Changing the Treatment of Goods Sent Abroad for Processing (GSAP) Practical and Analytical Impacts on Production Accounts Michel Girard - Statistics Canada

Changing the Treatment of Changing the Treatment of Goods Sent Abroad for Goods Sent Abroad for

Processing (GSAP)Processing (GSAP)

Practical and Analytical Impacts Practical and Analytical Impacts on Production Accountson Production Accounts

Michel Girard - Statistics CanadaMichel Girard - Statistics Canada

Presented to the working Group on the Presented to the working Group on the Impact of Globalization on National AccountsImpact of Globalization on National Accounts

Geneva, April 2008Geneva, April 2008 Statistics Canada Statistique Canada

Agenda item 8

Invited paper 18

OverviewOverview

Background – Goods send for processingBackground – Goods send for processing

Current conceptCurrent concept– Balancing the Canadian supply-use tables (SU)Balancing the Canadian supply-use tables (SU)– Consequences on IO accounts Consequences on IO accounts

New conceptNew concept– Transportation marginsTransportation margins– Analytical aspectsAnalytical aspects– SurveysSurveys

Statistics Canada Statistique Canada

BackgroundBackgroundTrendTrend

Companies moving away from only transforming Companies moving away from only transforming their own materialtheir own material

Companies now act as agentCompanies now act as agent– Provide processing services to other companiesProvide processing services to other companies– Receive processing feesReceive processing fees

Ownership of raw materials remains the property Ownership of raw materials remains the property of the customerof the customer


BackgroundBackgroundReasons Reasons

Separate companies seeking advantages of Separate companies seeking advantages of specialized servicesspecialized services

Companies within the same group seeking tax Companies within the same group seeking tax minimization advantagesminimization advantages

For the processing company, a way to avoid the For the processing company, a way to avoid the risk of holding stocks or finding customersrisk of holding stocks or finding customers

For the client company, a way to avoid the risk of For the client company, a way to avoid the risk of maintaining infrastructure of productionmaintaining infrastructure of production


BackgroundBackgroundMeasurementMeasurement

Treatment of material provided by the client Treatment of material provided by the client company to the processing company company to the processing company – Sometimes a transaction is imputed; sometimes notSometimes a transaction is imputed; sometimes not

Inconsistent treatmentInconsistent treatment– A transaction is imputed when material cross the border A transaction is imputed when material cross the border

or when material is exchanged between two parent or when material is exchanged between two parent companies in domestic economycompanies in domestic economy

– No imputation when transactions take place between No imputation when transactions take place between two separate companies on domestic markettwo separate companies on domestic market


Production context Production context

Material is sent by a unit in country A (client) Material is sent by a unit in country A (client) to another unit in country B (processor) to another unit in country B (processor) Material is transformed in a substantive way and Material is transformed in a substantive way and returned to country Areturned to country AThe client unit maintains legal ownership of the The client unit maintains legal ownership of the semi-processed and processed goodssemi-processed and processed goods

Impact of having client and processor units on Impact of having client and processor units on the SU tablesthe SU tables


Balancing supply-use tablesBalancing supply-use tablesMeasurementMeasurement

Data collection Data collection – Production-related surveys contain a mixture of Production-related surveys contain a mixture of

producers that are traditional producers, offering producers that are traditional producers, offering processing services or users of processing services, processing services or users of processing services, making difficult “imputing” for GSAPmaking difficult “imputing” for GSAP

– For administrative reasons, exports and imports are For administrative reasons, exports and imports are valued at a “market price equivalent”valued at a “market price equivalent”


Data availableData available

Annual Survey of Manufactures (ASM)Annual Survey of Manufactures (ASM)Establishment-based surveyEstablishment-based survey

Shipments and inventoriesShipments and inventories

Custom workCustom work

Cost of own materialCost of own material

Sub-contracts (expenses)Sub-contracts (expenses)

No explicit questions about GSAPNo explicit questions about GSAP

International Trade International Trade Imports and exports at a “market price equivalent”Imports and exports at a “market price equivalent”

AnecdotalAnecdotal evidence of companies sending goods evidence of companies sending goods for processing servicesfor processing services


Consequence – Industry accountConsequence – Industry accountTraditional Traditional processing processing

industryindustry

Traditional Traditional processing processing

industryindustry

ProcessorProcessor TotalTotal

Gross outputGross output 200200 100100 5050 150150

Intermediate Intermediate inputsinputs

125125 62.562.5 12.512.5 7575

Value addedValue added 7575 37.537.5 37.537.5 7575

IO coefficientIO coefficient 62.5%62.5% 50.0%50.0%

Currently difficult to assess quality if unaware of GSAPCurrently difficult to assess quality if unaware of GSAP

New proposal: New proposal:

Better relationship of labour and surplus to productionBetter relationship of labour and surplus to production

Balancing supply-use tableBalancing supply-use tableProcessor case with current surveysProcessor case with current surveys

Step 1 – Material is sent to the processorStep 1 – Material is sent to the processorProd + Prod + MM = inputs + final use + X + inventories = inputs + final use + X + inventories

7575 0 0 Fixing the imbalance?Fixing the imbalance?Step 2 – A good is producedStep 2 – A good is produced

Prod + M = inputs + final use + Prod + M = inputs + final use + XX + inventories + inventories Fixing the imbalance? Fixing the imbalance? 100100Step 3 – Payment stage (processing fee)Step 3 – Payment stage (processing fee)ProdProd + M = inputs + final use + X + inventories + M = inputs + final use + X + inventories

2525 25? 25?If M/X were “net” of the value of goods: balancing would If M/X were “net” of the value of goods: balancing would be easier be easier End up with very little information about supply and useEnd up with very little information about supply and use


Balancing supply-use tableBalancing supply-use tableClient case with current surveysClient case with current surveys

Step 1 – Material is sent to the processorStep 1 – Material is sent to the processorProd + M = inputs + final use + Prod + M = inputs + final use + XX + inventories + inventories

75 75 75 75 7575 Imbalance? Imbalance?Step 2 – A good is producedStep 2 – A good is produced

Prod + M = inputs + final use + X + inventoriesProd + M = inputs + final use + X + inventories 100 100 X1 X2 X3 Imbalance?100 100 X1 X2 X3 Imbalance?Step 3 – Payment stageStep 3 – Payment stage Prod + M = inputs + final use + X + inventoriesProd + M = inputs + final use + X + inventories 25 25?25 25?

If M/X were “net” of the value of goods: balancing would If M/X were “net” of the value of goods: balancing would be easier be easier Value of production ?Value of production ?


New conceptNew conceptTransportation marginsTransportation margins

By not imputing a value for goods sent for By not imputing a value for goods sent for processing, the link between transport margins processing, the link between transport margins and commodities will no longer existand commodities will no longer exist

Will not associate transport margins with Will not associate transport margins with processing feesprocessing fees

Transportation surveys will continue to collect Transportation surveys will continue to collect revenues and the associated goods transported revenues and the associated goods transported

Transportation services will replace Transportation services will replace transportation margins (Imports/exports)transportation margins (Imports/exports)


New conceptNew conceptAnalytical issuesAnalytical issues

IO coefficientsIO coefficients

Import intensityImport intensity

ProductivityProductivity– ProcessorProcessor– ClientClient

IO ModelsIO Models


New conceptNew conceptIO – Industry AccountIO – Industry Account

Under current treatmentUnder current treatmentProduction function reflects full range of intermediate inputsProduction function reflects full range of intermediate inputs

Under new treatmentUnder new treatmentDoes not allow establishing a clear relationship of all Does not allow establishing a clear relationship of all intermediate inputs involved in the production processintermediate inputs involved in the production process

Requires an adjusting entry or split industries into Requires an adjusting entry or split industries into processors, clients and traditional producersprocessors, clients and traditional producers

Prefer adjusting entry linked with either Prefer adjusting entry linked with either intermediate inputs or gross output – recreating intermediate inputs or gross output – recreating production technologyproduction technology


New conceptNew conceptIO modelIO model

Impact studies: Currently, the larger share of imports is Impact studies: Currently, the larger share of imports is compensated by an increased level of intermediate compensated by an increased level of intermediate demand, leaving value added unaffecteddemand, leaving value added unaffected

Concept of commodity of origin: Concept of commodity of origin: – Commodity is mainly produced by one industryCommodity is mainly produced by one industry– If custom work cannot be associated with specific industriesIf custom work cannot be associated with specific industries– Allocating the demand for custom work to the proper producing Allocating the demand for custom work to the proper producing

industries based on market shares will spread the output to all industries based on market shares will spread the output to all producers involved in custom workproducers involved in custom work

Will require adapting the IO commodity structureWill require adapting the IO commodity structure


New conceptNew conceptLabour productivity - HypothesisLabour productivity - Hypothesis

Switching to a more “client type” industrySwitching to a more “client type” industryPotentially a more efficient industry with lower value addedPotentially a more efficient industry with lower value added

Contributing less to overall productivityContributing less to overall productivity

Switching to a more “processor type” industrySwitching to a more “processor type” industry An industry with less gross output but same value addedAn industry with less gross output but same value added

Labour productivity not affectedLabour productivity not affected


New conceptNew conceptMultifactor productivity - HypothesisMultifactor productivity - Hypothesis

Impact depends on how multifactor productivity Impact depends on how multifactor productivity is derivedis derived

Net approach: No impact in the case of the Net approach: No impact in the case of the processing industry processing industry – ∆∆GDP/hours=(∆MFP + SGDP/hours=(∆MFP + Sk*∆(K/hours) + S*∆(K/hours) + Sll*∆Lc)*∆Lc)


New conceptNew conceptMultifactor productivity - HypothesisMultifactor productivity - Hypothesis

KLEMS – taking into accounts gross output and KLEMS – taking into accounts gross output and intermediate inputsintermediate inputs– Processing economyProcessing economy

Direction of the growth rate is not clearDirection of the growth rate is not clear

Output will play a larger role in the final resultOutput will play a larger role in the final result

– Client economyClient economyPotentially a more efficient industry with lower value added Potentially a more efficient industry with lower value added

Contributing less to overall productivityContributing less to overall productivity


New conceptNew conceptImports and exportsImports and exports

Not imputing a change of ownership Not imputing a change of ownership

Level of imports/exports often compared to Level of imports/exports often compared to value addedvalue added– Misleading in terms of sizeMisleading in terms of size– Exchange rate Exchange rate relationship with export and relationship with export and

import is affected since established against a import is affected since established against a transaction that never took placetransaction that never took place

However, lost of information about goods However, lost of information about goods send for processingsend for processing


SurveysSurveysPotential of new statisticsPotential of new statistics

ImportsImportsFrom Canadian Border Services AgencyFrom Canadian Border Services Agency

– Duties relief applicationDuties relief application

– Statistics related to inward processingStatistics related to inward processing

Goods entering country for processingGoods entering country for processing– Inward goodsInward goods

– Must be recorded in order to avoid paying VATMust be recorded in order to avoid paying VAT

ExportsExportsUnder investigationUnder investigation

Questions related to goods not soldQuestions related to goods not sold


SurveysSurveys

Switch to “client or processor types” will affect sampling Switch to “client or processor types” will affect sampling strategystrategy

Could say the same for editing, imputation and estimation Could say the same for editing, imputation and estimation steps of a given surveysteps of a given survey

Strategy related to the use of administrative data must be Strategy related to the use of administrative data must be adjusted adjusted

Data for contract processing could be recorded by Data for contract processing could be recorded by another entity within the firm, such as head office. The another entity within the firm, such as head office. The plant may not have that information and is most likely not plant may not have that information and is most likely not the one paying the processing fees the one paying the processing fees


Preparing IO accounts Preparing IO accounts and related productsand related products

For accuracy and analytical reasonsFor accuracy and analytical reasons

– Requires preparing IO accounts according to the Requires preparing IO accounts according to the imputation conceptimputation concept

Preserving statistics for structural analysisPreserving statistics for structural analysis

While respecting SNA rulesWhile respecting SNA rules

– Recognizing some goods send for processing on Recognizing some goods send for processing on domestic market would remained not imputed unless domestic market would remained not imputed unless changes are made to questionnaires (non affiliates)changes are made to questionnaires (non affiliates)


Documents

Changing the Treatment of Goods Sent Abroad for Processing (GSAP) Practical and Analytical Impacts on Production Accounts Michel Girard - Statistics Canada