The Treatment of Merchanting in Balance of Payments Statistics

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The Treatment of Merchanting in Balance of
Payments Statistics

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• April 2004
• Bank of Japan

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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.

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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.

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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.

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Typical Merchanting Trade
Movement of goods
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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...

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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.

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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.

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Disadvantage of treating Merchanting as Services
2/4

• The second problem is that it could result in
  discrepancies in global totals.

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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?
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Disadvantage of treating Merchanting as Services
3/4

• For example, regional treatment in Japans
  merchanting is not thoroughly consistent.

Case A
Case B
Japans Other Business Services vis-à-vis the
Middle East shows very large negative receipts
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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.

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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.

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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).
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Case in Which Merchanting Includes Freight
overvalued
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Case in Which Merchanting Includes Freight
overvalued
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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.

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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).

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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.

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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.

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Exception to rule

• ?Should an exception be approved? Yes.
• IMF Compilation Guide (Paragraph 138) says,
  Merchanting transactionsthat is, the buying and
  selling of goods (including nonmonetary gold)
  that do not cross national boundariesshould 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.

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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.

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Non-monetary gold in Japans 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

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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.

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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.

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