Chapter

II. Conceptual framework for the development of statistics on international trade in services

Author(s):
International Monetary Fund
Published Date:
March 2003
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A. Introduction

2.1. The present chapter identifies the need for a framework within which to compile statistics on international trade in services, describes relevant aspects of existing statistical systems and standards, and sets out the approach and framework adopted in the Manual.

2.2. Section II.B discusses the users’ statistical requirements addressed in the Manual. It considers both general requirements and the detailed information needs of GATS with regard to classification detail, information by origin and destination, and information by modes of supply. Section II.C carries out a review of standard statistical systems and classifications related to trade in services. This review describes relevant aspects of existing statistical standards, for which consistency with the Manual is sought, and assesses the extent to which the Manual needs to complement these standards as the best means of meeting the user needs discussed in the previous section. Section II.D describes the Manual’s approach and its main framework, as built on the SNA and BPM5 statistical systems, and identifies one area where it goes beyond these systems. The main framework has four components:

  • (a) BPM5 concepts and classification related to international trade in services (transactions between residents and non-residents);
  • (b) BPM5 extensions, providing for more detailed information on transactions by product category and by partner country;
  • (c) FATS statistics that complement BPM5, dealing with aspects of international trade in services, as broadly defined, that are out of the scope of BPM5 (e.g., transactions between residents);
  • (d) A simplified statistical approach for the treatment of modes of supply and the special case of measurement of presence of natural persons insofar as it is not covered in BPM5 trade in services.

B. Need for a statistical framework on international trade in services

1. Globalization and multilateral services trade negotiations

2.3. Rapid technological advances in the past few decades in transport, computing and telecommunications, including the development of the Internet and electronic commerce, have resulted in enterprises availing themselves of more distant resources for production and enabled them to serve ever wider markets. This trend towards globalization, reinforced by liberalization policies and the removal of regulatory obstacles to economic activities, has fuelled the steady growth of international investment and trade in goods and services. Better communications and multinational enterprises have also facilitated the movement of people, both as independent service suppliers and as employees.

2.4. It is estimated that services are the largest recipients of international investment flows, accounting for just over half of global outflows in 1999.17 Services comprised about one fifth of worldwide trade in balance of payments terms. There are currently few reliable international comparisons of FATS data, but for the United States at least, in 1998, services delivered to foreign markets by foreign affiliates of United States companies, and to United States markets by United States affiliates of foreign companies, exceeded the respective values of the exports and imports of services recorded in the United States balance of payments.18 The development of statistics on trade in services has lagged behind the reality of the marketplace. The present Manual is designed to encourage Governments to correct the data imbalance, and to arm themselves with more appropriate statistical tools for economic analysis and policy-making to match their needs, whether in economic development or trade negotiations.

2.5. An important response of the international community to the globalization of trade has been the creation of the World Trade Organization (WTO), which entered into force on 1 January 1995 as the major outcome of the Uruguay Round of multilateral trade negotiations. WTO provides a common institutional framework for the conduct of trade relations among its member countries. Its main functions are to facilitate the implementation, administration and operation of the multilateral trade agreements; to provide a forum for further negotiations; to review national trade policies; and to secure positive solutions to trade disputes. The three principal WTO agreements are the General Agreement on Tariffs and Trade (GATT) of 1994, the General Agreement on Trade in Services (GATS) and the Agreement on Trade-Related Aspects of Intellectual Property Rights. GATS is the first set of legally enforceable disciplines and rules ever negotiated and agreed at the world level to cover international trade in services.19

2.6. Trade negotiators require statistics as a guide to negotiate specific commitments in trade in services and thereafter to monitor compliance and the resulting changes for each type of service. Statistics can aid the evaluation of market access opportunities; inform decisions on negotiating priorities and strategy; support the comparison of commitments; facilitate the assessment of the extent of liberalization achieved in specific services and markets; and provide a statistical background for the settling of disputes. Private business also needs the information in order to be aware of the possibilities offered by trade liberalization. The analysis of markets for whatever purpose also requires that trade data can be linked to output data, whether in terms of activities or of products.

2.7. The Manual acknowledges the tight constraints under which statistical compilers operate, whether in national statistics offices, central banks or other institutions, as well as the need not to burden private enterprise unduly, while still providing a clear ultimate goal for a conceptually complete framework.

2. The General Agreement on Trade in Services

(a) Structure and guiding principles of GATS

2.8. GATS establishes a set of rules and disciplines governing the use by WTO member countries of trade measures in services. Such measures consist of laws, regulations, administrative actions and decisions affecting the purchase, payment or use of a service or the presence of foreign service suppliers. The GATS disciplines extend across all government levels, including non-governmental bodies in the exercise of delegated powers.

2.9. The pillars of GATS are a set of general obligations, many of which apply directly and automatically to all WTO members and all services; specific commitments resulting from negotiations, whose scope is limited to the sectors and transactions in which a member has undertaken access obligations; and several annexes covering specific sectors or trade-related matters such as the movement of natural persons.

2.10. First and foremost among the general obligations is the principle of most-favoured-nation (MFN) treatment, which forbids any form of discrimination between services and service suppliers originating in different countries. Thus, regardless of whether or not a country allows foreign competition in a sector, it must apply the same conditions to services and service providers from all other WTO member countries.20 Another general obligation (transparency) requires WTO members to publish all trade-related measures and establish national enquiry points to respond to other members’ information requests.

2.11. Specific commitments, relating to market access, national treatment and any additional undertakings, are specified and bound in national schedules as a result of negotiations.21 While the GATS requires all member countries to submit such a schedule, it does not obligate them to assume commitments in any particular sector. In turn, this leaves scope to adjust the level and structure of commitments to country specific objectives and constraints. Specific commitments may be undertaken with regard to any of the four modes of supply covered by GATS: cross border supply, consumption abroad, commercial presence, and presence of natural persons. For a given sector and mode, the relevant commitment may vary between full competition and denial of any degree of market access and national treatment. In many cases, members have opted for an intermediate solution, subjecting their commitments to particular limitations. Typical market access limitations, listed in GATS, are quota-type ceilings on the number of service suppliers, their operations or employees, and restrictions on the legal form of establishment or the participation of foreign capital. Frequently used national treatment limitations concern the eligibility of foreign suppliers for subsidies and restrictions on foreign land ownership.

2.12. The assumption of specific commitments does not prevent Governments from regulating the service concerned or the licensing of suppliers for quality purposes. GATS requires WTO members to ensure that the relevant standards, requirements and procedures do not constitute unnecessary barriers to trade and, in particular, that they are not more burdensome than is necessary to ensure the quality of the service.

2.13. Under GATS, WTO members are committed to entering into successive rounds of trade liberalizing negotiations.22 It was agreed that the first such round was to begin not later than five years from the date of entry into force of GATS, that is, by 1 January 2000.

(b) The four GATS modes of supply

2.14. In GATS, trade in services is defined as the supply of a service:

  • a. from the territory of one [WTO] Member [country] into the territory of any other Member;
  • b. in the territory of one [WTO] Member to the service consumer of any other Member;
  • c. by a service supplier of one [WTO] Member, through commercial presence in the territory of any other Member;
  • d. by a service supplier of one [WTO] Member, through presence of natural persons of a Member in the territory of any other Member.

2.15. These modes are generally referred to as mode 1 or cross-border supply, mode 2 or consumption abroad, mode 3 or commercial presence, and mode 4 or presence of natural persons.

2.16. Mode 1, cross-border supply, takes place when the consumer remains in his or her home territory while the service crosses national borders, the supplier being located in a different country. The delivery of the service can be effected, for example, by telephone, fax, Internet or other computer mediated links, television or the sending of documents, disks, tapes, etc. by mail or courier. It is similar to the traditional notion of trade in goods, where both the consumer and the supplier remain in their respective territory when the product is delivered. Indeed, freight transport services, which support trade in goods, are themselves examples of cross-border supply of services. Correspondence courses and telediagnosis are other examples.

2.17. Mode 2, consumption abroad, occurs when a consumer moves outside his or her home territory and consumes services in another country. Such tourist activities as visits to museums and theatres are typical examples of consumption abroad. Medical treatment of non-resident persons and language courses taken abroad are other examples of consumption abroad. Such activities such as ship repair abroad, where only the property of the consumer moves or is situated abroad, are also covered.

2.18. Mode 3, commercial presence, recognizes that it is often necessary for services to establish a commercial presence abroad as a way to ensure a close contact with the consumer in his or her home territory at the various stages of production and delivery, as well as after delivery. Commercial presence in a market abroad covers not only juridical persons in the strict legal sense, but also legal entities that share some of the same characteristics, such as representative offices and branches. Under GATS rules, “supply of a service” includes production, distribution, marketing, sale and delivery. Medical services provided by a foreign-owned hospital, courses in a foreign-owned school, and services supplied by a domestic branch or subsidiary of a foreign bank are examples of supplies through commercial presence.

2.19. Mode 4, presence of natural persons, occurs when an individual has moved into the territory of the consumer to provide a service, whether on his or her own behalf or on behalf of his or her employer. Thus, it covers two distinct categories of natural persons: self-employed and employees.

2.20. Mode 4 also applies to two areas: trade in services in the BPM5 sense (e.g., financial auditing services by an auditor sent by a foreign firm or provision of entertainment services by a self-employed professional foreign entertainer who is temporarily on tour in the host economy), and employment, meaning labour input in the production process. Presence of natural persons covers only non-permanent employment in the country of the consumer.23 However, GATS provides no definition of “non-permanent” employment. In countries’ commitments, the temporary status generally covers two to five years, and it may be different for different categories of natural persons.

2.21. Short-term employment of foreign doctors or teachers is covered under mode 4. Intra-corporate staff transfers and, more generally, short-term employment of foreign staff in foreign affiliates are particularly relevant in the GATS context because many countries have referred to this subcategory of natural persons in their schedules of commitments. Other examples are short-term employment of construction workers or paid domestic helpers.

(c) Services Sectoral Classification list - GNS/W/120

2.22. In 1991, the GATT secretariat produced a note setting out a classification of service sectors, known as the GNS/W/120 Services Sectoral Classification list, resulting from consultations with member countries. The list identified relevant sectors and sub-sectors with regard to national services regulations so that specific commitments on these regulations could be made and negotiated. GNS/W/120 should thus be considered as a negotiating list rather than as a statistical classification. It is reproduced in full in annex VI. In order to assist the clear delineation of each sub-sector, codes from the Provisional CPC were assigned to each of the sub-sectors.

2.23. The 12 major categories in the GATT GNS/W/120 list are:

  • Business services.
  • Communication services.
  • Construction and related engineering services.
  • Distribution services.
  • Educational services.
  • Environmental services.
  • Financial services.
  • Health-related and social services.
  • Tourism and travel-related services.
  • Recreational, cultural, and sporting services.
  • Transport services.
  • Other services not included elsewhere.

2.24. The List may evolve over time, and the services trade negotiators may use other classifications in future negotiations, as has been the case for basic telecommunications, financial services and maritime transport.

C. Statistical systems and classifications related to trade in services

2.25. The Manual seeks consistency with international standards related to trade in services. These standards are reviewed below. In particular, compatibility with the following systems and classifications is given the highest priority: BPM5, the 1993 SNA, ISIC, Rev.3 and CPC Version 1.0.

2.26. The key standards on which the Manual builds are noted below; fuller treatment of transactions between residents and non-residents and foreign affiliates systems appears in chapters III and IV, respectively. A brief summary of the relevant concepts contained in the standards is also given below.

1. International

(a) System of National Accounts, 1993

2.27. The System of National Accounts 1993 is an integrated system of accounts related to the economic activities and sectors of the economy of a country. To capture the transactions between that economy and all others, the 1993 SNA provides an account called the “rest of the world”, which it also refers to as the “external transactions account”. Within this account is an “external account of goods and services”, in which trade in goods and trade in services are separately recorded.

2.28. The 1993 SNA identifies “foreign-controlled corporations” as sub-sectors of the two institutional sectors - financial corporations and non-financial corporations. Foreign-controlled enterprises are defined more broadly in the 1993 SNA than are the majority-owned foreign affiliates covered by FATS statistics and described in chapter IV below. The difference is that the 1993 SNA suggests that countries may wish to treat some “associated enterprises”, which are enterprises in which the non-resident ownership is between 10 per cent and 50 per cent, as foreign-controlled. The foreign affiliates for which the core FATS statistics are to be compiled exclude associated enterprises and so are a subset of foreign-controlled enterprises as defined in the 1993 SNA. However, the Manual encourages countries that can do so to provide supplemental statistics covering other cases where foreign control may be deemed to exist, such as majority ownership by multiple foreign direct investors, ownership of exactly 50 per cent by a foreign direct investor, and cases where effective control is deemed to have been achieved through a minority stake in an enterprise. Thus, for countries that produce such supplemental statistics, the total coverage of FATS statistics may be identical to that of the statistics on foreign-controlled enterprises based on 1993 SNA.

2.29. 1993 SNA statistics on foreign-controlled enterprises relate to what is usually termed inward FATS, i.e., to enterprises operating in the compiling country that are controlled by non-residents. The 1993 SNA statistics for a given country do not provide information on outward FATS, i.e., on enterprises established abroad that are controlled by residents of that country (though these enterprises would be covered by the 1993 SNA statistics of their respective host countries).

2.30. The 1993 SNA provides the definitions of most of the economic variables that chapter IV recommends should be collected for FATS. These include the priority variables (gross output, employment and value added) as well as the lower priority items (financial and non-financial assets, net worth, operating surplus, gross fixed capital formation, taxes on income and compensation of employees). The 1993 SNA also provides the definition of an enterprise, which is required for compiling the priority variable number of enterprises.

(b) Fifth edition of the IMF Balance of Payments Manual

2.31. BPM5 describes the conceptual framework that underlies balance of payments statistics. The balance of payments statement systematically summarizes, for a specific time period, transactions that take place between an economy and the rest of the world. Transactions, for the most part between residents and non-residents, consist of those involving goods, services and income; those involving financial claims on, and liabilities to, the rest of the world; and those (such as gifts) that are classified as transfers. A transaction itself is defined as an economic flow that reflects the creation, transformation, exchange, transfer or extinction of economic value and involves changes in ownership of goods and/or financial assets, the provision of services or the provision of labour or capital.

2.32. The international transactions in trade in services that take place between residents and non-residents of an economy that are described in the present Manual are based on the BPM5 classification and definition of services, but the detail recommended in chapter III of the present Manual is greater than that of BPM5.

2.33. The 1993 SNA and BPM5 have a common conceptual framework. The definitions of residence and time of recording and the principles of accrual accounting recommended in the present Manual are the same as those in both BPM5 and the 1993 SNA.

2.34. The scope of international trade in services between residents and non-residents in the present Manual is the same as that in BPM5. The one difference with respect to the 1993 SNA relates to the recommended treatment of financial intermediation services indirectly measured (FISIM), which for practical reasons is excluded from trade in services in BPM5. FISIM is discussed in some detail in paragraphs 3.108-3.115 below.

(c) Central Product Classification, Version 1.0

2.35. The Central Product Classification, Version 1.0 is a part of the international system of interrelated classifications of economic activities and products (i.e., goods and services). It is the standard for all products that are an output of an economic activity, including transportable and non-transportable goods and services. For the description of goods, CPC, Version 1.0 is fully harmonized with the Harmonized Commodity Description and Coding System24 (HS) of the World Customs Organization. For services, CPC, Version 1.0 is the first international classification covering the whole spectrum of outputs of the various industries, and it can serve the different analytical needs of statistical and other users. For example, the Provisional CPC was used for the elaboration of the categories of services that were used during the negotiations leading to GATS that were conducted during the Uruguay Round, and was also used to describe the balance of payments services components recommended in BPM5. The general service product classification of CPC, Version 1.0 will serve as a guideline for the elaboration of such classifications for specific areas of the economy, including international trade in services.

(d) International Standard Industrial Classification of All Economic Activities, Revision 3

2.36. The International Standard Industrial Classification of All Economic Activities, Revision 3 is a basic tool for fostering international comparability of data across a wide range of economic and social statistics, including production, value added, employment and other economic statistics. It is a standard classification of productive economic activities linked as far as possible with the way economic processes are organized in units. An industry is thus defined as the set of production units engaged primarily in the same or similar kinds of productive economic activity. Criteria relating to the economic transactors (e.g., financial institutions) and to types of transactions (intermediate and final consumption, capital formation etc.) reinforce the considerations for identifying stages of production. In line with the United Nations programme for the harmonization of international economic classifications, ISIC, Rev.3 categories are correlated with those of CPC, Version 1.0. A correlation table indicates the main kinds of activities that produce particular goods and services.

(e) International Merchandise Trade Statistics

2.37. The United Nations publication International Merchandise Trade Statistics: Concepts and Definitions, Revision 225 (IMTS, Rev.2) contains the revised recommendations of the Statistical Commission regarding statistics of international merchandise trade. The implementation of these recommendations will result in data that better meet the needs of a variety of national and international users and that are more comparable with other statistics compiled in the framework of the 1993 SNA and BPM5. IMTS, Rev.2 provides a brief description of flows of goods between residents and non-residents that are not covered by merchandise trade statistics and identifies those services, the value of which is included in the value of imported and exported goods.

(f) International migration frameworks and the Recommendations on Statistics of International Migration

2.38. The Recommendations on Statistics of International Migration, Revision 126 set out a framework for reporting statistical information that measures international migration flows and stocks, including how population censuses can help gather information on foreign persons. The framework builds on the taxonomy of traveller inflows and outflows, and it gives priority to the identification of internationally mobile individuals who satisfy simple general definitions of short-term and long-term migrants. The recommended period of stay for inclusion among the former is three months, and for inclusion among the latter a year or more. Persons staying for periods shorter than three months are not included in these recommendations. Thus, this use of the term migrant is somewhat broader than that in BPM5, where an actual or intended stay of a year or more is required. A fuller taxonomy of migrants and other travellers, is provided in the Recommendations.27 An ILO publication28 provides an extensive discussion on sources of migration statistics.

(g) Tourism Satellite Accounts: Recommended Methodological Framework

2.39. Eurostat, the World Tourism Organization, OECD and the United Nations have developed the Tourism Satellite Account: Recommended Methodological Framework,29 (TSA), which sets out a framework to measure the contribution of tourism to an economy in an internationally comparable way. TSA respects the definitions and norms of the 1993 SNA, where relevant. The present Manual and TSA have different coverage and the relationship between them is described further in annex VII. However, balance of payments data on travel, excluding business travel, as defined in paragraphs 3.77-3.86 below, are one source of data on a part of tourism as defined in TSA. The TSA framework allows for a breakdown of visitors’ expenditure in a way that may be useful for GATS, for example, disaggregating visitors’ expenditure on goods, hotels, and food and beverage serving services, or disaggregating visitors’ expenditure by resident and nonresident visitors. TSA also provides lists of tourism-specific products with CPC links.

2. Other statistical systems and classifications

(a) Joint OECD-Eurostat Trade in Services Classification

2.40. The Joint OECD-Eurostat Trade in Services Classification30 is closely linked to BPM5. It can be characterized as a disaggregation of the BPM5 classification for balance of payments transactions in trade in services. It covers all service transactions between residents and non-residents. The main categories of this classification are identical to the 11 main service categories of the BPM5 standard components, and the two-, three- and four-digit items are compatible with these standard components and BPM5 services subcomponents, with one minor exception, the treatment of construction services, which also affects other business services. The Joint Classification asks for data on construction abroad and construction in the compiling economy. Both of these items include goods and services purchased by construction services operations, while BPM5 recommends that these expenditures for goods and services purchased in the host economy be included in other business services, other. With this one exception, compiling and reporting on the basis of the Joint Classification simultaneously satisfies IMF requirements. The Joint Classification is also partially linked to the Central Product Classification through its relationship with BPM5.

2.41. The Joint Classification represents a first attempt to take account of GATS, particularly as regards financial services and telecommunications, and it also reflects the statistical implications of the completion of the European Communities’ Single Market in Services, which entailed a great number of directives relating to financial, telecommunications, transport, tourism and audiovisual services.

2.42. EBOPS, as recommended in the present Manual, is a disaggregation of the Joint Classification.

(b) OECD Benchmark Definition of Foreign Direct Investment

2.43. Foreign direct investment has assumed a crucial role in the internationalization of economic activities. The third edition of the OECD Benchmark Definition of Foreign Direct Investment31 (BD3) provides operational guidance, within the conceptual framework of BPM5 and as an elaboration of it, on how foreign direct investment data should be compiled to meet internationally agreed standards.

(c) OECD Manual on Economic Globalisation Indicators32

2.44. The proposed OECD manual on economic globalization indicators will provide a framework of methodological and statistical guidelines for constructing indicators, on an internationally harmonized basis for use by policy makers and for the systematic monitoring over time of the progressive degree of worldwide economic integration. GATS obligations relate to many aspects of the presence of enterprises established abroad, which supply services through mode 3, commercial presence. As explained in paragraphs 4.1-4.15 below, FATS statistics provide information on the activities of majority-owned foreign affiliates. Although the OECD manual will cover a wider canvas than FATS statistics, the FATS framework has been conceived in a way that is consistent with the framework that is expected to be defined in the OECD manual.

D. Approach and framework of the Manual

2.45. To address the needs identified in paragraphs 2.3.-2.24 above, two basic principles underlie the Manual’s approach:

  • consistency with international standards related to trade in services, extending them where necessary and feasible;
  • phased implementation.

These principles facilitate the introduction and progressive implementation of a set of distinct elements in a flexible way to meet each country’s priorities, at the same time progressively improving inter-country comparability. Throughout its coverage of international services transactions, links are provided between the Manual and relevant international standards.

2.46. The Manual’s framework has two main building blocks for describing transactions in international trade in services. These are transactions between residents and non-residents (based on BPM5) and trade in services through the operations of foreign affiliates (the newly developed FATS statistical system). It is described here in four parts: BPM5 services and related transactions, BPM5 extensions, FATS statistics and a simplified statistical approach to the treatment of modes of supply. The four components are presented in paragraphs 2.51-2.101 below.

2.47. The Manual’s statistical framework with regard to resident/non-resident transactions is based on BPM5, which contains, among other things, recommendations for the definition, valuation, classification and recording of resident/non-resident trade in services. BPM5 is a primary source of statistical guidance on international trade in services, international investment transactions and economic flows associated with the movement of workers. Extensions to BPM5 are developed in the Manual to provide for a more detailed treatment of service transactions between residents and non-residents by product category and by partner countries. The Manual does not set out to change the BPM5 broad service components but it does call for more detail so as to identify services that feature significantly in international trade in their own right. Examples of this more detailed treatment are in the areas of transport, communications, computer and information services, business and professional services, and personal services.

2.48. In addition to trade in services between residents and non-residents, services may be supplied through foreign affiliates in host countries. The FATS statistical system, which draws to a great extent on the concepts and definitions contained in the 1993 SNA, has been designed to provide information on the activity of foreign affiliates that is out of the scope of BPM5. The Manual’s framework is based on FATS statistics as a complement to, and in parallel with, BPM5.

2.49. The Manual proposes a simplified statistical approach that may be used as a starting point in allocating BPM5 and FATS service transactions to the GATS modes of supply. This approach draws on the correspondence between commercial presence and FATS, as well as between the other modes of supply and transactions between residents and non-residents, as captured in BPM5. It also includes systematic criteria for the allocation of modes of supply and simplifying methods and guidelines for the treatment of complex transactions. Because delivery of services through mode 4 can be measured only in part through the BPM5 and FATS systems, the Manual also outlines the issues arising in a more comprehensive measurement of services provided through mode 4.

2.50. The descriptions of BPM5. its extensions, FATS statistics and issues surrounding mode 4 statistics are discussed only briefly in the present chapter because fuller descriptions are provided in chapters III and IV below and annex I.

1. Statistics on trade in services, labour and investment from BPM5

2.51. Balance of payments statements summarize the economic transactions of an economy with the rest of the world for a specific period. Two key concepts are involved: transaction and residence. A transaction is an economic flow that reflects the creation, transformation, exchange, transfer or extinction of economic value, and involves change of ownership of goods and/or financial assets, the provision of services, or the provision of labour or capital. Residence is central because the identification of transactions between residents and non-residents underpins the BPM5 system. The definition of residence that is used in BPM5 is identical to that in the 1993 SNA, and is based on a transactor’s centre of economic interest. Since political boundaries may not always coincide with those appropriate for economic purposes, the economic territory33 of a country is used as the relevant geographical area for the characteristic of residence. An institutional unit is a resident unit when it has a centre of economic interest in the economic territory of a country.

(a) Main BPM5 standard services components

2.52. BPM5 statistics are arranged within a coherent structure to facilitate their use and adaptation for many purposes, including policy formulation, analytical studies, projections, bilateral comparisons of particular components or total transactions, and regional and global aggregations. The 11 main BPM5 standard services components are:

  • Transportation.
  • Travel.
  • Communications services.
  • Construction services.
  • Insurance services.
  • Financial services.
  • Computer and information services.
  • Royalties and license fees.
  • Other business services.
  • Personal, cultural, and recreational services.
  • Government services, not included elsewhere (n.i.e.).

2.53. These 11 services components together match the GATS product coverage relatively well, with several exceptions. First, for the most part, the component government services, not included elsewhere (n.i.e.) is excluded from GATS.34 Second, some transactions considered as services under GATS are recorded under goods in BPM5; this concerns the value of repairs of most goods that are sent abroad for repair, as well as most processing services. Third, some BPM5 components, especially travel, include transactions in goods. Fourth, BPM5 includes payments for royalties and license fees. Except for franchise payments, this component is excluded from GATS coverage.

(b) Labour-related flows of funds

2.54. The relevance of information on short-term employment of foreign staff in service industries was indicated above (see paras. 2.20 and 2.21). BPM5 labour-related flows in the current account provide such information, although the income to be recorded in the balance of payments covers the compensation of persons working not only in service-producing activities but also in goods-producing industries.

2.55. When individuals work for less than one year in an economy where they are not resident, BPM5 records their earnings as compensation of employees, within the income component, while their expenditure in the host economy is placed in the travel component. Compensation of employees comprises wages, salaries and other compensation received by individuals for work performed for residents (natural or juridical persons) of economies where they are not resident.

2.56. In addition to staff working abroad for less than one year, compensation of employees covers potentially longer-term employees, such as border workers and local (host country) employees of embassies, consulates and international organizations.

2.57. Individuals who stay abroad for one year or more, or who intend to do so, are regarded in BPM5 as residents of the foreign economy, and so their earnings and expenditures are not recorded in the balance of payments because the flows are domestic transactions within that foreign economy.35 Such individuals are called migrants in BPM5. Workers’ remittances are current transfers by migrant workers who are employed in a foreign economy and considered to be residents there. These remittances are classified as current transfers in BPM5.

2.58. The relevance of information about workers’ remittances is related to the facts that GATS does not provide precise guidelines for the definition of temporary presence and that most countries’ commitments refer to two to five years of stay. Thus, workers’ remittances are a useful complement to the information provided by compensation of employees.

(c) Foreign direct investment

2.59. Foreign direct investment is usually a precondition for the establishment of a commercial presence. FDI statistics are thus a relevant complement to FATS statistics as information on the commercial presence mode of supply. Where countries do not compile FATS statistics, FDI statistics may be the only available quantitative information on this mode of supply.

2.60. FDI reflects the objective of obtaining a lasting interest by a resident entity in one economy (a direct investor) in a business in another economy (a direct investment enterprise). The lasting interest implies the existence of a long-term relationship between the direct investor and the direct investment enterprise, as well as a significant degree of influence on the management of the enterprise. Direct investment includes the initial transaction between the two entities and all subsequent financial transactions between them and among affiliated enterprises, both incorporated and unincorporated. In inward and outward direct investment statistics, where feasible, the direct investment enterprise should be classified by its industrial activity in the host country and by the industrial activity of its direct investor.

2.61. A foreign direct investor is an individual, an incorporated or unincorporated public or private enterprise, a government, a group of related individuals or a group of related incorporated and/or unincorporated enterprises that has invested in a direct investment enterprise. A direct investment enterprise is a subsidiary, associate or branch operating in a country other than the direct investor’s country of residence. The conceptual basis for compiling foreign direct investment statistics has been defined in BPM5 and in the OECD Benchmark Definition, involving such concepts as direct investor, lasting interest, significant influence on management and at least 10 per cent equity interest or equivalent voting power.36

2. BPM5 extensions

(a) Analysis of balance of payments transactions by origin and destination

2.62. Balance of payments statistics by origin and destination are needed for analytical and policy purposes and for use in bilateral and multilateral negotiations. Country or regional analysis of trade in services, whether associated with balance of payments transactions, foreign direct investment or FATS, is a necessary complement to both product and economic activity classification systems. To the extent feasible, an identical geographical basis should be used for all related sets of services statistics. The geographical allocation of services transactions in the balance of payments is to the country where the provider or acquirer of the service is resident.

(b) The Extended Balance of Payments Services Classification

2.63. The Extended Balance of Payments Services Classification has been devised for the Manual based on the experience gained with the implementation of the Joint Classification. It is a disaggregated sub-system of the BPM5 services classification. Annex II shows the relationship between EBOPS, the BPM5 classification of services and the Joint Classification. Correspondence tables are provided in annex III linking the EBOPS with CPC Version 1.0, thus providing greater detail and a necessary although partial statistical link between domestic production and trade in services. The need for a convergence of the product classifications of industry and trade, for comparative purposes, requires further development work to more closely align the structural components of EBOPS and CPC. The correspondence shown in annex III is an important first step in this direction, which clarifies the definition of EBOPS through the use of the detailed categories of CPC. As described in chapter III, EBOPS contains main categories that are identical to the 11 major BPM5 standard services components, as well as further details that are consistent with BPM5. The harmonization is bolstered by the standardization of the coding systems for identification and reporting purposes.

3. Foreign affiliates trade in services statistics

2.64. Affiliates are often established abroad to deliver services that require close contact between the supplier and the consumer. In the present Manual and following GATS coverage, domestic sales by foreign affiliates are covered by the term “international trade in services”. However, because foreign affiliates are resident entities in their host country, their sales in these countries are not recorded in the balance of payments accounts, which are only concerned with transactions between residents and non-residents.

2.65. FATS statistics have been designed to capture such information. In addition, FATS statistics include a range of other statistical indicators so as to assess diverse aspects of the globalization phenomenon and to monitor the commercial presence mode of supply in a variety of contexts, such as those relative to trade, domestic output and employment.

(a) FATS statistics: concepts and classification

2.66. FATS statistics measure the commercial presence abroad of service suppliers through affiliates in foreign markets, and are therefore closely related to statistics on FDI. Data on the activities of majority-owned foreign affiliates in the compiling economy are usually referred to as inward FATS, and those relating to majority-owned foreign affiliates of the compiling economy that are established abroad are referred to as outward FATS. FATS statistics cover a range of variables that can comprise some or all of the following: sales (turnover) and/or output, employment, value added, exports and imports of goods and services, number of enterprises, assets, net worth, operating surplus, gross fixed capital formation, taxes on income, research and development expenditures, compensation of employees and other aspects of potential interest to policy makers.

2.67. Ideally, it would be possible to attribute FATS variables on the basis of either the industrial activities of producers or the types of products produced and sold. Data on a product basis would identify the specific types of services delivered through the commercial presence mode of supply and could most readily be compared with data on services delivered through trade between residents and non-residents. However, some FATS variables, such as value added and employment, do not lend themselves to a product classification. Also, for some countries, FATS statistics may be developed as a subset of domestic enterprise or other statistics that are classified only on an activity basis. Further, for some purposes, the data may need to be viewed in conjunction with data on stocks and flows of foreign direct investment, which would normally be classified by activity but not by product.

2.68. The Manual thus recommends that FATS variables be classified by activity according to the ISIC Categories for Foreign Affiliates, a group of categories derived from ISIC (see chapter IV below and annex IV). ICFA covers all kinds of activities, including goods production. ICFA was designed so as to provide the best possible link with EBOPS in order to facilitate as much as possible the comparability of the two sets of statistics (see annex IV on the link between ICFA and EBOPS). This basis of presentation allows activities of services enterprises to be viewed in the context of the activities of all enterprises. In addition, where a cross-classification by product is possible, it provides a framework for displaying services produced as a secondary activity by enterprises classified as goods producers.

(b) FATS statistics and other statistical frameworks

2.69. FATS statistics, as conceived in the Manual, are consistent with existing statistical frameworks. They fall within the overall ambit of the 1993 SNA and observe the conventions of both BPM5 and BD3 in relation to foreign direct investment. They look to CPC and ISIC for product and activity classifications and to International Labour Organization (ILO) standards for employment variables. They also have been defined in a way that is consistent with the standards expected to be defined in the proposed OECD manual on economic globalization indicators for the measurement of foreign affiliates’ activity. FATS statistics capture the activities of majority-owned foreign affiliates that form a subset of enterprises on the register of direct investment enterprises, and cover a wide variety of indicators on both their domestic and foreign operations.

2.70. The 1993 SNA defines a direct investment enterprise as “an incorporated or unincorporated enterprise in which an investor resident in another economy owns 10 per cent or more of the ordinary shares or voting power (for an incorporated enterprise) or the equivalent (for an unincorporated enterprise). Direct investment enterprises comprise those entities that are identified as subsidiaries (investor owns more than 50 per cent), associates (investor owns 50 per cent or less), and branches (wholly or jointly owned unincorporated enterprises), either directly or indirectly owned by the investor” (1993 SNA, para. 14.152). Further, foreign-controlled enterprises as defined by the 1993 SNA include subsidiaries and branches, but associates may be included or excluded according to a qualitative assessment of foreign control.

2.71. FATS statistics, as described in chapter IV below, relate mainly to subsidiaries and branches (both of which are majority-owned by the direct investor), but they may also include supplemental information on associates that are deemed to be under effective foreign control. In the real world, ownership structures can be very complex and may not fit neatly into any of these categories; in addition, actual management responsibilities may bear little or no relationship to the formal legal structure of the enterprise. Although it does not cover every possible case, chapter IV provides practical guidance on determining statistical coverage under different ownership structures (more comprehensive treatment of these issues is planned for the OECD manual on economic globalization indicators).

4. Statistical treatment of modes of supply: the simplified approach

2.72. Modes of supply are central to GATS. They are defined in its very first article and are the basis on which WTO member countries’ commitments are scheduled. The Manual introduces, for the first time, modes of supply in the statistical context.

2.73. However, a comprehensive statistical treatment of modes of supply that would fully mirror the GATS legal definition and other GATS articles would be out of the scope of the present Manual. Such an approach would fail to ensure compatibility with international statistical systems, such as BPM5 and the 1993 SNA, and would demand excessive resources for implementation.

2.74. Drawing on GATS legal provisions, the Manual proposes, as a first approximation, a simplified approach to the statistical allocation of trade in services to modes of supply that is operational in the statistical context and consistent with international statistical standards.

(a) Simplified statistical criteria

2.75. To allow the allocation of services transactions to modes of supply in a systematic way, the Manual proposes unambiguous criteria derived from the GATS definitions. The Manual acknowledges that this allocation is only a first step in the estimation process and that further research and empirical information will be required both to validate and to refine the estimates. These simplified criteria are based on the following considerations:

  • (a) To the extent that foreign affiliates are a good approximation of commercial presence entities, FATS statistics provide information of service supplied through mode 3;
  • (b) Service transactions between residents and nonresidents, as captured in the balance of payments accounts described in the BPM5 system, broadly cover mode 1, mode 2, and part of mode 4.37

2.76. It is therefore possible to derive much information on services transactions by modes of supply from BPM5 and FATS statistics. However, the fourth mode of supply, mode 4, goes beyond the notion of “services transactions” in BPM5 and FATS. It would be necessary to draw on supplementary data from BPM5 and FATS as well as from other statistical systems, such as migration and labour market statistics, to have a broader picture of mode 4.

2.77. The simplified statistical criteria are based on the territorial location of the transactors (consumer and supplier) at the time the service is supplied, as well as on the type of the supplier (an individual or a business enterprise, respectively termed “natural or juridical persons” in GATS). They yield the same results as the GATS definition in most cases, while also providing clear guidelines for those that present special difficulties. However, it should be stressed that the Manual’s guidelines on the compilation of statistics by modes of supply are laid out only for statistical purposes and do not imply any legal interpretation of GATS provisions. These criteria are shown in chart 1. In addition, each mode of supply is further illustrated in chart 2.

Chart 1.The four modes of supply: statistical criteria

a The “other” statistical areas, such as migration and employment statistics, are not part of the statistical framework defined in the body of the Manual; they are dealt with in annex I.

Chart 2.Synthetic view of modes of supply

2.78. These statistical criteria for the allocation of modes of supply are further complemented with simplification rules discussed below.

(b) Balance of payments statistics by modes of supply

2.79. Balance of payments service transactions broadly correspond to mode 1, mode 2, and part of mode 4, Yet a given balance of payments service category generally includes transactions corresponding to several modes. Moreover, several modes of supply may be used for a single service transaction. With a view to facilitating the analysis and compilation of service transactions between residents and non-residents by modes of supply, the Manual suggests the use of two simplification rules.

2.80. First, separate identification of modes deemed to be relatively marginal in a given service category is not recommended. Thus, if the major part of a given service category corresponds to services supplied under one mode, this mode could be fully allocated to that service category. For example, telecommunications services would be allocated to cross-border supply (mode 1) because most transactions between residents and non-residents are cross border. According to this methodology, a given service category in the balance of payments accounts would normally correspond to only one or two modes of supply.

2.81. Second, there are cases where specific balance of payments service transactions involve several modes of supply, such as when an architect designs a construction project, delivers it through a telecommunications link and has to make some visits to the country of the consumer at the implementation phase. In those cases, it is recommended that, if estimates cannot be provided for the subdivision of the transaction value by modes, the transaction be allocated to the most important mode in terms of time and resources associated with it.

Balance of payments services components corresponding to Mode I

2.82. Mode 1 applies when a service is delivered from a supplier abroad to a consumer in his or her territory of residence. This is the case for most balance of payments transactions recorded under transportation, communication services, insurance services, financial services, and royalties and license fees. Non-mode 1 transactions in these components mainly take place in two instances:

  • Transactions fully occurring through presence of natural persons (mode 4), which are presumed to be marginal in these components;
  • Transactions that involve both modes 1 and 4 (such as an insurance agent travelling to discuss the terms of a contract, whereas most of the insurance service would be produced in the country where the insurance company is located). In those cases, it might appear reasonable to allocate the transaction to mode 1.

Thus, applying the simplified approach, the BPM5 components indicated above would be allocated to mode 1.

Balance of payments services components corresponding to both mode 1 and mode 4

2.83. Mode 1 also applies to part of transactions in computer and information services, other business services, and personal, cultural, and recreational services. However, these components also comprise transactions corresponding to mode 4 situations, where the supplier travels to the territory of the consumer. For these components, further analysis and empirical information are needed to determine how they can be separately identified or estimated. In particular, the knowledge of the location of the supplier at the time when major transactions are delivered would be critical for a proper assessment of the share of modes 1 and 4 in these balance of payments components.

Balance of payments components and mode 2

2.84. The travel category broadly corresponds to mode 2 or consumption abroad, although it does not categorize all the types of services supplied to travellers. Further refinements would be needed for a better measurement of mode 2. In particular, an adjustment would be needed to exclude any goods purchased by travellers. A memorandum item is provided in EBOPS for this purpose.

2.85. Repairs and supporting and auxiliary services to carriers in foreign ports are also covered by mode 2. Although repairs are included in goods in BPM5, supporting and auxiliary services are included in transportation.

An exception: balance of payments, mode 3 transactions in construction services

2.86. The preceding paragraphs have set out how balance of payments transactions may be allocated to modes 1, 2, and 4. Commercial presence (mode 3) concerns mostly domestic sales of foreign affiliates (i.e., transactions between residents), as described in FATS statistics.

2.87. There are cases, however, where a commercial presence is not considered as being resident in its host country, such as an unincorporated site office carrying out a short-term construction project. The services provided in the host country by this type of commercial presence are transactions between residents and nonresidents, and they are recorded in the balance of payments accounts under construction services and not in FATS statistics. These services are to be considered as supplied through mode 3 because under GATS, a commercial presence may be any type of establishment owned or controlled by foreign entities, even those created for a short period.

2.88. In turn, the balance of payments component construction services also includes transactions resulting from mode 4 - presence of natural persons. Whether or not these mode 4 transactions are minor relative to the mode 3 transactions in this category will depend on the characteristics of the compiling country.

Balance of payments components and mode 4

2.89. Preceding paragraphs have shown that some transactions in BPM5 service components correspond to mode 4. In addition, supplementary information on other mode 4 activities may be provided by the compensation of employees component of income in BPM5.

2.90. Compensation of employees covers income in the form of wages, salaries and other compensation received by non-resident individuals who are employed in resident enterprises that are producing goods and/or services, including manufacturing and agriculture, as well as industries primarily producing services. To provide relevant supplementary information on mode 4, identification of the part of compensation of employees arising from production of services is encouraged.

(c) FA TS statistics and modes of supply

FATS statistics and commercial presence

2.91. By including commercial presence as a mode of supply, GATS has created a need for information on foreign affiliates in host economies. Service suppliers may choose to set up foreign affiliates as a means to sell their services in foreign markets as an alternative or a complement to exports through mode 1. On the grounds that such sales may, to a certain extent, substitute for cross-border exports, the Manual views domestic sales of foreign affiliates as the primary statistical indicator of mode 3.

2.92. FATS statistics, as recommended in the Manual, differ from the coverage of the GATS in the following ways:

  • (a) GATS refers to control as well as majority ownership, whereas FATS statistics mainly use the latter as the criterion for inclusion;
  • (b) GATS covers services products, whereas FATS is primarily based on activities.

FATS statistics and presence of natural persons

2.93. Non-permanent employment of foreign staff in foreign affiliates is particularly relevant to mode 4, as a subcategory of natural persons often referred to in countries’ schedules of commitments. Quantitative information on foreign employment in foreign affiliates would be an indicator of the income dimension of mode 4. The Manual does not propose a further breakdown between permanent and short-term employment because the GATS notion of “non-permanent employment” differs among countries, and it is generally for a substantially longer period than the one-year rule recommended by the relevant statistical systems (see paras. 2.20 and 2.21 above).

(d) Special problems in statistical treatment of mode 4

2.94. Mode 4 services supplied through the presence of natural persons pose particular measurement problems that cannot be fully resolved within the BPM5 and FATS framework. In addition, no simple correspondence can be readily established between any existing statistical framework and the part of GATS mode 4 services that is not covered by the BPM5 concept of trade in services. The trade-related movement of natural persons has given rise to a need for information collected on a new conceptual basis. Although not a new phenomenon, the concept of mode 4 delivery of services in trade is new; it must first be defined, and then a new statistical framework must be elaborated for measuring it. In that respect, annex I begins the process of constructing such a system: it reviews relevant existing statistical frameworks in order to identify useful aspects that might provide relevant measures for mode 4 services in the future.

2.95. GATS is clear that its use of the term “presence” refers to a non-permanent presence. Although nowhere is the term “non-permanent” defined, countries have commonly defined it as referring to a period of between two and five years. Commitments are also made with regard to specific sectors or occupations and are not general. The statistical interpretation of resident is an individual who has a centre of economic interest in an economy. This is usually defined as an individual who stays, or intends to stay, for one year or longer in an economy.

2.96. The mode 4 service may be directly supplied - by self-employed individuals abroad or by employees abroad sent by non-resident firms to the host country - or may be indirectly supplied with the individual abroad working for a service supplier resident in the host country. Only services directly supplied by a nonresident supplier to a resident customer would be counted as international trade in services in the BPM5 framework.

2.97. The issues concerning definition and measurement of mode 4 are addressed in more detail in annex I, yet there remains a need for further research and development of a framework for statistics that can be used to measure the value of services provided through mode 4.

(e) Conclusion

2.98. The allocation of modes of supply to service transactions in the BPM5 and FATS statistics, following the simplification criteria and rules, have been discussed above. The following were discussed in particular:

  • (a) As a general rule, FATS statistics provide information on mode 3 and balance of payments statistics correspond to the other modes of supply. The exception is that the balance of payments construction services component may be allocated to mode 3 or broken down between modes 3 and 4;
  • (b) The balance of payments components transportation, communication services, insurance services, financial services, and royalties and license fees may be allocated to mode 1;
  • (c) The balance of payments components computer and information services, other business services, and personal, cultural, and recreational services may be broken down by mode 1 and mode 4;
  • (d) The travel component broadly corresponds to mode 2, excluding travellers’ expenditure on goods;
  • (e) Balance of payments labour-related flows provide supplementary information on mode 4.

2.99. Table 1 summarizes the two statistical systems underlying the Manual’s main frameworks, BPM5 and FATS, and brings together information for each mode of supply.

Table 1.Statistical coverage of modes of supply
ModeStatistical coverage
Mode 1BPM5: transportation (most of), communications services, insurance
Cross border supplyservices, financial services, royalties and license fees
Part of: computer and information services, other business services, and
personal, cultural, and recreational services
Mode 2BPM5: travel (excluding goods bought by travellers); repairs to carriers in
Consumption abroadforeign ports (goods); part of transportation (supporting and auxiliary
services to carriers in foreign ports)
Mode 3FATS: FATS statistics, each ICFA category
Commercial presenceBPM5: part of construction services
Mode 4BPM5: part of: computer and information services; other business
Presence of natural personsservices: personal, cultural and recreational services; and construction
services
FATS (supplementary information): foreign employment in foreign affiliates
BPM5 (supplementary information): labour-related flows Other sources: see Annex I

2.100. A generalized framework for statistics on affiliates’ operations would provide information on domestic sales according to both an activity breakdown (ICFA categories) and a product breakdown (EBOPS components). When product breakdowns are not available, the ICFA activity breakdown is used. This has been aligned with EBOPS for the purpose of approximating products produced by various industrial activities. There is, however, no intention of establishing one-to-one correspondence between ISIC, Rev.3 and EBOPS for the estimation of services produced by foreign affiliates. Such a correspondence might overlook important areas of secondary production by industries (for further explanation, see annex IV), Only when compilers are able to classify the output of foreign affiliates on a product basis will it be possible to directly compare the values of specific types of services, delivered to foreign markets through trade between residents and nonresidents, with sales by foreign affiliates.

2.101. To achieve its goals of clarity, feasibility and minimum cost, this simplified statistical approach to modes of supply does not strictly adhere to GATS provisions. Rather, it has been designed to provide relevant information for GATS, while ensuring feasibility and minimizing the resources needed for its implementation. However, the introduction of these modes in the statistical context, albeit in a simplified way, may still necessitate significant resources. Thus, the breakdown of statistics by modes of supply is accorded a relatively low priority, and countries may choose to see the provision of statistics by these modes as a longer-term objective.

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