Download 13. Goods for processing

Goods for processing
Training Workshop on 2008 SNA for ECO Member States
14-17 October 2012, Tehran, Islamic Republic of Iran
GULAB SINGH
United Nations Statistics Division
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Introduction
 With globalization and outsourcing, it is becoming more
common to have parts of a production process conducted
in different economies.
 Firms are increasingly sending their material to an
affiliate or non-affiliate for processing.
 Sometimes the material (raw materials or semiprocessed goods) is sent to firms within the domestic
economy; sometimes the material is sent abroad.
 The process of sending material for processing is
called "goods sent for processing".
 This practice is very common in industries such as
chemicals, manufacturing of electronic and metal
goods.
Treatment in 1993 SNA and BPM5
 Both the 1993 SNA and BPM5 treated goods that were
sent abroad for processing and then returned to the
same country as undergoing an effective change of
ownership – treatment based on physical movement of
goods basis
 The goods were therefore recorded in exports and
imports when they leave the first country and again
when they return to it.
 The country undertaking the processing was shown as
producing goods which were valued as their full value,
even though the processor never has to pay for the
value of the goods on entry.
 Transactions are imputed.
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Treatment in 1993 SNA and BPM5 - Example
 An enterprise in Country A owns raw materials/semifinished goods valued at 80 units.
 In period 1, the raw materials/semi-finished goods are
sent to an enterprise in Country B for
assembly/processing.
 In period 2, enterprise in country B undertakes the
processing.
 In period 3, finished goods are returned to the
enterprise in country A, which pays a 20 unit processing
fee to the enterprise in country B.
• Enterprise in country A retains ownership at all
times.
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Country B:
Processing
(Contractor)
Country A
(Principal)
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1993 SNA and BPM5 treatment
(Gross approach/Imputed change of ownership)
Country A:
 Period 1:
• Exports of goods 80
• Imputed reduction in
inventories of 80
• Imputed increase in
accounts receivable of 80
 Period 3:
• Imports of goods 100
• Imputed increase in
inventories of 80
• Imputed reduction in
accounts receivable of 80.
Country B:
 Period 1:
• Imports of goods 80
• Imputed increase in
inventories of 80
• Imputed increase in accounts
payable of 80
 Period 3:
• Exports of goods 100
• Imputed reduction in
inventories of 80
• Imputed reduction in
accounts payable of 80
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Change from 1993 SNA and BPM5 treatment –
Why?
 Both the 1993 SNA and BPM5 treated goods that were
sent abroad for processing and then returned to the
same country as undergoing an effective change of
ownership – treatment based on physical movement of
goods basis
 The goods were therefore recorded in exports and
imports when they leave the first country and again
when the return to it.
 The country undertaking the processing was shown as
producing goods which were valued as their full value,
even though the processor never has to pay for the
value of the goods on entry.
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Change from 1993 SNA and BPM5 treatment –
Why?
 With the increasing importance of offshore processing, this
treatment is increasingly questionable.
 Case study:
• Small Country C assembles personal computers on a fee for
processing basis for an owner in Large Country U.
• Large stock of computer chips, owned by business in Country
U, held in storage in Country C for future assembly/processing.
• Owners in Country U decided to scrap the entire stock of
existing chips to make way for a new model/version.
• Result:
 If followed 1993 SNA and BPM5,
• Country C’s trade balance much worse (chips imported, but
never exported).
• Huge holding loss experienced by Country C.
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2008 SNA and BPM6 treatment
 Transactions should be based on ownership principle.
• The SNA shows transactions, not physical movement of
goods.
• The SNA concept of ownership and balance sheet is to show
assets with the entity that has the risks and benefits of
ownership, not physical possession.
 Export and imports should be recorded on a strict
change of economic ownership basis.
 Imports and exports of goods sent abroad for
processing are no longer recorded. Processing fees
are recorded as service (net basis of recording)
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Goods for processing – domestic economy
 Though goods sent for processing are mostly
discussed in an international context, the phenomenon
also occurs on domestic markets.
 When goods move between affiliates (establishments
of the same enterprise), there is no change of
ownership since the entities have the same owner.
 Where goods move from A to its affiliate B and then B
sells the processed goods on the open market, a
change of ownership must be recorded.
• In such a case, according to the 2008 SNA, establishment A is
viewed as taking the risks related to production, determining
the price of the processed goods and finding buyers for them.
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2008 SNA and BPM6 treatment
(Net approach/No imputations)
Country A:
 Period 2:
• Imports of processing
services 20
Country B:
 Period 2:
• Exports of processing
services 20
• Goods stay on
Enterprise A’s balance
sheet all the time.
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Example


Country A sent to country B of raw
materials worth 80 units for
processing.
100 units worth of finished goods are
sent back to country A after
processing.
1993 SNA
Country A
(Principal)
Export of
goods
80
Import of
goods
80
Import of
goods
100
Export of
goods
100
A 80 B (proc 20)  A (100)


The 1993 SNA treatment is based on
physical movement of goods
The 2008 SNA treatment is based
on change of ownership principle
Country B
(Contractor)
2008 SNA
Country A
(Principal)
Country B
(Contractor)
Export of
goods
100
Import
0
Import of
services
20
Export of
services
20
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Effects on SNA accounts
Current account
 Under the 2008 SNA, the imports and the exports of
goods sent for processing are no longer recorded.
 The processing fees are recorded, as a service and the
import (export) of the principal (contractor).
 In principle, the overall current account balance is not
affected.
 However, trade in goods will diminish while trade in
services will increases by the same amount.
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Effects on SNA accounts
Production account
 Under the 1993 SNA, the value of goods sent for
processing entering the country of the contractor is
allocated to intermediate inputs of the receiving industry.
 The value of gross output of that industry is equal to the
value of the material and the processing fee.
 In the 2008 SNA, the value of the goods to be processed
is not included in intermediate consumption.
 Value added in the processing economy is unaffected.
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Effects on SNA accounts
Accumulation account
 1993 SNA treatment implies a need to record a change
in inventories in the capital account and balance sheet
of the processor if processing is unfinished at the end of
the accounting period.
 Since the capital account and the balance sheet of the
Principal country will also be adjusted for inventories,
imputations will be necessary in the financial account of
both countries to prevent errors and omissions in BOP
equal to the value of the goods sent for processing.
 Under the 2008 SNA, no imputations will be necessary,
 Though better information on business practices related
to trade in goods will be needed.
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Data sources
Trade data
 The main source for the compilation of the BOP is the
merchandise trade statistics, recorded at physical
movement of goods basis.
 The trade data may be coded to identify goods for
processing as well as goods resulting from such
processing.
• Identify goods that are declared as "for processing“ when
they clear customs, and use the information to adjust
merchandise trade estimated on a balance of payments
basis
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Data sources
Sample surveys
 In the production surveys, for a principal unit, new
questions need to be added covering:
• Value of goods of own manufacture that are sent abroad or
outsourced domestically for processing,
• Post processing value when the goods are returned, and
• Fees paid to foreign and domestic contractors
 Adjusted for timing and transaction costs, make up the
difference between the two values.
 The two gross values, summed across all industries,
could be compared with the tagged data obtained from
customs sources to enhance data quality and
consistency of a given class of goods.
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Goods for processing – A sum up
 Change of economic ownership: Export and imports should be
recorded on a strict change of economic ownership basis.
 Net basis of recording:– processing fees are recorded as service.
 Goods sent abroad for processing:
• Imports and exports are no longer recorded.
• Processing fees are recorded as service and export of the contractor.
 Effects on SNA accounts:
• Overall current account balance is not affected - trade in goods will
diminish while trade in services will increases by the same amount,
• Value added in the processing economy is unaffected, and
• Accumulation accounts - no imputations will be necessary,
 Data Sources:
• Merchandise trade data - identify goods for processing as well as
goods resulting from such processing.
• In the production surveys, for a principal unit, new questions need to be
added
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Thank You
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