Introduction ²

In 2004, the large increase in the Current Account surplus was generated by a much larger surplus in goods combined with a lower deficit on investment income. On the other hand, the deficit for services ³ increased. The resulting Current Account surplus was $28.8 billion in 2004 (see Chart 1 ), the sixth consecutive annual surplus.

In 2004, exports of services increased by 3.9% to $61.8 billion. The main contributor to this rise was higher receipts for travel. Imports for total services experienced an increase of 5.0% reaching $74.5 billion. The services deficit was $12.7 billion, its worst performance in 10 years.

A-Travel

The deficit - the difference between spending by Canadians abroad and spending by visitors to Canada – remained virtually unchanged at $4.1 billion in 2004 and accounted for one third of the total deficit for services.

After suffering numerous setbacks in 2003, revenues from foreign tourists have advanced and are now back at the 2002 level of $16.7 billion. The 13.3% increase in receipts from personal travel was more than offset by a 14.8% rise in similar payments which kept the deficit at the previous year level. While Americans still make up the bulk of tourists visiting Canada, total receipts from non-US visitors increased by 20.1%. The number of visitors from countries other than the United States increased 24.3% in 2004 after 3 years of decline.

Travel payments have increased to $20.8 billion for 2004. Over the years, personal travel by Canadian residents, for other purposes than for health or education, has been gradually shifting to non-US destinations which now account for 48.3% of these expenditures up from 33.4% in 1994.

Numbers of same-day trips to the United States have dropped consistently since their peak in the early 90s, contributing to the lower share of spending allocated to that country. Spending on personal trips to American destinations increased by 11.7% in 2004 but by 18.8% for other destinations.

More details on travel issues are available in the quarterly National Tourism Indicators ⁴ publications as well as in the publication, International Travel. ⁵

B-Transportation

In 2004, the transportation services deficit increased by 6.5% to reach $4.8 billion, the largest deficit of all services. The deficit was mainly due to a 7.3% increase in payments for water transportation through higher freight on imports and 19.2% for air transportation because of higher operational expenditures. Increases in fuel prices pushed up the cost of transportation.

In 2003, revenues related to air transport were severely hit by the same shocks that affected the travel component. Despite a 21.3% jump in 2004, revenues were still around the 2002 results. Most of the increase in 2004 resulted from higher revenues of Canadian airlines on foreign passenger fares and larger expenses by foreign airlines in Canada. After dropping for 2 consecutive years, water transport receipts increased by 12.6% due mainly to higher port expenditures from foreign shipping lines.

C-Commercial Services

• 2003 data are based mainly on a large annual survey which includes details on type of service, country, and affiliation when applicable.
• 2004 data are based mainly on a quarterly sample survey which provides fewer details.

1. Summary for 2004

Commercial services ⁶ consist of a broad group of activities ranging from telecommunications, insurance and management to royalties. Commercial services posted a deficit of $4.3 billion in 2004 compared to $3.4 billion in 2003. In order of size, the components with the largest deficits in 2004 were royalties and licence fees, tooling and other miscellaneous services and insurance services.

Computer and information services followed by architecture, engineering and other technical services as well as research and development posted the largest surpluses. As a group their combined surplus fell to $4.4 billion in 2004 down form its high of $5.9 billion in 2000. This was despite the $0.5 billion gain for the architectural, engineering and other technical services in 2004.

2. Details for 2003

Details on commercial services by affiliation and by geographical area are presented up to 2003 as these details are based mainly on annual surveys for which results are not yet available for 2004.

a) Affiliation ⁷

The major source of revenue for Canada’s commercial services trade has historically come from transactions with arms length clients. In 2003, these types of transactions generated 58.4% of service exports. In contrast, service importers received a smaller share of their foreign supply from third parties (45.8%) than from related parties (54.2%).

As a result, the 2003 deficit in transactions with related parties reached $6.0 billion while there was a $2.7 billion surplus with non-affiliated parties. Transactions with non-affiliates have been in surplus since 1995.

In 2003, the largest deficit on transactions with affiliated parties came again from royalties and license fees where payments were three times larger than receipts for that year. Tooling and miscellaneous services have also continued to register large deficits during the past years despite the downward revision to both payments and receipts since 2001. Managements services which historically had large deficit, posted their smallest deficit since at least 1981, (the first year theses data were released).

The largest surplus in transactions with affiliates was again in research and development (R&D). The intangible nature of the outputs from R&D means that it is largely done within global enterprises. Computer services have also shown and important surplus.

Still for 2003, the global surplus for unaffiliated transactions was largely generated through surpluses in computer services and in architectural and engineering services while the largest deficits came from reinsurance services and financial services.

b) Geographical area

Commercial service dealings with Canada’s principal trading partner, the United States, have always been in deficit. Deficits with the United States in 2003 and previous years originated from transactions between related parties. Commercial services accounts form a smaller share of receipts and payments with the United States when compared to trade in goods. In 2003, transactions with the United States accounted for 61.5% of receipts and 67.3% of payments for Commercial Services. In comparison, receipts and payments for American goods account for 82.6% and 70.1% respectively of the total exports and imports.

The deficits in commercial services with the United States continue to be widely spread. The combined category of royalties and licence fees has shown the largest deficits during the last two years. The deficit in tooling and other miscellaneous services was close to $2.0 billion. Computer services and miscellaneous services to businesses generate surpluses with the United States.

Foreign direct investment in Canada is mostly from the United States. Foreign direct investment measures the investment by a non-resident enterprise that has been made with the intent of having a significant influence in the affairs of a resident enterprise. Therefore, it is not surprising that most payments for commercial service imports are with affiliated parties in that country. The majority of total commercial service payments (56.1%) that go to the United States are with affiliated companies.

Canada also experiences consistent deficits with the Caribbean ⁸ countries due to the large deficits in insurance services with Barbados and, in a lesser measure, with Bermuda.

Canada has experienced deficits with Central and East Asia in recent years. The large royalties and licence fees payments to Japan contribute to these deficits. However, Canada has showed surpluses with the other Asian countries than Japan and Hong Kong. A large share of these surpluses was generated by architectural and engineering services. Unlike trade in services with China, Canada reported a record deficit in merchandises ⁹ with this country in 2004. Less than 7% of the Canadian trade in commercial services is performed with Asian countries.

The above deficits were partly offset by surpluses with European countries, Africa and South America. Ireland and Sweden led the European surplus. Since 2000, Canada has experienced a surplus with the United Kingdom especially through computer services and computer software royalties. South American services trade were mainly in the area of engineering, R&D and construction. There have been relatively large transactions related to architectural and engineering in Africa and Oceania.

C-Commercial Services trade by industry ¹⁰

Industries generating a deficit

For the past 30 years, commercial services have reported a deficit. There are significantly different patterns by industry. For the most part, industries mainly producing commercial services reported a surplus in 2003. The overall deficit is generated by:

• companies producing mainly goods and
• finance and insurance industries

Companies mainly producing goods reported the bulk of the deficit in commercial services transactions. They account for 15.6% of receipts and 32.4% of payments. Goods producing industries are dominated by manufactures reporting secondary sales of commercial services. In 2003, manufacturing industries reported a deficit of $6.1 billion in commercial services. This deficit was created by a huge drop in tooling activities and high payments for patents. Manufacturing industries are characterized by a high levelof trade between affiliated companies, 78.4% of exports and 87.6% of imports in 2003 commercial services.

After manufacturing, the finance and insurance industries remain the largest contributor to the overall commercial services deficit. The main leaders were life and non-life reinsurance services with deficits of more than $1 billion each. There was also a sizeable deficit (-$0.7 billion) in commissions on securities trading which is included under “Other financial services”.

Industries generating a surplus

The largest surplus is in the professional, scientific and technical services sector which had a surplus of $4.6 billion in 2003. The information, culture and arts sector followed with a surplus of $1.5 billion.

The main types of services exported by these industries are: computer, architecture and engineering services and finally, audio-visual and management services. In terms of affiliation, most dealings were with non-affiliated companies.

It is interesting to note that the information and communication technology (ICT) sector also posted large surpluses. The ICT sector is defined as a special aggregation of NAICS industries. This sector comprises industries primarily engaged in producing goods or services, or supplying technologies, used to process, transmit or receive information.

D-Revisions

Data have been revised for reference years 2001 to 2004. This is in keeping with the general policy to revise National Accounts statistics back four years at the time of the first quarter data release. Broadly, the revisions reflect more current sources of information coming from annual surveys and administrative data that were not available at the time of the previous release.

Exports of commercial services were revised down particularly in 2001 and 2002. Tooling services (from 2001 to 2004) and research and development (from 2002 to 2004) showed large reductions but those were offset in 2003 and 2004 by increases mainly in management services, computer services, and royalties.

Imports of commercial services have been reduced from 2001 to 2003. The largest drop appeared in 2002 when the total imports were reduced by $1.1 billion. Sizeable corrections were made in the tooling services and to research and development. In 2004, the imports were raised due mainly to an upward change to computer and information services and to royalties.

Large downward revaluations of the services of tooling, engineering, launching, and obsolescence (TELO) of motor vehicle manufacturers have been made to both exports and imports of this category of commercial services from 2001 onward. These revisions followed research and discussions with motor vehicle manufacturers that led to a better understanding of the way services related to production and trade were transacted in that industry. This research revealed that some of these production costs are included in the price of cars and parts whereas they had been treated as separate services in the past.

Globally, the deficit for insurance services has been reduced in 2002 and 2003 but slightly increased in the other years. In 2003, premiums and claims assumed from non-resident insurers and those ceded to them have all been increased for non-life reinsurance but reduced for life reinsurance. The 2004 results are preliminary and based on a small sample of respondents.

Revisions have been made, back to year 1999, to the allocation of commercial services by industry based on NAICS. More accurate information of the main economic activity of some respondents provided a slightly different distribution of services by industry.

In transportation, receipts were decreased from 2002 to 2004, especially due to lower revenues on auxiliary services supplied in Canada to foreign shipping operators and foreign airlines. Passenger fares paid by foreign travellers to Canadian airlines have been revised downward for the fourth quarter of 2004.

On the other side, imports of transportation services were increased for all of the four years. Freight payments on ocean shipping via the United States were readjusted upward to be closer to the U.S. estimate. A new component of payments for the launching of satellites was added for the year 2002. Expenditures by Canadian airlines on auxiliary services were raised in 2002 but reduced the following year. Finally, the passenger fares were increased in the 2004 with the final figures of the fourth quarter.

Revisions to government services have been relatively small from 2001 to 2004 except for some military expenses for which better information from the public accounts was used back to 2001.

There have been some upward revisions to the payments on education-related travel in 2003 and 2004 leading to a bigger deficit for 2003. However, for 2004, deficit was slightly reduced due to the revisions to the fourth quarter figures.

Foreign affiliate trade statistics ¹²

2003

Goods and services can be sold in the international market either through cross-border exports or through foreign affiliates. Exports involve Canadian companies producing the goods and services in Canada and exporting them to the foreign markets. Sales through foreign affiliates involve establishing a commercial presence in the foreign market from which to conduct business transactions. At present, only the operations of Canadian-owned foreign affiliates abroad (also known as outward FATS) are being compiled. However, foreign affiliate trade statistics can also be collected to measure the operations of foreign-owned affiliates in Canada (inward FATS).

FATS data are now available for reference years 1999 to 2003. While the focus may be on the delivery of services, the data related to goods-producers are also included to provide an overall view of foreign affiliate operations. Furthermore, these data can be more completely compared with those of both services and goods exports. Specifically, the sales and employment data of these foreign affiliates are presented below. Additional information on key FATS terminology is available in the Glossary at the end of this article.

Lower foreign affiliate sales in the U.S. drive down overall sales

Sales of goods and services abroad by Canadian-owned foreign affiliates totaled $324 billion CDN in 2003, down $33 billion or 9% from 2002. Sales of foreign affiliates declined for the third consecutive year, primarily due to a 12% drop in sales figures for U.S. affiliates. The average 12 % appreciation of the Canadian dollar vis-à-vis the US dollar in 2003 resulted in lower values, as US-dollar denominated sales figures were converted into Canadian dollars. While the United States recorded a 4.9% growth in nominal GDP in 2003, the highest of all G-7 countries, several corporate restructurings resulted in significant U.S. affiliates no longer being owned by Canadian firms which contributed to the decrease in the level of sales in the United States.

Employment in foreign affiliates at 885 thousand was down 13 thousand from 2002 or just over 1%, much lower than the decline in sales.

There were 3,677 foreign affiliates in operation in 2003. On average, each affiliate generated $88 million in sales and employed 241 individuals.

Foreign affiliate sales relative to gross domestic product (at market prices) declined from 31% in 2002 to 27% in 2003. Nevertheless, the ratio does confirm the significant commercial activity of these affiliates in foreign markets.

Sales and employment levels of service-providers drop

In 2003, sales and employment decreased considerably for foreign affiliate service-providers. At $113 billion CDN, sales of service-providers were down 17% from 2002. The decreases were primarily driven by a few large closures of existing foreign affiliate operations in the United States. Finance & insurance (down $13 billion or 28%), Information and cultural industries (down $4 billion or 13%) and Transportation and warehousing (down $3 billion or 26%) led the decline in sales. Parts of these declines were also tied to less robust sales in some industries as personal consumption expenditures on services in the United States were lower in 2003 compared with 2002.

Employment of foreign affiliate service-providers dropped 8% to 311 thousand in 2003. Information and cultural industries (down 13 thousand or 16%), Transportation and warehousing (down 8 thousand or 26%) and Finance & insurance (down 6 thousand or 14%), were the largest contributors to the decrease in employment levels. As a partial offset, the Wholesale trade industry experienced an increase of 9 thousand in its level of foreign affiliate employment.

Foreign affiliate goods-producers experienced a more moderate decrease in sales of $9 billion or 4% to $211 billion in 2003. The Manufacturing industry fully accounted for the decrease, with the Computer and electronic product manufacturing sector playing a significant role in the decline.

In contrast, employment in foreign affiliate goods-producers increased 13 thousand or 2% to 574 thousand in 2003. A significant portion of the increase relates to acquisitions of foreign affiliate operations in Europe which occurred in the last quarter of 2003.

The sharp fall in service-provider sales and employment created the greatest differential in the goods/services split in the last five years. The goods/services split for both sales and employment shifted from 61/39 in 2001 to 65/35 in 2003.

Sales and employment, by industry

Sales and employment decrease in the United States and the U.K.

Foreign affiliate sales in the United States accounted for 59% of the total in 2003, down from 61% in the previous year. Sales in the European Union (excluding the U.K.) accounted for 13% of the total, up from 11%. In the remaining regions, foreign affiliates in the U.K. accounted for 9% of sales; affiliates in Other OECD countries accounted for 7%; and affiliates in Other countries accounted for 12%.

The story for foreign affiliate employment was similar. Only the European Union (excluding the U.K.), and Other OECD countries experienced increases in their employment levels, 7% and 19% respectively. The percentage of foreign affiliate employment in the United States, at 55%, was at its lowest level since these estimates were first released for 1999.

Goods-producers bigger but not necessarily better than service-providers

For 2003, there was a close to even split between the number of foreign affiliate goods-producers and that of service-providers. Of the 3,677 foreign affiliates, 1,894 or 52% were goods-producers while 1,783 or 48% were service-providers. However, goods-producers generated $211 billion in sales or $111 million per affiliate, whereas service-providers accounted for only $113 billion in sales or $63 million per affiliate.

This may be in part due to the size of the operation or foreign affiliate. In 2003, goods-producers had an average of 303 employees per foreign affiliate, considerably higher than the service-provider average of 174 employees. As a result, the measurement ratio of sales per employee between good-producers and service-providers are very close at $367 thousand and $364 thousand per employee, respectively.

United States records highest average sales per foreign affiliate

The United States accounted for 39% of the number of foreign affiliates in 2003. Foreign affiliates in the United States also had the highest average sales per affiliate, that being $133 million. The United Kingdom was a reasonably close second with average sales of $119 million per affiliate.

Average employment per affiliate in the United Kingdom was highest at 349 employees per affiliate, followed closely by the United States at 334 employees per affiliate. These ratios were much higher than the average for all regions of 241 employees per affiliate.

Value of exports down for third consecutive year

As with foreign affiliate sales, the value of cross-border exports declined for the third consecutive year. Total exports decreased $17 billion to $460 billion in 2003, while foreign affiliate sales dropped $33 billion to $324 billion.  Lower sales by foreign affiliate service-providers were the main contributor to the decrease in foreign affiliate sales, whereas lower goods exports were the primary factor in the decline in exports in 2003. This marks the 5 ^th consecutive year that a similar pattern has been exhibited between foreign affiliate sales and cross-border trade.

Both exports of goods and sales by foreign affiliate goods-producers were significantly lower on account of the manufacturing sector. In 2003, exports of goods were $400 billion, down $14 billion from the previous year, while foreign affiliate sales by goods-producers decreased $9 billion to $211 billion.

Within the services sector, exports of services decreased $3 billion to $60 billion in 2003, whereas service-providers saw their sales decrease much more considerably, from $137 billion down to $113 billion. Sales by foreign affiliate service-providers were down sharply in Finance & insurance and to a lesser extent within Transportation and warehousing. On the other hand, exports of services were down primarily in both the Travel and Transportation of services accounts.

Foreign affiliate sales in Europe more than double exports to Europe

Foreign affiliates in Europe sold $71 billion in goods and services in 2003, while total exports to Europe only amounted to $34 billion. Part of the reason for strong affiliate sales in Europe is that Canadian direct investment in Europe has more than doubled since 1999. There was also a considerable difference in the geographic distribution with respect to affiliate sales and goods exports to Europe. Goods exports to Europe only represented 6% of all goods exports, while the percentage of sales by goods-producers in Europe was 24% of all affiliate goods sales.

As seen in previous years, goods exports continue to be heavily concentrated in the United States, where 82% of goods exports went in 2003. Sales by goods-producers were much less concentrated with only 56% of all foreign affiliate sales by goods-producers transacted in the U.S.

The geographic distribution of services exports and sales by foreign affiliate service-providers differed only marginally in 2003. The largest difference was in the  United States where 59% of services exports were sent, while sales by foreign affiliate service-providers accounted for 65% of their total.