11.1 Concepts and definitions1
11.5 In general terms, international trade statistics can be defined as the statistical compilation of flows of goods and services between residents of an economy and non-residents over a given period. More broadly, international transactions can also cover income flows as well as financial transactions. This chapter specifically deals with trade in goods and services.
11.6 The balance of payments convention constitutes the conceptual framework for international trade within Canada's System of National Accounts (CSNA). To the extent possible, this framework reflects the standards and conventions set out in the System of National Accounts1993 and in the Balance of Payments Manual (1993), Fifth edition of the International Monetary Fund. These standards and conventions provide the means for developing a record of transactions between residents and non-residents.
11.7 The conceptual framework of the balance of payments establishes the line between residents and non-residents. Such delineation is important because the balance of payments records only transactions between these units. Institutional units that reside, (e.g., produce, consume) in Canada are considered residents of Canada. Canadian residents may be legal entities (businesses) or persons. For individuals, this usually means that that they must have their principal residence in Canada. For businesses (unincorporated, corporations or public enterprises), their residence is linked to their Canadian production activities. In other words, they are Canadian residents if they carry out production in Canada through resident entities. These entities may be Canadian corporations or a Canadian branch or subsidiary of a foreign corporation.2
11.8 International trade in goods and services is defined as follows in the System of National Accounts 19933 (SNA 1993):
"Exports of goods and services consist of sales, barter, or gifts or grants, of goods and services from residents to non-residents, while imports consist of purchases, barter, or receipts of gifts or grants, of goods and services by residents from non-residents." 4
11.9 The concepts associated with trade in goods and services are defined in detail in the next two sections.
11.10 The Income and Expenditure Accounts (IEA) make direct use of the data on flows of goods and services from the Balance of Payments Division (BPD).5 The only exception is the addition in IEA of the category of financial services indirectly measured (FSIM). These services represent an indirect measure of the value of certain financial services – specifically, the income earned by financial institutions on services provided but for which financial institutions do not charge explicitly.
Trade in goods
11.11 As noted above, goods are considered imported or exported in the balance of payments when there is a change of ownership between residents and non-residents. By international convention, the cross-border movement of goods, as measured by customs data, represents a proxy for the change in ownership. Most goods that cross the border and appear in customs documents are therefore included in the balance of payments and, as a result, in the income and expenditure accounts.
11.12 However, there are two general instances where customs data do not correspond to a change in ownership. First, there is the case of goods that change ownership but which are not recorded in customs documents. These goods could include, for example, satellites or vessels (which do not necessarily cross a country's economic territory) or non-monetary gold traded with non-residents, but which remain in the country. In these cases, the customs data are amended with information from other administrative sources or Balance of Payments Division surveys. Second, there are cases of goods recorded in the customs data that are clearly not subject to change of ownership. These included goods for processing, repair and financial leases of capital equipment. These, however, are still treated as goods by international standards.
11.13 In the balance of payments framework, goods are recorded at market prices at the border (customs frontier) of the exporting country. Generally, this matches the customs value of the goods. In the Canadian customs documents goods are valued at the transaction value – that is, at the point of exit for Canadian exports and at the point of last direct shipment for Canadian imports. For the most part, the transaction value corresponds to the market price at the frontier of the exporting country. Canadian exports shipped to overseas countries are valued at free on board prices (FOB),6 port of exit, inland freight included to the point of exit. Similarly, exports to the United States are valued at the point of exit from Canada. For imports, however, the transactions prices at the point of direct shipment to Canada (and not at the frontier of the exporting country) exclude freight costs from the point of shipment to the border. These inland freight costs and all related costs incurred for the goods prior to direct shipment to Canada are included to arrive at the FOB valuation at the customs frontier.
Adjustments to customs data
11.14 Adjustments are made to customs data for both exports and imports to bring them to a balance of payments basis. These adjustments reflect change in ownership or, in the case of imports, to add the cost of freight to the border. Other adjustments are also needed to bring customs data in line with balance of payments concepts. There are four types of adjustments: coverage, timing, valuation for inland freight, and adjustments for valuation and residence. Table 11.1 summarizes the various adjustments to customs data.
11.15 For exports, four main coverage adjustments are made. The first two affect crude petroleum and natural gas exports to the United States. The crude petroleum and natural gas adjustments involve replacing customs data with more accurate information from the Manufacturing, Construction and Energy Division of Statistics Canada and the National Energy Board. A third adjustment corrects an under reporting of exports to countries other than the United States. This adjustment is based on regular studies of the goods balancing done by the Industry Accounts Division and periodic studies by the International Trade Division in cooperation with the Canada Border Services Agency (CBSA). Finally, an adjustment is made for rail cars and locomotives exported to the U.S. but not included in customs data.
11.16 There are two timing adjustments that affect exports: the first is for customs exports of grains and the second takes into account late customs documents. For grains (wheat, canola, barley, oats, rye, flaxseed and corn), customs data are replaced by volume data from the Canadian Grain Commission – considered more reliable for movements of Canadian grain – and by price data from the Agriculture Division.
11.17 For exports to the United States, an adjustment or revaluation is applied to inland freight. Although inland freight is included in customs data it is removed in the derivation of balance of payments based export and import commodity flows. The Balance of Payments Division makes the adjustment in two stages. The first step involves removing the inland freight valued by the International Trade Division. The second consists of calculating a new estimate, based on various sources, and recording it in a separate series, Other balance of payments adjustments.7
11.18 Each of the following elements are calculated and included as part of inland freight for exports to the United States:
- Freight by truck, as reported in U.S. customs data;
- Rail freight of forestry products, as reported in U.S. customs data, adjusted on a cost, insurance and freight beyond the border basis;
- Movement of petroleum by pipeline, as calculated by the National Energy Board and the Manufacturing, Construction and Energy Division;
- An amount added for miscellaneous freight in cases where no mode of transport is indicated in customs data; and
- An adjustment for double-counting of rail charges on exports transiting through the United States and already estimated for goods to overseas destinations.
11.19 There are three final adjustments to export data on software, gold and pharmaceutical products. Pre-packaged software exports are undervalued because certain transactions of U.S. imports, the source of these data, are estimated at the value of the medium (CD, DVD) rather than the value of the content. The data used to calculate the adjustment comes from the Bureau of Economic Analysis. The adjustment on non-monetary gold consists of adding the gold sold to non-residents, but which is left in Canada. Data for these adjustments are obtained from surveys of Canadian banks and refiners. Also added to exports of non-monetary gold is the value of monetary gold sold by Canadian monetary authorities to foreign residents other than foreign monetary authorities.8 Pharmaceutical products are adjusted to take into account Internet sales that may not be properly evaluated by customs data.
11.20 On the import side, there are four coverage adjustments made to customs data. The first pertains to crude petroleum, where customs data are replaced by more accurate data from the Manufacturing, Construction and Energy Division. A second coverage adjustment deals with data on imports by mail that are not recorded in customs data. This adjustment is derived from internal surveys and administrative sources. The third adjustment pertains to imports of undeclared tobacco products, which have been estimated from studies on production and trade. Lastly, a fourth adjustment is compiled by the International Trade Division to subtract custom software already covered in service statistics.
11.21 As noted previously, customs imports are valued at the point of last direct shipment to Canada, making it necessary to add inland freight to the border of the exporting country in order to bring the customs data in line with balance of payments concepts – that is, valuation at the frontier of the exporting country. For imports from the United States, the adjustment for inland freight to the border of the United States is done by mode of transport (truck, rail) and by commodity. The International Trade Division uses direct imputation for trucking, while rail freight is compiled from Balance of Payments Division surveys among Canadian and American carriers. In the case of imports from other countries, the freight is derived from freight rates applied to the value of imports.
11.22 Lastly, two residency adjustments are made to imports. The first adjustment deals with gold bought in Canada from non-residents, but which does not cross the border. Data drawn from a survey of banks and refiners are used for this adjustment. The second adjustment is aimed at showing imports according to country of last shipment which is believed to be a better indicator of the change of ownership. This adjustment is made on the level of countries and cancels out on a global basis. In some respects, it amounts to a redistribution of imports by country.
Trade in services
11.23 Services differ fundamentally from goods in that they are intangible in nature. In the past, trade in services was referred to as the trade in invisibles. According to the SNA 1993, services are not separate entities over which ownership rights can be established. They cannot be traded separately from their production. By the time their production is complete, they must have been provided to the consumer.
11.24 As covered in the balance of payments guide,9 services transactions normally require the simultaneous presence of both the producer and the consumer of the services. This simultaneity is not easily realized between countries where distance and political boundaries separate the supplier and the client.10 This may explain the low volume of international services transactions relative to goods, where both the sellers and buyers of goods remain in their respective economies while the traded goods move across the border. This situation exists despite the fact that, in industrialized countries, services often represent close to three-quarters of the economy in value. However, there is ongoing interest in the trade in services, perhaps because a large part of international trade negotiations in recent years has focused on services.
11.25 The Income and Expenditure Accounts (IEA) use the four main service categories of the balance of payments, to which are added financial services indirectly measured (FSIM). The IEA categories are:
- commercial services;
- government services; and
- financial services indirectly measured (FSIM).
11.26 In conformity with international standards, travel covers purchases of goods and services by:
- persons travelling in another country for less than a year;
- persons travelling in another country for more than a year for medical or education reasons;
- seasonal and border workers working in another country (cross-border workers); and
- crews of airplanes, ships, trucks or trains stopping off or laying over in other countries.
11.27 Purchases of goods and services consist of expenditures for food, lodging, recreation, gifts, incidentals and local transportation purchased in the country of travel. Travel statistics exclude passenger fares for international transportation (which are included in transportation services), as well as spending of diplomats and military personnel posted for more than one year in their host country.11 No upper limit is spelled out for health and education travel. Travel imports represent the purchases of goods and services by Canadians when travelling abroad while travel exports represent the purchases of goods and services of foreigners while travelling in Canada.
11.28 Transportation12 services include revenues (receipts) and expenses (payments) at the international level arising from transportation of goods and cross-border travellers, as well as from supporting services related to transportation.
11.29 Canadian transportation receipts (exports of transportation services) cover passenger revenues of Canadian carriers (mainly airlines) from cross-border fares purchased by foreign travellers. It also includes freight revenues earned from non-residents by Canadian carriers for transporting:
- Canadian exports beyond the Canadian border;
- Canadian imports to the Canadian border; and
- Foreign-owned goods in transit in Canada and between foreign ports.
11.30 Revenues earned by Canadian residents chartering vessels to non-residents are also included, as well as those earned by Canadian residents providing port services in Canada to foreign air and shipping carriers.
11.31 Conversely, Canadian transportation payments (imports of transportation services) cover cross-border passenger fares purchased from non-resident carriers (mainly airlines) by Canadian travellers, as well as freight expenses paid to non-resident carriers for transporting:
- Canadian imports beyond the Canadian border;
- Canadian exports to the Canadian border; and
- Canadian-owned goods between foreign ports.
11.32 Expenses of Canadian residents chartering vessels from non-residents are also included, as well as expenses incurred by Canadian carriers receiving port services abroad, largely from air and water-bound carriers.
11.33 Cross-border trucking with the United States is a special transportation case as discussed in previous paragraphs. The value of imports and exports of transportation services is determined by the residence of the carrier and the location from which the transportation services are provided. Services provided by Canadian truckers beyond Canadian borders are considered to be exports of transportation services, while services provided by U.S. truckers in Canada are considered as imports of transportation services (see Table 11.2).
11.34 International trade negotiations—which extended in recent years to cover services—increased the demand to provide detailed breakdowns of service categories as well as data for individual countries. Prominent among cross-border services13 are those described in Canadian statistics as commercial services.14 Canadian statistics on cross-border commercial services are produced for over 26 categories based on the international standards initially set out by the International Monetary Fund and subsequently extended by the Organisation for Economic Cooperation and Development (OECD) and Eurostat (the statistical arm of the European Union). This breakdown is based on the Central Product Classification (CPC),15 whose main objective "is to provide a framework for international comparison of various kinds of statistics dealing with goods, services and assets."16
11.35 Government services17 cover international transactions arising largely from official representation and military activities, as well as commercial activities of governments not covered in other accounts. They include expenses of staff at embassies and missions and of individuals stationed on military bases. Receipts (exports of government services) chiefly comprise expenditures in Canada by foreign governments and their staff recruited abroad. Receipts also include overheads to administer official assistance. Payments (imports of government services) cover expenditures abroad of both the Canadian federal and provincial governments and their staff recruited in Canada. Beginning with the reference year 1996, separate information is available on construction, existing building and land transactions for both embassy and other use by the Government of Canada abroad. Construction is now included in imports of commercial services while purchases of existing buildings continue to be treated as imports of government services. In conformance with international standards, land transactions are classified as non-produced non-financial assets in the capital account.
11.36 Outlays by the federal government for contributions to the operations of international organizations and programs are excluded and shown in current transfers, as per international standards. For provincial governments, the data exclude receipts and payments by provinces for the promotion of tourism, which are included in commercial services. To the extent that the source data—official government records—are on a cash basis, they are incorporated as such in the balance of payments accounts and not on an accrual basis, as called for by international standards.
Financial services indirectly measured (FSIM)
11.37 Financial services indirectly measured arise when a financial institution such as a bank or finance company channels funds to lenders and/or to borrowers. Most financial institutions do not charge explicitly for these services. Instead, they pay lower interest rates to their depositors than the rates they charge to their borrowers. The services they provide to their depositors and borrowers have to be measured indirectly. These services are referred to as financial services indirectly measured (FSIM).18
11.38 There is a notional reference rate of interest at which lending and borrowing can take place directly between a lender and a borrower, satisfactory to both parties. This reference rate represents the pure cost of borrowing funds—that is, a rate from which the risk premium has been eliminated to the greatest extent possible and which does not include any financial services indirectly measured. In principle, it is the difference between the interest rate paid to depositors or paid by borrowers and the reference rate that enables the calculation of financial services indirectly measured (FSIM).
11.39 Table 11.3 shows the logic in the calculation of FSIM for imports. In this case, FSIM is paid by Canadian residents to non-residents, related to a) deposits held by Canadians in other countries and b) loans contracted by Canadians in other countries' financial institutions. Table 11.3 shows the case of a Canadian resident having a deposit of $600 in a Swiss bank paying an 8% interest rate on deposits. This person receives $48. But, after making the calculation using a reference rate of 10%, it is apparent that this person should have received $60 in interest and paid $12 of service charge. Borrowing is similar.The Canadian resident paid $60 in interest on a loan of $500 to a foreign bank, but this $60 can be split into an interest portion of $50 and a service charge of $10. Overall, Canadian residents paid $22 of service charges to foreign financial institutions. This amount would appear as international imports of FSIM in the Income and Expenditure Accounts.
11.40 Table 11.4 presents the situation for international exports. Implicit service charges paid by non-residents to Canadian residents on deposits and loans in Canadian financial institutions are measured. FSIM related to deposits of foreign residents in Canadian financial institutions are valued at $20. This service charge corresponds to the difference between what was really paid by banks to the non-residents (8% of its $1,000 deposits) and the interest that should have paid if the reference rate had been used (10% of its $1,000 deposits). The other part of the FSIM calculation relates to an $800 loan contracted by a non-resident in a Canadian financial institution. The table shows that the non-resident paid $96 for this loan (at a 12% rate). In reality, this amount is split in two: $80 for the interest portion and $16 of administrative charges related to the loan.
Link between the Balance of Payments and the Income and Expenditure accounts
11.41 Every component of the current account of the Balance of Payments is present in the Income and Expenditure Accounts. However, the link between both accounts is not straightforward. One difference is related to the financial services indirectly measured (FSIM). A second is related to the treatment of reinvested earnings on direct investment. Appendix 11A shows a full reconciliation table between the Income and Expenditure Account's non-residents sector and the Balance of Payment's current account.
Treatment of Financial Services Indirectly Measured (FSIM)
11.42 In the Income and Expenditure Accounts (IEA), financial services indirectly measured (FSIM) are explicitly shown as a service charge. In the Balance of Payments (BOP), only paid interest is shown. No distinction between the interest and service charges is made in BOP. With the upcoming BOP manual, this delineation will be included. The explicit inclusion of FSIM is equivalent to reclassifying a portion of interest as financial services. It is thus possible to reconcile the interest portion of investment income in the current account of the BOP with interest, dividends and miscellaneous investment income and receipts in the IEA of non-residents. Table 11.5 presents the data from Table 11.3 and Table 11.4 as they would appear in the BOP current account.
Financial Services Indirectly Measured and interest investment income and receipts within Balance of Payments accounts - example using fictive numbers
11.43 Table 11.6 also presents data from Table 11.3 and Table 11.4 in the context of the Income and Expenditure non-residents sector accounts.19 In this case the investment income and receipts appearing in the Balance of Payments are split into an implicit service charge (FSIM) and investment income. As shown in the table, this investment income can be presented in two ways. It can be shown net of the implicit charges or including investment income and implicit charges (as is done in BOP) plus an adjustment for FSIM. Both methods yield the same income and outlay, but the first one is a more appropriate theoretical presentation while the second one is a more practical approach. In practice the second one is used in the Income and Expenditure Accounts.
Financial Services Indirectly Measured and interest investment income and receipts within Income and Expenditure Account of non-residents sector - example using fictive numbers
Treatment of reinvested earnings on direct investment
11.44 In the Balance of Payments current account, one flow of investment income is reinvested earnings on direct investment. As an example, Company A in the United States, is 60% owned by a Canadian corporation, makes $10.0M in profits and is not distributing dividends. In this example, 60% of profits ($6.0M) are imputed reinvested earnings.20 As such, it is classified as receipts under the investment income aggregate of the BOP current account with a counterpart entry in the financial account.
11.45 This imputed flow of investment income is not counted as part of the income and outlay account of the non-resident sector. That is because, in this account, saving must reflect current income and current outlay of the non-residents sector arising from actual transactions on goods and services or transfers, in order to be consistent with the other sectors.
11.46 As such, the reconciliation of the balance of payments current account with the income and outlay account of non-residents is done after the balancing item (net saving) is measured in the income and outlay account (see the reconciliation table in Appendix 11A).
1. For a more detailed description see Canada's Balance of International Payments and International Investment Position: Concepts, Services, Methods and Products, catalogue no. 67-506.
3. Commission of European Communities, International Monetary Fund, Organization for International Cooperation and Development, United Nations, and the World Bank. System of National Accounts1993, manual prepared under the auspices of the Inter-secretariat Working Group on National Accounts, Brussels/Luxembourg, New York, Paris, Washington, D.C., 1993, 773 p.
6. The FOB price can be regarded as the purchaser's price that would be paid by an importer taking delivery of the goods after these have been loaded onto his own carrier (or other carrier) at the exporter's frontier after payment of any export taxes or the receipt of any rebates (SNA 1993, paragraph 14.37).
10. See page 41 of Canada's Balance of International Payments and International Investment Position: Concepts, Sources, Methods and Products, catalogue no. 67-506.
11. These personnel remain residents of their home countries, and their spending in the host countries is included in trade in government services; however, a visit in the interim, whether on leave or on official business, is considered part of travel.
12. See Chapter 5 of Canada's Balance of International Payments and International Investment Position: Concepts, Sources, Methods and Products, catalogue no. 67-506.
14. For more commercial services information, see Canada's Balance of International Payments and International Investment Position: Concepts, Sources, Methods and Products, catalogue no. 67-506, Chapter 6.
17. See Canada's Balance of International Payments and International Investment Position: Concepts, Sources, Methods and Products, catalogue no. 67-506, Chapter 7.
18. See paragraph 7.89 for further explanation.
19. See Table 14 from the National Income and Expenditure Accounts, catalogue no. 13-001.
20. While there are no actual flows, or remittances, the income flows are deemed to have occurred. An imputation is required to take these deemed income flows into account. A further offsetting adjustment is required in the BOP financial account. Specifically, the imputed re-investment is treated as additional acquisitions of direct investment equity in the BOP financial account. As re-invested earnings are not included in either the IEA income and outlay account or the capital account, the IEA sector account financial transactions also do not reflect the imputed equity flows.
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