Reconciliation study

Canada and China have undertaken a merchandise trade reconciliation study, covering 2002 and 2003. This study builds on the first Canada-China study which covered 1998 to 2001. Because of the close economic link between China and Hong Kong, some Hong Kong trade data were used in both studies.

The 2002/03 study identified the major differences in the trade data between Canada and China. It also calculated estimates to better reflect the actual trade occurring between the two countries. Overall, indirect trade was the primary cause of the differences found in data between the two countries.

Import data more reliable than export data
Significant differences between trade figures
Sources of discrepancy
Canada's reconciled trade deficit smaller than reported
Conclusion

Import data more reliable than export data

Both Canada and China derive their trade statistics from administrative data provided by their respective customs agencies. Customs offices are generally more attentive to goods entering the country as opposed to leaving because of the requirements of tariff and tax assessments and the application of trade agreements.

Consequently, import data are usually more reliable than export data. Generally, exports to country A reported by country B should not exceed imports from country B reported by country A.

Canada's two-way trade with China, as reported by Canada, reached $23.3 billion in 2003, up 16% from the previous year. Canadian trade with China was import-driven with imports representing almost 80% of total trade. Both imports and exports increased by 16% over the previous year: imports grew from $16 billion to $18.6 billion and exports from $4.1 billion to $4.8 billion.

China reported that its total trade with Canada increased 13% from $12.5 billion in 2002 to $14 billion the following year. Exports accounted for roughly 56% of all trade with Canada. In the two years under study, exports increased 17% from $6.8 billion to $7.9 billion and imports were up 18% from $5.7 billion to $6.1 billion.

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Significant differences between trade figures

There were significant reported differences between Canadian and Chinese trade figures. According to the official statistics, Canadian imports from China (as reported by Canada) were 2.4 times greater than what China reported as their exports to Canada.

The difference between Canadian-reported imports from China and Chinese-reported exports to Canada increased, in absolute terms, from $9.2 billion in 2002 to $10.7 billion in 2003.

In the westbound trade, Chinese-reported imports from Canada were 1.3 times higher than Canadian-recorded exports to China. In absolute terms, the gap narrowed from $1.6 billion in 2002 to $1.4 billion in 2003.

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Sources of discrepancy

Indirect trade main source of discrepancy

The study identified indirect trade as the main source of discrepancy between Canadian and Chinese trade statistics in both directions of trade.

A substantial portion of Canada-China merchandise trade is indirect. Slightly over one-third of Canadian-reported imports from China include indirect trade in both 2002 and 2003.

In the opposite direction, 22% of Chinese-reported imports from Canada were indirect in 2002, as were 17% the following year. Hong Kong and the United States are the principal economies involved. Well over half (57%) of the estimated eastbound indirect trade in 2002/03 went through the United States. In the westbound flow, almost 80% of the estimated indirect trade was through Hong Kong.

For most countries, export trade statistics are allocated to the country of final destination as known at the time of shipment. However, trade and transportation patterns can be complex and can involve one or more intervening countries en route to a final destination. Attributing trade to a country that is not the final destination of goods results in a situation in which the two partner countries credit trade to different countries. This is known as country misallocation.

For example, Canada may ship goods through Hong Kong to China, the final destination. However, as the final destination may not be known at the time of export, Canada may report this trade as being with Hong Kong rather than with China.

Meanwhile China, the last country that received the goods, will allocate this trade to Canada because the trade data are compiled on a country of origin basis. This creates a statistical imbalance.

Based on the findings of this reconciliation study, it is clear that export trade was understated in both directions.

Both Canada and China report direct and indirect trade in their import statistics. However, while China reports direct and indirect trade in its export statistics, Canada does not.

Indirect trade adjustments are applied to the partner country's export figures. This is the estimated amount of misallocated trade.

Control adjustment eliminates double counting

Canadian export statistics do not separately record indirect trade and direct trade. Consequently, indirect trade data taken from the Chinese statistics were added to Canadian export figures.

This sometimes resulted in Canadian exports exceeding the reported Chinese imports, implying that the export adjustment is too large because of double counting. Accordingly, the adjustments are reduced by a 'control' factor to ensure that adjusted Canadian exports do not exceed Chinese reported imports. In the westbound flow, the estimates for the 'control' values were $144 million in 2002 and $44 million the following year.

Price mark-ups complicate analysis

Indirect trade further complicates the analysis of trade data because of the likelihood of a price mark-up. For the purposes of this study, it was assumed that goods imported into a country, and subsequently re-exported, show a higher value than those same goods imported for domestic consumption.

This could be as a result of value added by further processing, or simply because of profit taking. In consequence, differences appear in each partner country's reported value of goods, and this leads to additional discrepancies between the country's trade statistics.

Hong Kong mark-up

An adjustment for price mark-up for goods traded via Hong Kong was made in both directions of trade.

In the eastbound direction, the Hong Kong price mark-up ratio was calculated by comparing values of Hong Kong re-exports of Chinese goods to Canada with Hong Kong imports of Chinese merchandise. The estimated mark-up ratios in 2002 and 2003 were 1.43 and 1.40 respectively.

Canadian import trade via Hong Kong was adjusted to take into account the mark-up value. The amount of indirect trade attributed to the price mark-up was estimated at roughly $900 million in each year.

The Hong Kong mark-up values were determined by taking the difference between the Canadian published imports via Hong Kong and the adjusted Canadian imports via Hong Kong. The estimated values were $1.46 billion in 2002 and $1.21 billion in 2003.

The final eastbound adjustment for indirect trade via Hong Kong, taking into account the Hong Kong mark-up, was $2.2 billion in 2002 and $1.9 billion in 2003.

In the westbound trade, the mark-up ratio for goods going from Canada to China via Hong Kong was not expected to be as high as that for trade flowing eastbound. This is because these tend to be primary goods that generally do not command a high mark-up.

Using the same methodology for the westbound trade was not feasible. Therefore, data from a Hong Kong survey was used to determine mark-up estimates for westbound trade.

Based on Hong Kong's survey methodology, the mark-up ratio for re-exports to China was used to calculate the mark-up adjustment. In 2002, this value was 1.103.

The figure for 2003 was assumed to be the same as that in 2002. To arrive at an adjustment for indirect trade via Hong Kong, the mark-up ratio was applied to the Chinese indirect imports via Hong Kong, adjusted for insurance and freight.

For reconciliation purposes, the indirect trade adjustment was amended to take into account the Hong Kong mark-up. The final westbound adjustment for indirect trade via Hong Kong was $95 million in 2002 and $86 million in 2003.

United States mark-up

Canadian imports from China via the United States have grown significantly. According to Canadian statistics, Canadian imports from China via the United States are now greater than Canadian imports from China via Hong Kong. An adjustment for price mark-up for goods traded via the United States was made for eastbound trade only.

It is likely that goods travelling between China and Canada via the United States are also going through Hong Kong. Canada reported that nearly a quarter of its imports from China arrive via the United States. Chinese export statistics indicate that there is almost no trade with Canada via the United States.

This difference might be attributable to goods flowing from China through both Hong Kong and the United States before arriving in Canada, resulting in difficulties in identifying the last country of shipment.

If the Chinese goods that Canada reports as arriving via the United States are going through Hong Kong first, it is likely there is a Hong Kong price mark-up applied to the goods, and that this mark-up finds its way into the value of Canadian imports via the United States.

It was not possible to adequately assess mark-up values for goods moving from China to Canada via the United States using US trade data. Therefore, data from Hong Kong were used.

Hong Kong uses survey-based methodology to determine re-export mark-up ratios for trade going from mainland China to other countries. This ratio, which is not country-specific, was 1.34 in 2002. The mark-up ratio for 2003 was assumed to be the same. The indirect trade adjustments for trade via the United States take into consideration the price mark-up value.

The final eastbound adjustment for indirect trade via the United States was $2.4 billion in 2002 and $3.4 billion in 2003.

An adjustment for US price mark-up was not made for westbound trade. China reported that roughly 3% of this trade with Canada in 2002/03 was through the United States. While US trade data do distinguish domestic exports from re-exports, a record of the country of origin of these goods is not kept. Consequently, an adjustment to the data was not made.

The estimated mark-up values for the westbound indirect trade attributed to the United States are accounted for in the residual adjustment without any attempt to identify them from other causes of data discrepancies.

Other country mark-up

No attempt was made to estimate mark-up values for the indirect trade via other countries. In most cases, data required to calculate these price mark-ups were not available. In addition, the amount of indirect trade via other countries was relatively small, less than 3% of total trade during 2002/03.

Goods re-exported from the partner country not included in import statistics

In both directions of trade, an adjustment for re-exports was made. Export statistics are based on the country of final destination. This includes domestic goods, that is, goods originating in the country of export. It also includes re-exports, that is, goods of foreign origin that have entered a country's domestic consumption and are then sold without any substantial transformation occurring in that country.

Import data are based on the country-of-origin principle. Therefore, goods re-exported from China to Canada will not appear as a Chinese import in the Canadian statistics. However, they will appear as an export from China to Canada in the Chinese statistics.

Canada keeps track of goods it re-exports, while China does not. Estimates of Chinese re-exports were calculated using Canadian data.

Canadian re-exports amounted to $493 million in 2002 and $811 million the following year. Chinese re-exports were estimated at $106 million in 2002 and $139 million in 2003.

Valuation differences between countries

The value of goods can be reported in different ways: free on board (FOB) and cost, insurance and freight (CIF). FOB basis does not include the costs incurred to ship the goods from the point of exit to the port of destination. Goods reported on the CIF principle have the costs associated with the shipment of goods to the border included in their valuation.

Canadian imports and exports are collected and published on an FOB basis. China publishes its imports on a CIF basis and its exports on an FOB basis. Therefore, an adjustment was made to compensate for the valuation differences.

While China reports imports on a CIF basis, it does not capture insurance and freight costs separately. However, the Census and Statistics Department of Hong Kong estimates insurance and freight rates for its imports. The estimated rates for 2002 and 2003 were roughly 3%. These rates were used in the adjustments in the Chinese import data. The valuation adjustment for 2002 was $171 million; for 2003 it was $180 million.

Residual differences small

The remaining unexplained difference between Canadian and Chinese statistics may be due to several other factors: over or under-estimation of the reconciliation estimates, non-Hong Kong and non-US mark-ups, time lags, export undercoverage, other discrepancies not fully investigated, and any revisions made during the reconciliation study period.

In the eastbound direction, the residual values were $1.9 billion in 2002 and $2.7 billion in 2003. Westbound, they were $720 million and $905 million respectively.

The following tables summarize the various adjustments that were calculated in an attempt to better reflect the trade between Canada and China.

	Table 2a. Reconciliation of Canada-China eastbound merchandise trade, 2002 and 2003
	Table 2b. Reconciliation of Canada-China westbound merchandise trade, 2002 and 2003

The 2002/03 Canada - China reconciliation study points out that both sets of data required adjustments to make them comparable. Canada's trade statistics tend to overestimate the true balance between the two countries, while Chinese statistics tend to underestimate the balance.

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Canada's reconciled trade deficit smaller than reported

Canadian statistics indicated a negative merchandise trade balance of $13.8 billion in 2003, a 16% increase from the previous year. Chinese statistics indicated a positive merchandise trade balance of $1.8 billion for 2003, up 60% from the previous year. Both sets of official statistics show that China was in a surplus position, while Canada was running a trade deficit.

Reconciled data showed that Canada had a smaller trade deficit with China than official published Canadian numbers, while China had a larger surplus with Canada than official published Chinese statistics.

In 2002, Canada's reconciled trade deficit with China was $8.2 billion, 31% less than what was published. The following year it was $10.3 billion, 25% less that what was published.

	Table 3a. Canada's trade balance: published versus reconciled results, 2002 and 2003
	Table 3b. China's trade balance: published versus reconciled results, 2002 and 2003

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Conclusion

The study confirmed that the major contributing factor to the discrepancy between the Canadian and Chinese published trade data was indirect trade. Misallocated trade resulting from differences in which indirect trade is reported, as well as price mark-ups, have an impact on Canada's reported trade balance with China.

The usefulness of this reconciliation study in identifying differences has also resulted in an agreement between Canada and China to continue discussions and perhaps undertake further reconciliation work.