided.
On the other hand, the treatment of merchanting as goods has also disadvantages. I’d like to show 2 problems.
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15. Disadvantage of treating Merchanting as Goods 1/2
Freight and insurance charges may become mixed in with goods.
Assume that freight =10 is added to the resale value = 100, and that Country C bears the freight cost (in principle, importer bears freight charges).
First, freight and insurance charges may become mixed in with goods because it is difficult to strictly eliminate freight and insurance charges from CIF values.
Please see this diagram, in which country A purchases goods at the value of 80 from B, and subsequently resell them at the value of 100 to C. The goods themselves move country B to C.
Assume that freight value of 10 is added to the resale value of 100, and that country C bears the freight cost following the principle that importer bears freight charges. Thus transporter is a resident of either country B or A.
In this case, the merchandise trade would be overvalued as follows;
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16. Case in Which Merchanting Includes Freight
overvalued
If transporter is a resident of country B, transport services are exported from country B to country C, and the freight value is recorded on credit side of B and debit side of C.
However, those transportation services become mixed in with merchandise trade of country A. Although country A imports the goods at the value of 80 and exports them at the value of 100, the trade of merchandise statistics are overvalued in consequence.
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17. Case in Which Merchanting Includes Freight
overvalued
Similarly, if transporter is a resident of counry A, transport service exports become mixed in with merchandise exports of Country A.
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18. Disadvantage of treating Merchanting as Goods 1/2
However, in reality, it is unavoidable for some goods to become mixed in with the service component. (BPM5 Paragraphs 223, 228, etc.)
Therefore, it appears that the first problem related to gross basis accounting are relatively minor ones.
However, it is recognized that, in reality, it is unavoidable for some goods to become mixed in with the service component. Similarly, part of the service flow between nonresidents may become included in goods. (BPM5 Paragraph 227)
On the other hand, not only gross accounting but also net accounting creates mixed-in freight problem in a certain case and merchanting services become overestimated.
Therefore, it appears that the first problem related to gross basis accounting are relatively minor one.
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19. Disadvantage of treating Merchanting as Goods 2/2
Because of the large volume of merchanting on gross basis, revising the treatment may affect the perception of statistics on trade in goods
In the case of Japan, based on the 2003 preliminary figures, merchandise exports and imports could be increased by 32.5% and 40.6%, respectively (including non-monetary gold).
The second problem of shifting to gross accounting is that the change might affect the perception of statistics on trade in goods.
In the case of Japan, based on the 2003 preliminary figures, such a shift would increase merchandise exports and imports by 32.5% and 40.6%, respectively (including non-monetary gold).
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20. Disadvantage of treating Merchanting as Goods 2/2
However, this problem can be significantly alleviated through the following measures:
(1) separating merchanting from other transactions in goods by creating a sub-component for goods in merchanting;
(2) creating a time series covering a sufficiently long retroactive period.
However, this problem can be significantly reduced through the following measures: (1) separating merchanting from other transactions in goods by creating a sub-component for goods in merchanting; (2) creating a time series covering a sufficiently long retroactive period.
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21. Net basis vs. Gross basis (wrap- up)
Both net accounting (service) and gross accounting (goods) have disadvantages.
Shortcomings of net accounting are more serious and all of them could be avoided by shifting to gross basis.
Meanwhile, the problem of mixed-in freight is unavoidable under the current treatment too.
Therefore, wrapping it up, both net basis and gross basis have disadvantages.
Comparing both methodology, in my opinion, net accounting has more serious problems and all of them could be avoided by shifting to gross basis accounting.
Meanwhile, though gross base account could cause the mixed-in freight, this problem is also unavoidable under the current treatment.
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22. Exception to rule →Should an exception be approved? Yes.
IMF Compilation Guide (Paragraph 138) says, “Merchanting transactions—that is, the buying and selling of goods (including nonmonetary gold) that do not cross national boundaries—should be recorded in the BOP as service transactions”
Even if the treatment of merchanting is changed to gross basis accounting, non-monetary gold should be an exception.
It seems that treatment of merchanting on gross basis is more appropriate than the current treatment. However, there should be an exception.
BOP Compilation Guide indicates that, non-monetary gold that does not cross frontiers is also recorded under merchanting services
However, non-monetary gold should be treated differently from other goods in merchanting, primarily for the following two reasons.
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23. Why should non-monetary gold be an exception?
(1) Gold is special goods in that it has characteristics of both goods and financial assets.
(2) Dealing in gold are widely undertaken without any physical movement of gold through use of the books of the London gold dealers.
First, gold is special goods in that it has characteristics of both goods and financial assets.
Second, as in the case of financial assets, in reality, dealing in gold are widely undertaken without any physical movement through use of the books of the London gold dealers.
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24. Non-monetary gold in Japan’s merchanting
During 2003, Japans gross transactions of non-monetary gold not involving the crossing of frontiers amounted to 7341 billion yen in imports and 7373 billion yen in re-exports. These amounts were equivalent to 45.6% and 43.7% of gross merchanting transactions, respectively.
These amounts were equivalent to 18.5% and 14.2% of total merchandise exports and imports, respectively
Take Japan’s case as an example. During 2003, Japan’s gross transactions of non-monetary gold that do not cross frontiers amounted to about 7 trillion Japanese yen .
These substantial amounts were equivalent to 18.5% and 14.2% to total merchandise exports and imports, respectively.
Thus the inclusion of these amounts in the accounting of goods on gross basis can obscure trends and developments in the entire merchandise trade.
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25. Non-monetary gold not crossing frontiers
They can be treated as either (1) service or (2) financial transactions.
If (1) is applied, the margin on acquisition and resale price is recorded as a service
Regarding (2), it is necessary to define “Financial Gold” appropriately.
Transactions in non-monetary gold not involving physical exports and imports can be treated either as service or as financial transactions. 　ここまで。
[1] Accounting the margin on acquisition and resale price as a service.
Note: In case of dealer-led dealing, consideration must be given to determining who is providing a service to whom.
[2] Separating transactions in non-monetary gold into real-demand transactions (jewelry, industrial uses) and dealing transactions aimed at getting capital gain, and apply different accounting methods to the two categories.
Notes: 1. For example, categorize the former as goods and account on gross basis, and treat the latter as margin and account on net basis. Alternatively, treat transactions in non-monetary gold as financial transaction and create “Financial Gold” as new component of “Financial Account” to be accounted on net basis.
Notes: 2. In connection with “Financial Account,” it will be necessary to clarify the definition of “Financial Gold.”
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26. To conclude,
There is room for reviewing the current treatment of Merchanting.
Gross basis accounting (i.e., recording the pertinent transaction under Goods) could be more appropriate methodology.
In case of non-monetary gold not involving the crossing of frontiers, the special characteristics of gold as a good should be considered.
In conclusion, there is much room to review the current treatment of Merchanting as services.
As I have shown, the treatment generates at least 4 major problems. Consequently, it is no doubt that it cause discrepancies in BOP statistics.
Therefore, it is necessary to deepen our discussion, with consideration of recording the transaction under Goods.
As for non-monetary gold not crossing boundaries, the discussions should not be restricted to the perspective of merchanting but should consider the special characteristics of gold as a good.
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27. Thank you for listening!
Thank you for listening for my presentation.
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