Summary of Major Conclusions and Recommendations

As the U.S. economy becomes increasingly internationalized, it is essential that public and private decision makers have timely, accurate, and relevant information on U.S. international economic activities. The existing data collection system for U.S. international transactions was developed in a period when the United States was less integrated in the world economy than it is today. Although various federal agencies in recent years have made significant efforts to improve the data, the increasingly complex nature of international economic activities has complicated their tasks, and major shortcomings remain.

To assist public and private decision makers, who increasingly face new economic policy issues and unprecedented business opportunities in a competitive world economic environment, federal statistical agencies must set priorities as they seek to upgrade existing data systems. The goal should be to move toward a flexible and responsive system of data collection that provides timely, accurate, relevant, and cost-effective data. To reach the goal, the Panel on Foreign Trade Statistics concludes that the agencies must undertake three sets of activities:

  • Supplementing the existing statistical framework and integrating disparate data sets to accurately reflect the changing structure of the U.S. economy and facilitate more comprehensive analysis of U.S. international economic activities in the emerging global trading environment;



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BEHIND THE NUMBERS: U.S. Trade in the World Economy Summary of Major Conclusions and Recommendations As the U.S. economy becomes increasingly internationalized, it is essential that public and private decision makers have timely, accurate, and relevant information on U.S. international economic activities. The existing data collection system for U.S. international transactions was developed in a period when the United States was less integrated in the world economy than it is today. Although various federal agencies in recent years have made significant efforts to improve the data, the increasingly complex nature of international economic activities has complicated their tasks, and major shortcomings remain. To assist public and private decision makers, who increasingly face new economic policy issues and unprecedented business opportunities in a competitive world economic environment, federal statistical agencies must set priorities as they seek to upgrade existing data systems. The goal should be to move toward a flexible and responsive system of data collection that provides timely, accurate, relevant, and cost-effective data. To reach the goal, the Panel on Foreign Trade Statistics concludes that the agencies must undertake three sets of activities: Supplementing the existing statistical framework and integrating disparate data sets to accurately reflect the changing structure of the U.S. economy and facilitate more comprehensive analysis of U.S. international economic activities in the emerging global trading environment;

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BEHIND THE NUMBERS: U.S. Trade in the World Economy Enhancing data accuracy, coverage, and usability through increased emphasis on compliance by data filers and through increased productivity in data collection processes; and Improving the data collection and data analysis interface to ensure relevant data are compiled. This overarching conclusion is based on an extensive review of existing systems used to collect data on U.S. merchandise trade and international services transactions, and, to a more limited extent, capital flows. This summary presents the panel's specific conclusions and high-priority recommendations, which are in the order of the chapters of the report. Detailed analyses and additional recommendations are in each chapter. The panel's recommendations have taken into account the budgetary constraints faced by statistical agencies. The panel supports the economic statistics initiative of the President's Council of Economic Advisers that calls for increases in several agency budgets to improve the quality of federal economic statistics, particularly those on U.S. international transactions. The panel's emphasis is on increasing the operational efficiency and cost-effectiveness of statistical programs and the importance of producing useful information relevant to the new global trading environment, rather than on correcting old problems that may not be worth attention in the internationalized U.S. economy. SUPPLEMENTING THE EXISTING STATISTICAL FRAMEWORK AND INTEGRATING DISPARATE DATA SETS Two major economic forces have been shaping the international trading environment over the past several decades: rapid technological changes and the liberalization and deregulation of domestic and international markets. These forces have accelerated the movement of goods, services, labor, capital, and information across national boundaries, which in turn have increased globalization of production, integration of financial markets, and proliferation of transnational investment activities. These developments have altered the nature and extent of international transactions. They have also significantly transformed the U.S. economy and made it considerably more interdependent with those of other countries. As the U.S. economy has become more internationalized, policy makers increasingly have had to deal with new economic policy issues, including coordinating U.S. economic policies with those

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BEHIND THE NUMBERS: U.S. Trade in the World Economy of other nations; negotiating bilateral, regional, and multinational trade agreements to enhance market access for U.S. goods and services abroad; formulating domestic programs to improve the nation's ability to compete internationally; and assessing the impact of international trade and financial transactions on the domestic economy and its various sectors. Businesses increasingly have to weigh the opportunities of selling at home and abroad; evaluate the cost-effectiveness of producing domestically and overseas; and consider the merits of engaging in various collaborative activities with foreign counterparts to maximize market opportunities. The new economic policy issues arising from the growing interdependence of national economies and increasingly complex commercial relations of business enterprises call for a broadened statistical framework that relates explicitly to the emerging international trading environment. A SUPPLEMENTAL FRAMEWORK Underlying the compilation of existing data on U.S. international transactions is the concept of cross-border transactions—of residents versus nonresidents—as well as the separation of domestic and international economic activities. International transactions are defined as involving the transfer of ownership of goods, services, and capital flows between U.S. residents and those of foreign states, with national boundaries establishing the distinction between residents and nonresidents. These concepts are used because a common purpose of these statistics is to provide data for the nation's balance-of-payments accounts, a summary statistical statement of transactions in goods, services, and capital flows between U.S. residents and those of the rest of the world during a given period. Although the balance-of-payments framework is useful for understanding changes in the nation's general price level and domestic output and employment, it is inadequate for analyzing new economic issues arising from the emerging international economic order. Most important, it does not capture the sales and purchases of goods and services by foreign affiliates of U.S. firms abroad and U.S. affiliates of foreign firms in the United States; those transactions are several times larger than the combined value of U.S. imports and exports. A supplemental statistical framework that integrates data on cross-border goods and services activities compiled under the balance-of-payments accounts and those on sales and purchases by affiliates'

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BEHIND THE NUMBERS: U.S. Trade in the World Economy operations collected outside the balance-of-payments framework is needed (1) to improve understanding of the transformation of the U.S. economy; (2) to assess the international competitiveness of U.S. firms; (3) to examine the impact of foreign direct investment in the United States on the U.S. economy and that of U.S. direct investment abroad on foreign economies; and (4) to facilitate multilateral, regional, and bilateral negotiations on improved market access for U.S. firms in foreign countries and for such purposes as developing local-content rules in free trade areas. One convenient way of developing such a framework is to organize data on U.S. international economic activities by national ownership (that is, U.S. owned versus foreign owned) of the firms selling the goods and services, rather than the country of residency of the firms selling the goods and services. Using such a framework to report on U.S. international economic activities provides a different perspective on the performance of the U.S. internationalized economy from that depicted under the balance-of-payments accounts. For example, the balance-of-payments account for 1987 shows a U.S. trade deficit of goods and services of $148 billion, but the supplemental framework shows that the sales of goods and services by U.S.-owned firms (located either in the United States or abroad) were only $64 billion less than purchases from foreign-owned firms (located either in the United States and abroad. The figures derived under the supplemental framework do not mean that the usual macroeconomic concerns about the U.S. trade deficit should be modified, but one can infer from the framework that U.S.-owned business is competing in the world economy better than is often inferred from the trade statistics. The supplemental framework also provides additional perspectives on the impact of foreign-owned enterprises on the economic performance of the internationalized U.S. economy. COMPARABLE DATA As domestic and international economic activities are increasingly linked, improving the comparability of domestic production and other economic data with data on international economic activities will enhance the analytical usefulness of existing data. Moreover, as the world economy becomes increasingly interdependent, international economic activities will require more comparable economic data across countries. At present, there is limited comparability between data on U.S. international economic activities and those on domestic production.

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BEHIND THE NUMBERS: U.S. Trade in the World Economy Different classification systems, collection methods, and levels detail are currently used to compile data on U.S. trade in goods and services and capital flows. Still other classifications, collection methods, and levels of detail are used to monitor domestic production, employment, services, and financial activities. Although comparisons of data on trade in goods and domestic production are possible through the use of concordances that artificially bridge the data sets, it mains extremely difficult to make such comparisons for services and financial transactions. The disparateness of data sets has limited the analytical usefulness of existing data, especially for assessing the impact of international economic activities on the domestic economy and its various sectors. Cross-border trade in services, for example, is grouped in only about 25 categories, as compared with 125 for domestic services, while sales of services by foreign affiliates of U.S. firms are classified into still fewer categories. Meanwhile, some types of services—for example, transportation, communications, finance, and insurance— are not even covered in the domestic quinquennial economic censuses, but they are included in international services data. Other categories of transactions are classified at different levels of detail of the Standard Industrial Classification (SIC), a classification system that is unique to the United States. Because of these differences in the level of detail at which disparate data are compiled, different sectors of the internationalized U.S. economy can be related to each other only at a fairly aggregate level. Comparable data on international transactions at disaggregated detailed levels across countries are not available because of differences among countries in their coverage, definitions, concepts, and methodologies. As a result, international comparisons of production, trade, and financial activities are at best tenuous. Several efforts are currently under way by international organizations to harmonize data across countries. U.S. efforts to improve the nation's statistical systems for international transactions can fit into that ongoing work. RECOMMENDATIONS Recommendation 1-1 A supplemental statistical framework that integrates balance-of-payments data and data on affiliates' operations at home and abroad should be developed to better reflect the link between trade and foreign direct investment.

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BEHIND THE NUMBERS: U.S. Trade in the World Economy Recommendation 2-1 The United States should take the lead in international cooperative efforts to build coherent comparable worldwide accounts through standardizing data concepts and methodologies on production, trade, employment, and investment and establishing a statistical framework that captures changing international commercial relations. Recommendation 2-2 As part of the quinquennial surveys, the Census Bureau should collect data on purchases of imported goods and services. The Bureau of Economic Analysis should use the data to strengthen its program on the compilation of the U.S. input-output tables. Recommendation 2-3 Data at the four-digit SIC industry level, compiled in most cases on a four-digit SIC product basis, should be collected not only on the domestic production of goods, but also on the domestic production of services, the production of goods and services by foreign affiliates, and foreign direct investment so that data on international trade in goods and services can be related to these data. Quantitative and qualitative information about the use of labor, capital, and intermediate inputs in producing goods and services should also be collected at the four-digit SIC level. Data on the trade of affiliates should also be collected in greater detail. ENHANCING DATA QUALITY There are major data gaps and quality problems with existing data on U.S. international transactions. One indication of the seriousness of the data gap problem is the growing statistical discrepancy in the U.S. balance-of-payments accounts, which, in 1990 alone, surged to an unprecedented $63.5 billion, or about 70 percent of the current account deficit. Underreporting of exports of goods and inadequate coverage of U.S. international services and portfolio transactions are among the key sources of such discrepancies. Among factors contributing to these errors and omissions are deficiencies in the existing data collection systems. They include lax enforcement of compliance requirements, inadequate data base management by statistical agencies, and reliance on archaic methods of data collection. Adequate data are also lacking on foreign goods and services used as intermediate inputs in domestic production activities. To

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BEHIND THE NUMBERS: U.S. Trade in the World Economy date, analysts have only been able to make a rough estimate for the input-output table of the value of intermediate inputs that are imported and used by any industry. Yet having accurate information about the foreign content of any product is becoming increasingly important not only as indicators of the rising trend of intracompany trade and guides to setting standards in bilateral, regional, and multilateral negotiations involving customs unions and free trade areas, but also as indicators of the changing structure of U.S. industry. There are also problems with the timeliness and usability of existing data. Although there is often a tradeoff between data accuracy and timeliness, we believe that enhancing the quality and the productivity of processes for producing existing statistics will improve both accuracy and timeliness. Existing data could also be made more useful. Users of data on U.S. international transactions often report difficulties using the data in their current forms, formats, and distribution media. Changes in processing procedures or definitions have made data comparisons over time difficult or impossible, and limited data comparability has diminished the analytic usefulness of the data. There is almost no evidence of modern process quality management in the statistical agencies that produce the data on U.S. international transactions. Although some inspection-based quality-control measures exist, these appear largely focused on controlling human processing errors. Yet improvements in process quality and productivity are essential for significant gains in the efficiency, accuracy, and timeliness of U.S. international trade and financial statistics. MERCHANDISE TRADE Enhanced coordination between the Customs Service and the Census Bureau and a substantial rise in electronic filing of import data have significantly reduced processing delays and lowered carryovers on merchandise trade data in recent years. Nonetheless, the underreporting of exports remains a problem, and other operational improvements are needed. Underreporting of exports is related to the de facto voluntary compliance by filers. Although import documents are reviewed in connection with tariff collection, export documents are subject to minimal scrutiny by Customs. In addition, in an effort to promote U.S. exports, Customs avoids creating obstacles to export shipments. One result is that there are few incentives for exporters to file promptly and

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BEHIND THE NUMBERS: U.S. Trade in the World Economy accurately. The well-documented underreporting of U.S. exports to Canada, port audits conducted by Customs and Census, and comparisons of U.S. export data with corresponding ones on imports from the United States reported by major trading partners all indicate that U.S. exports have been persistently undercounted. The underreporting of U.S. exports to Canada has been addressed through data reconciliations and data exchanges with Canada, but the same basic reporting system that led to the undercount of U.S. exports to Canada is still in use for U.S. exports to the rest of the world, although the magnitude of undercounts in vessel and air shipments to these other countries may be lower because document controls (for example, manifests, entrance and clearance documents) exist for those cargoes. Underreporting of exports can be attributed to a failure to file as well as to inaccurate filing to avoid high shipping costs, circumvent export controls, and reduce tariffs and duties in importing countries. Lax enforcement efforts perpetuate the underreporting. Other common errors in merchandise trade data include commodity misclassifications and inaccuracies in data on quantity, weight, and country of destination or origin. Such errors are frequently detected by users. Although Customs and Census are aware of the shortcomings of the data collection system, they do not have a formal data management framework to guide the collection, processing, storage, and dissemination of merchandise trade data. This lack makes it difficult for the agencies to monitor and evaluate their own performance and identify areas for improvement. There is also little interaction between data filers and the two agencies, yet data filers hold the key to the accuracy and timeliness of the incoming data. INTERNATIONAL SERVICES TRANSACTIONS Primarily by improving surveys on travel and adding new surveys on education and selected business, professional, and technical services for 1985-1987, Bureau of Economic Analysis (BEA) in 1989 uncovered an additional $20 billion of net receipts of U.S. international services transactions previously unaccounted for in the data for those years. Such improvement was possible with minimal additional resources. Similar efforts directed at other services undoubtedly would yield similar results, especially for financial services. Nonetheless, several difficulties will persist and complicate the

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BEHIND THE NUMBERS: U.S. Trade in the World Economy collection of U.S. international services data, making them vulnerable to inaccuracies and inadequate coverage. These obstacles stem largely from the diversity of the various service activities and the manner in which transactions occur. To determine data to be collected requires a basic understanding of the nature and scope of services and what constitutes international transactions in services. In addition, rapid technological and organizational changes in the service industries impede efforts to define, classify, and measure the activities. Full coverage of transactions is also difficult because it is not easy to locate all possible respondents to surveys, including newly established companies. In addition, similar transactions may not be reported consistently by different companies. It is difficult to delineate boundaries between individual sectors when service activities overlap. Telecommunications, for example, may cover the same ground as data processing and information transmission; tourism may encompass transportation. In addition, goods and services sold or provided jointly in a package present enormous problems of classification, which is an increasingly important feature of a variety of products. For several types of services, the minimum values of individual transactions for which reports are requested are so high that some types of transactions (for example, legal services) are substantially underreported or simply not represented at all, and the total value of such omitted transactions may be substantial. CAPITAL FLOWS One recent development that will improve the quality of direct investment data is the enactment of the Foreign Direct Investment and International Financial Data Improvement Act of 1990. This act allows BEA access to the Census Bureau's Standard Statistical Establishment List (SSEL) data, enabling BEA to produce more disaggregated data on foreign direct investment in the United States. This, in turn, will facilitate the analysis of the impact of foreign direct investment on the domestic economy at detailed, industry-by-industry establishment level. Nonetheless, in improving the coverage and accuracy of capital flow data, BEA, Treasury, and the Federal Reserve Bank of New York have to contend with the less than satisfactory compliance by filers. Sizable revisions of these data do occur when late reports are received and errors detected. More important, Treasury and the Federal Reserve Bank of New

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BEHIND THE NUMBERS: U.S. Trade in the World Economy York have to deal with the increasingly complex nature of financial portfolio transactions. The existing reporting system for these transactions is designed to collect the bulk of the information from a panel of large financial intermediaries and corporations. Yet the integration of financial markets and innovations in electronic and communications technology have greatly increased the number of financial transactions, led to a proliferation of new financial instruments, and facilitated new modes of transactions, bypassing traditional financial intermediaries and channels. These changes have made it increasingly difficult and costly to capture comprehensive and accurate data on portfolio transactions under the existing system, rendering the data inaccurate and incomplete. The low number of filers on securities transactions, which totaled only 350 in 1990, raises doubt that the data fairly represent the volume of transactions. In addition, sizable discrepancies and undercounts exist, for example, in data on Eurodollar deposits by U.S. residents and nonbank financial assets and liabilities abroad as recorded by Treasury, when compared with those reported by the Bank for International Settlements (BIS) and the International Monetary Fund (IMF). Such discrepancies are estimated to have amounted to about $80-180 billion for Eurodollar deposits in 1988 and $155-190 billion for nonbank assets and liabilities in 1990. Although there are differences in definitions and, in particular, in coverage between the Treasury reporting systems and the BIS and IMF statistical frameworks, such sizable discrepancies suggest the need for an examination of the possibility of underreporting in the U.S. data. RECOMMENDATIONS Merchandise Trade Recommendation 4-1 The Customs Service and the Census Bureau should strengthen their enforcement efforts to assure accurate and timely reporting of exports to correct the problem of export underreporting. The Census Bureau should no longer allow carriers to report exports as late as 4 days after departures of shipments. Incentives should be provided to exporters to file promptly and accurately. Increased efforts should be made to exchange and reconcile data with major trading partners and to perform port audits. In order to guide the allocation of resources devoted to data quality improve

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BEHIND THE NUMBERS: U.S. Trade in the World Economy ment, the Census Bureau should identify the characteristics of those filers prone to incomplete or inaccurate reporting. Recommendation 4-2 The Customs Service and the Census Bureau, in order to guide those responsible for data collection, analysis, and dissemination, should identify and develop measures of the quality of merchandise trade statistics. The quality measures should permit overall estimates of the quality of the published merchandise trade data and estimates of the quality of specific key processes, such as data collection, coding, editing, imputation, error correction, and revision procedures. Recommendation 4-3 The Census Bureau and the Customs Service should work closely with data filers to evaluate and improve the quality of the incoming trade data. They should also work closely with merchandise trade statistics users to monitor continuously the users' perceptions of the quality of trade statistics and to improve continuously their production processes and the quality of the data. Recommendation 4-4 The Census Bureau should establish a continuous independent review system (CIRS), in which the incoming information for a small sample of import and export transactions would be independently reviewed by professional staff and the results would be used to determine the sources and causes of errors and to develop procedures to improve data quality. Recommendation 4-5 In addition to coordinating with the Customs Service, the Census Bureau should develop mechanisms for comparing Census data with monthly agricultural export data compiled by the Department of Agriculture directly from firms and with monthly oil import data gathered by the Energy Information Administration (EIA) of the Department of Energy directly from oil companies. Agricultural exports and oil imports not only represent two large components of U.S. trade, but also are subject to large seasonal changes. Cross-checking of monthly data with Agriculture and EIA should enhance the ability of the Census Bureau to detect error-prone data and work toward improving their accuracy. Furthermore, comparisons of Census's Foreign Trade Division annual export data on manufactured goods with data

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BEHIND THE NUMBERS: U.S. Trade in the World Economy on manufactured exports recorded in the Annual Survey of Manufactures (ASM) conducted by Census's Industry Division should yield similar payoffs. Recommendation 4-10 The Census Bureau should accelerate its efforts to improve its processes for collecting, processing, and disseminating trade data through increased automation. The Census Bureau should initiate a joint effort with other appropriate agencies to develop a simplified universal electronic shipping and trade document. Recommendation 4-11 The Census Bureau and the Bureau of Economic Analysis should consider initiating a substantial multiyear effort to develop and test concepts, content, design, and procedures for surveys to collect integrated merchandise and services trade data from establishments. Initially, the goal of such surveys might be to supplement existing sources of data, but the Census Bureau should give serious consideration to the long-run objective of replacing the compilation of merchandise trade data from official documents. Common data sources will enhance comparability of data. International Services Transactions Recommendation 5-1 Among the international services categories, improvements in data on international financial services should be accorded a high priority. The Bureau of Economic Analysis, the Treasury Department, and the Federal Reserve should work together to develop a clear conceptual framework, as well as effective statistical methods and procedures for collecting the information. Recommendation 5-2 The Bureau of Economic Analysis should place greater emphasis on increasing the response rates of the mandatory surveys. Recommendation 5-3 For the travel accounts, a study should be made of the feasibility of introducing methods other than the current questionnaire card surveys or of obtaining improved responses from the present method. Recommendation 5-4 For information on international sales and purchases of services by affiliates, beyond that required

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BEHIND THE NUMBERS: U.S. Trade in the World Economy for the balance-of-payments tabulations, the Bureau of Economic Analysis should develop separate and expressly designed surveys, in coordination with the service sectors concerned, to obtain the additional data. Burdening the existing system with additional details would increase time lags in reporting, reduce the quality of responses, and weaken the basic data requirements of the balance-of-payments accounts. Capital Flows Recommendation 6-1 Because the existing system for collecting data on international portfolio transactions was developed before the advent of modern electronic and telecommunications technology currently used by growing numbers of transactors, research is needed to explore alternative methods of data collection. Over the long term, the clearing systems for securities, the payments systems for banking transactions, and other clearing channels for nonbanking transactions should be explored as alternative sources of information. Increased automation in trading and clearing systems would facilitate the compilation of data from such sources. Recommendation 6-2 Research should be performed to develop ways to broaden coverage and to enforce compliance of reporting by filers. For securities transactions, improvements in coverage of U.S. outward investment in foreign securities and transactions by nonfinancial entities are of particular importance. For reporting by banks, the principal research effort should focus on enhancing the timely and accurate reporting of U.S. affiliates of foreign banks. For transactions on nonbanking concerns, improvements in the coverage of activities of the U.S. nonfinancial population, both corporate and personal, are needed. A broadening of the filing of TIC C forms, perhaps through lowering exemption levels for reporting, should also be considered. Recommendation 6-3 The adequacy of data on official U.S. government international capital transactions should be examined. Official U.S. government international capital transactions are of growing importance, but the myriad forms of transactions in U.S. official reserve assets and other government assets and the involvement of numerous government agencies make them susceptible to inadequate reporting. There

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BEHIND THE NUMBERS: U.S. Trade in the World Economy have also been few evaluations of government agencies' compliance with reporting requirements. Recommendation 6-4 The methodology of estimating portfolio investment incomes should be improved, including new methods to measure current values of U.S. securities holdings abroad, as well as other forms of U.S. international financial assets and liabilities. Appropriate rates of return can be developed through close consultations with financial institutions at home and abroad. Recommendation 6-5 In view of the difficulties of obtaining data on residents' direct purchases or sales of foreign securities, research should be undertaken to explore the feasibility of exchanging data with partner countries. This would require, among other things, the development of universal codes for identifying securities and uniform standards for reporting, as well as common definitions of the residence of the immediate transactor and of the ultimate owner. IMPROVING THE DATA COLLECTION AND DATA ANALYSIS INTERFACE The major function of federal statistics is to inform public policy making. To this end, data must be responsive to policy and program needs. To best accomplish the task, data collection agencies must understand the basic purposes of the data and build appropriate concepts and definitions into the design and development of the statistical framework. To ensure that the data collected are suitable for the purposes intended, statistical agencies must also be able to analyze and interpret them. In addition, since users understand the need for the data and are knowledgeable about the policies and programs for which the data are collected, data collection agencies need to work closely with users to ensure that relevant data are compiled. Such collaboration also makes users more aware of the availability of data and data limitations and enables them to make maximum use of the data for their purposes. Until now, the absence of a strong nexus between data collection and data analysis has resulted in the production of data of limited analytic usefulness or, in other cases, not fully utilized. An important symptom of the communications failure between data users and data collectors is the absence of clear measures of

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BEHIND THE NUMBERS: U.S. Trade in the World Economy uncertainty accompanying the data provided by the federal government. In our judgment, those who collect data and those who use data need to be cognizant that these are not perfect measures, but only estimates. Currently, collectors of data report statistics as if they were perfect measures, and users generally use them as if they were perfect; major misinterpretations can easily occur. There is strong demand for more data, but little demand for more accurate data. Because the international trading environment will continue to evolve, continuing interaction between statistical agencies and users is essential to ensure that relevant data will be collected and irrelevant data will not. Such interface will promote flexibility in the data collection system. Moving toward a responsive system of data collection is critical to enhance cost-effectiveness in compiling the massive international trade and financial data. MERCHANDISE TRADE The quality of the merchandise trade data and their limitations are inadequately communicated to users. The published merchandise trade balance data also routinely fluctuate widely from month to month. Users at times have interpreted a large fluctuation in the monthly change as indicative of shifts in the underlying trend or other basic properties of the data. This, in turn, has sent inappropriate signals to financial and foreign exchange markets. Our analysis shows the monthly changes in the U.S. merchandise trade balance over the period from February 1987 through February 1991, corrected for trend and for correlation over time, have a mean value which is small, $249 million, and a large standard error, $1.4 billion. Moreover, monthly changes tend to alternate in sign from positive to negative to positive. These results show that large monthly changes in the merchandise trade balance can exist without any change occurring in the underlying trend. Our analysis also suggests that fluctuations in the reported monthly changes in the merchandise trade balance can be induced by the seasonal adjustments procedure used by the Bureau of the Census. Alternative methods of seasonal adjustments could model seasonal movements as well or better than current methods and reduce the volatility of the monthly trade balance data. The monthly merchandise trade statistics also lack a long-term orientation, limiting their usefulness for policy analysis and re-

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BEHIND THE NUMBERS: U.S. Trade in the World Economy search. As a statistical agency, the Census Bureau's objective is to collect, process, and disseminate the monthly data on a timely basis. From a data collector's perspective, each batch of the monthly figures is largely a product in itself, rather than part of an ongoing time series. As a result, consistent time series of merchandise trade data are lacking. INTERNATIONAL SERVICES TRANSACTIONS The development of data to cover new services has been hampered by BEA's limited analytic resources. Such constraints have kept BEA from improving concepts and methodologies, especially to determine how different types of services should be measured, and from refining survey questionnaires. Data compiled in large sector aggregates mask major changes in particular components; lack of detailed U.S. international services data limits analytic uses. At present, BEA does not analyze extensively the data it collects nor present its own analyses and interpretations widely to the public. Users' access to data on U.S. international services transactions is also limited. CAPITAL FLOWS Data on capital flows are also not well synthesized and organized in usable formats, limiting their usefulness. BEA and Treasury have yet to exploit fully the analytic potential of the data and to disseminate them broadly to users. Existing data are not regularly reviewed by BEA and Treasury to determine if additions, deletions, or other modifications are necessary. RECOMMENDATIONS Recommendation 3-1 The Bureau of Economic Analysis, the Treasury Department, and, especially, the Census Bureau should strengthen their research and analytic capabilities so that they can develop proper concepts and methods to measure the U.S. international economic activities. The Census Bureau and the Bureau of Economic Analysis should work jointly to develop concepts, definitions, measures, and strategies for capturing in more detail the rapidly growing intracompany trade and trade in intermediate inputs. The Treasury Department and the Federal Reserve should jointly explore similar improvements to cover portfolio transactions and the flow-

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BEHIND THE NUMBERS: U.S. Trade in the World Economy of-funds accounts. In addition, efforts should also be made to measure more accurately prices of international transactions and other dimensions of competitiveness, including taxes, costs, and rates of return, as well as to improve constant-price measures of exports and imports. These agencies should seek outside professional advice from analytic users and other experts in these efforts. Recommendation 3-2 Sufficient information in the form of data quality profiles should be provided to users to help them evaluate the quality of the data. Recommendation 3-3 An advisory body should be established to guide long-term developments, as the international trade environment continues to evolve and transactions become increasingly complex. This advisory body should be composed of experts from industry, academia, and government; it should include research and analytic data users, data filers, and respondents to government surveys, as well as user agency officials. Priority should be given to the development of timely, accurate, relevant, and cost-effective data for public policy making. Recommendation 3-4 For data that primarily benefit specialized groups that can be clearly defined, market mechanisms should be developed to coordinate the supply of and demand for the data. When the benefits of the data accrue largely to specialized groups but also to public policy makers, cost sharing should be the rule. Recommendation 4-6 Measures of uncertainty about the accuracy of trade data should be published. In particular, attention should be given to establishing normally acceptable ranges for the fluctuations displayed in monthly trade balance figures. In addition, the Census Bureau should assess the feasibility of applying alternative seasonal adjustment procedures to produce data more indicative of underlying trends.

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