5

International Services Transactions

Along with improvements in transportation, communications, information technology, and expansion in domestic services in the past decade, there has been a rapid growth in U.S. international services transactions, both in cross-border delivery of services and in the sales of services abroad by foreign affiliates of U.S. firms. As a consequence, the demand for international services data has greatly increased. The federal government needs such data to better measure economic activities and to formulate and evaluate domestic and international trade policies. The private sector needs such data to monitor trends and assess market opportunities. In addition, for the first time, services are a subject for negotiation in the current Uruguay Round of the General Agreement on Tariffs and Trade (GATT). More specific data on U.S. international services transactions will be needed in the future when the United States begins negotiations on individual services.

Two pieces of U.S. legislation during the 1980s—the Trade and Tariff Act of 1984 and the Omnibus Trade and Competitiveness Act of 1988—have mandated enhancements of statistical programs for international transactions in services. Over the past 5 years, the Bureau of Economic Analysis (BEA) has made great strides in improving the coverage and accuracy of data on U.S. cross-border trade in services and sales of services by majority-owned foreign affiliates of U.S. firms. Nonetheless, there remains a considerable range in the quality of the data now available, and much more needs to be done.



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BEHIND THE NUMBERS: U.S. Trade in the World Economy 5 International Services Transactions Along with improvements in transportation, communications, information technology, and expansion in domestic services in the past decade, there has been a rapid growth in U.S. international services transactions, both in cross-border delivery of services and in the sales of services abroad by foreign affiliates of U.S. firms. As a consequence, the demand for international services data has greatly increased. The federal government needs such data to better measure economic activities and to formulate and evaluate domestic and international trade policies. The private sector needs such data to monitor trends and assess market opportunities. In addition, for the first time, services are a subject for negotiation in the current Uruguay Round of the General Agreement on Tariffs and Trade (GATT). More specific data on U.S. international services transactions will be needed in the future when the United States begins negotiations on individual services. Two pieces of U.S. legislation during the 1980s—the Trade and Tariff Act of 1984 and the Omnibus Trade and Competitiveness Act of 1988—have mandated enhancements of statistical programs for international transactions in services. Over the past 5 years, the Bureau of Economic Analysis (BEA) has made great strides in improving the coverage and accuracy of data on U.S. cross-border trade in services and sales of services by majority-owned foreign affiliates of U.S. firms. Nonetheless, there remains a considerable range in the quality of the data now available, and much more needs to be done.

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BEHIND THE NUMBERS: U.S. Trade in the World Economy This chapter describes the key features of international services trade data; delineates the existing methods of data collection; analyzes the adequacy of the data; and makes recommendations for their improvement. DATA ON INTERNATIONAL SERVICES TRANSACTIONS: KEY FEATURES International sales of services differ from sales of goods: goods can usually be consumed in a different country from the one in which they are produced, but services often must be produced and consumed in the same country. Services sales to foreigners can involve many different forms of delivery: the cross-border movement of a producer, such as the provision of professional and business services to foreigners; the cross-border movement of a consumer, such as services provided to foreign tourists, students, and medical patients; information, including electronic transmission of voice, video, or data; legal instruments, such as contractual arrangements to use intellectual property, including patents, trademarks, and broadcast rights; the movement of services themselves, including transportation of goods and passengers. Unlike the collection of merchandise trade data, the various forms of delivery of international services require the use of different data sources to gather information on transactions. Also unlike merchandise trade statistics, data on U.S. international services cover two kinds of transactions: (1) cross-border ones, in which services move across national boundaries or are purchased or produced by temporary visitors who cross borders (for example, transportation services for passengers and cargoes and communications and information services); and (2) establishment transactions, which involve the delivery of services through foreign affiliates located in the consuming country (for example, banking, accounting, engineering, and advertising). Statistics on U.S. international services transactions are compiled and estimated by BEA largely on the basis of periodic surveys of companies engaged in international services transactions. This method is used because international services transactions do not usually generate official records or customs documentations. Some data on international services transactions are based on benchmark surveys conducted at 5-year intervals; others are compiled from annual or quarterly surveys. In developing its estimates for different services categories, BEA often refers to data from other government agencies, private organizations, foreign

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BEHIND THE NUMBERS: U.S. Trade in the World Economy governments, and international organizations. When only annual data are available, quarterly estimates are interpolations of annual estimates. BEA relies on various sources to update its mailing lists of respondents for its surveys. It also has obtained legal authority to gain access to the Census Bureau's Standard Statistical Establishment List (SSEL), a comprehensive list of business establishments used in Census Bureau 's surveys, to enhance the completeness and accuracy of its sampling frames. Prior to the mid-1980s, data on sales of services to foreigners consisted largely of cross-border transactions of traditional services (such as royalties and fees on the use or sale of U.S. intangible properties, travel, transportation, telecommunications, construction, reinsurance, and film rentals). Separate sales and purchases data on establishment transactions were not available. Since the mid-1980s, several major developments have improved the coverage and quality of U.S. international services data. Mandatory reporting, as required under the Trade and Tariff Act of 1984, has increased response rates of surveys, improving the quality of the data. In addition to the traditional service categories, new surveys have been conducted by BEA to collect sales and purchases data not previously gathered on business, professional, and technical services, including: advertising; computer and data processing; database and other information services; telecommunications; research, development, and testing services; industrial engineering; management, consulting, and public relations services; legal services; installation, maintenance, and repair of equipment; agricultural services; management of health care facilities; accounting, auditing and bookkeeping services; mailing, reproduction, and commercial art; personnel supply services; sports and performing arts; primary insurance; and construction, engineering, architectural, and mining services. Estimates of medical services sales have been available since 1987 and of educational services sales and purchases since 1989. Noninterest income of U.S. banks, which had been commingled with interest income, was reclassified to services in 1989. Although data on establishment transactions (sales of services through affiliates) have been available since 1982 for foreign affiliates of U.S. companies, corresponding data for U.S. affiliates of foreign firms have been available only since 1987. Since June 1989, incomes paid and received on investments, which had been included in “services” broadly defined, have been labeled separately from services in the U.S. balance of payments. In addition, the Omnibus Trade and Competitiveness Act of

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BEHIND THE NUMBERS: U.S. Trade in the World Economy 1988 has provided for U.S. international services data to be included in the National Trade Data Bank and for the improvement of eight specified groups of services: banking services; information services, including computer software services; brokerage services; transportation services; travel services; engineering services; construction services; and health services. Most of the eight services are already covered by surveys. For the two major uncovered services—banking and brokerage transactions—BEA is actively studying ways to improve the data, including investigating the feasibility of instituting a new survey for financial services transactions. Due to budgetary constraints and for reasons of efficiency, BEA limits its surveys of purchases and sales of services to companies believed to have large transactions, except for travel data, which are collected from individual travelers. Information reported to BEA is confidential. Numbers of responses on which estimates are based vary with different surveys. In 1988 about 35,000 responses were used for the travel estimates; 14 to 130 for different transportation sectors; 900 for business, professional, and technical services; 500 for royalties and fees; 200 for insurance surveys; and 130 for construction, engineering, architectural, and mining services. The differences reflect the degree of industry concentration in the various services categories: for example, there are fewer than 10 U.S. airlines that provide international flights. They also partly reflect the concentration of international service transactions undertaken by firms in certain industries: for example, there are only a small number of firms that do international business in the construction industry. Unlike merchandise trade statistics, which are published in 14,000 import and 8,000 export commodity categories covering 212 countries and regions, international services transactions statistics are collected in aggregate values in approximately 25 broad categories, and country breakdowns are available only for major services. These statistics on a highly aggregated basis are reported in the quarterly release of the U.S. balance-of-payments accounts. BEA publishes annually the more detailed tables on international services in its September issues of Survey of Current Business. Several difficulties complicate the collection of international services data, making them vulnerable to inaccuracy and inadequate coverage, primarily the diversity of the various service activities and the manner in which transactions occur. Even determining what data should be collected requires a clear understanding of the nature and scope of services and their international dimensions. In addition, rapid technological and organiza-

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BEHIND THE NUMBERS: U.S. Trade in the World Economy tional changes in service industries further complicate definition, classification, and measurement of services transactions. It is also not easy to delineate boundaries between individual service sectors because some service activities overlap one another. Telecommunications, for example, may cover the same ground as data processing and information transmission; tourism involves transportation. In addition, goods and services sold or provided jointly in a package (such as turnkey manufacturing facilities and major office and computing equipment) present problems of classification; there is no standard for allocating value to services associated with production of goods (this problem also applies to domestic services). Full coverage of transactions is difficult, in part because it would not be easy to locate all possible respondents to surveys, including newly established companies. In addition, similar transactions may not be reported consistently by different companies. Surveys on services transactions are also subject to sampling and nonsampling errors and errors in the gathering and processing of data. The reporting burden on respondents can limit the volume of data that can be gathered, and the complexity of surveys can affect response rates and quality of data reported. Data compiled in large sector aggregates also mask major changes in particular components. METHODS OF ESTIMATING INTERNATIONAL SERVICES TRANSACTIONS Our discussion on sources and methods used in estimating U.S. data on international services transactions focuses on procedures that have been used since 1986, when a program of major improvements was initiated. The improvements resulted in a small upward revision of net receipts for 1985 (from +$10.5 billion to +$13.1 billion), followed by a net increase of $6.9 billion in the revised 1986 data and an upward revision of $6.0 billion in the previously published 1987 data; see Table 5-1. Nearly all of the changes represent revisions of transactions with nonaffiliated foreign parties; there is comparatively little change in the data on transactions between U.S. enterprises and their foreign affiliates or parent corporations. Sources and methods differ for the collection of data on services transactions between affiliated parties of multinational corporations; data on “other” private services transactions with

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BEHIND THE NUMBERS: U.S. Trade in the World Economy TABLE 5-1 Revisions in Data for U.S. International Services Transactions (in billions of dollars)   Revised Data   1987 1988 1989 Service 1985 1986 1985 1986 1987 1985 1986 1987 1988 Private service receipts, total 16.8 19.0 16.7 19.7 22.3 19.9 29.4 32.1 35.1 Royalties and fees from affiliates 4.2 4.7 4.1 5.4 6.9 — 5.4 6.9 8.3 Royalties and fees from other nonresidents 1.9 2.1 1.9 1.9 2.1 6.0 1.8 2.2 2.4 Other service receipts from affiliates 2.5 3.1 2.5 3.0 2.4 — 3.0 2.2 2.9 Other service receipts from other nonresidents 8.2 9.1 8.2 9.4 10.9 13.9 19.2 20.8 21.5 Private service payments, total −6.2 −6.7 −6.2 −7.0 −8.9 −6.8 −9.8 −12.7 −13.5 Royalties and fees to affiliates −0.5 −0.6 −0.5 −0.6 −0.8 — −0.6 −0.8 −1.0 Royalties and fees to other nonresidents −0.4 −0.5 −0.4 −0.4 −0.6 −0.9 −0.5 −0.5 −1.1 Other service payments to affiliates 0.7 1.3 0.7 1.3 1.9 — 1.3 0.6 0.7 Other service payments to nonresidents −6.0 −6.9 −6.0 −7.3 −8.4 −5.9 −10.0 −12.0 −12.1 Net private services 10.6 12.3 10.5 12.7 13.4 13.1 19.6 19.4 21.6 With affiliates 6.9 8.5 6.8 9.1 9.4 — 9.1 8.9 10.9 Othera 3.7 3.8 3.7 3.6 4.0 — 10.5 10.5 10.7 aThis category does not include shipping or travel; it does include the services enumerated in Table 5-2, Table 5-3, and Table 5-4. SOURCE: Survey of Current Business, various June issues.

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BEHIND THE NUMBERS: U.S. Trade in the World Economy unaffiliated parties, including those covering royalties, fees, and payments for intangible rights, reinsurance and direct insurance, and construction and engineering services; data on the two major traditional service sectors, international shipping and tourism; and data on financial, educational, and medical services transactions. For some of the data, BEA uses various surveys; see Figure 5-1. TRANSACTIONS BETWEEN AFFILIATED PARTIES OF MULTINATIONAL CORPORATIONS Services between affiliated parties of multinational corporations primarily include intracorporate receipts and payments of royalties, fees, and other service items between foreign affiliates and their parent companies. Data on services transactions between U.S. corporations and their foreign affiliates, as well as those between foreign corporations and their U.S. affiliates, are compiled from a portion of the information collected in direct investment surveys. Separate surveys are used to cover U.S. direct investment abroad and foreign direct investment in the United States. Services Transactions Related to U.S. Direct Investment Abroad A hierarchy of BEA surveys are used to collect information on U.S. direct investment abroad. First are the benchmark surveys of U.S. direct investments abroad, the BE-10 series, which are generally scheduled at 5-year intervals; second are the annual surveys of these investments, the BE-11 series; and third are the quarterly series (BE-577). The most recent benchmark covers 1989. The benchmark surveys are intended to be all-inclusive: a direct mailing is made by BEA to all U.S. firms identified as being a parent of a foreign affiliate (that is, a U.S. person, or affiliated group, owning a 10 percent or greater voting interest in a foreign corporation, or a comparable interest in an unincorporated foreign business). The BEA mailing list is comprehensive, having been built up over many successive surveys, and it is updated daily on the basis of a wide variety of public and other sources reporting on the establishment of a direct-investment relationship. The exemption level for reporting for individual foreign affiliates is fairly low: a foreign affiliate whose assets, sales, or net income fall between $3 million and $15 million is required to be reported on the short form (BE-10B(SF)); one whose assets, sales, or net income are in excess of $15 million is required to be reported on the long form

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BEHIND THE NUMBERS: U.S. Trade in the World Economy FIGURE 5-1 BEA Surveys (Forms Used) on Direct Investment and International Services Transactions Direct Investment Direct Transactions of U.S. Reporter With Foreign Affiliate (BE-577) Transactions of U.S. Affiliate, Except an Unincorporated Bank, With Foreign Parent (BE-605); Transactions of U.S. Banking Branch or Agency With Foreign Parent (BE-606B) Benchmark Survey of U.S. Direct Investment Abroad (BE-10A, BE-10A Bank, BE-10B, BE-10B Bank) Benchmark Survey of Foreign Direct Investment in the U.S. (BE-12) Annual Survey of U.S. Direct Investment Abroad (BE-11) Annual Survey of Foreign Direct Investment in the United States (BE-15) Initial Report on a Foreign Person's Direct or Indirect Acquisition, Establishment, or Purchase of the Operating Assets of a U.S. Business Enterprise, Including Real Estate (BE-13) Travel Survey of U.S. Travelers Visiting Canada (BE-536) Expenditures of United States Travelers in Mexico (BE-575) Transportation Ocean Freight Revenues and Foreign Expenses of U.S. Carriers (BE-30) U.S. Airline Operators' Foreign Revenues and Expenses (BE-37) Foreign Ocean Carriers' Expenses in the United States (BE-29) Foreign Airline Operators' Revenues and Expenses in the United States (BE-36) Other Services Benchmark Survey of Selected Services Transactions With Unaffiliated Foreign Persons (BE-20) Annual Survey of Selected Services Transactions With Unaffiliated Foreign Persons (BE-22) Annual Survey of Royalties, License Fees, and Other Receipts and Payments for Intangible Rights Between U.S. and Unaffiliated Foreign Persons (BE-93) Annual Survey of Construction, Engineering, Architectural, and Mining Services Provided by U.S. Firms to Unaffiliated Foreign Persons (BE-47) Annual Survey of Reinsurance and Other Insurance Transactions by U.S. Insurance Companies With Foreign Persons (BE-48) (BE-10B(LF)); even if there is no reportable foreign affiliate, a parent company must reply to that effect. There are also specialized reports for banks. In these surveys, more detailed data are collected for majority-owned affiliates than for those that are minority owned. The annual surveys (BE-11A, B, and C) are not primarily intended to amplify the data used in the balance-of-payments accounts, but rather to keep current other aspects of the operations of the multinational enterprises—such as sales or revenues, employment, details of the balance sheets and profit-and-loss accounts, and trade with parent companies in the United States. Conse-

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BEHIND THE NUMBERS: U.S. Trade in the World Economy quently, the data derived from these surveys has no significant bearing on the magnitude of international services transactions in the U.S. balance of payments, but they can be used as a partial measure of the sale of services by U.S. companies in foreign markets. In contrast, the quarterly survey (BE-577) is used to generate data for the balance-of-payments accounts. Data obtained from the quarterly survey are directly linked back to the coverage of the benchmark surveys. Filing is required for each foreign affiliate with assets, sales, or net income exceeding $20 million. The relative scopes of the benchmark and the quarterly surveys are reflected in the number of reporters and affiliates covered by each. In the benchmark census of 1982, 2,245 reports were filed by U.S. parent companies, covering 33,650 foreign affiliates, of whom 18,339 were required to report detailed information. Recent reporting on the BE-577 has covered 1,200 U.S. parent companies and 9,160 foreign affiliates. Another measure of coverage is given by the percentage of statistical features of the benchmark that is also covered by the quarterly BE-577. On that basis, it is estimated by BEA that almost 90 percent of the current income and service transactions of the universe of direct investors is covered by the quarterly reports, and that percentage, within narrow margins, is used to expand the data cells derived from the quarterly survey to yield universe estimates. An indication of the magnitude of services transactions between U.S. companies and their foreign affiliates is given in Table 5-1 (above). The net receipts by U.S. parent companies of royalties, fees, and earnings from the use of intangible property rose very rapidly from 1985 through 1988, while receipts from affiliates for other service items, including intracorporate charges for management services, were relatively flat over that period. Table 5-1 also shows that receipts of royalties, fees, and other service items from foreign affiliates of U.S. companies account for almost one-third of all receipts from these types of private services. These data can be extracted from the various direct investment surveys. In the benchmark report (BE-10B(LF)) filed for each sizable foreign affiliate, items 101-107 provide a set of data on service transactions between an affiliate and its U.S. parent, covering royalties, fees, and payments for the use of intangible property, as well as allocated expenses and service transactions between the affiliate and the U.S. parent. For smaller foreign affiliates reporting on the short form (BE-10B(SF)), service transactions with the parent are covered in items 67-69, with some breakdown by

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BEHIND THE NUMBERS: U.S. Trade in the World Economy type. In addition, data for royalties, fees, and the like are given in items 82 and 83, but these yield operating rather than balance-of-payments data. As a rough generalization, the coverage of current-account entries in the balance of payments expected to be provided by the short form is estimated at less than 10 percent of the combined coverage of the long and short forms. There are specialized benchmark reports for banks (BE-10A Bank and BE-10B Bank). Items 70-72 on the BE-10 Bank form parallel the other forms in covering certain service transactions between an affiliate and a U.S. parent company. These entries provide a basis for the entries in the balance-of-payments accounts, but they cover only a small part of the overall entries for international banking services in the accounts. The annual surveys covering parent companies contain no balance-of-payments type of data on services transactions; the form covering majority-owned foreign affiliates (BE-11B) contains some entries (items 47-50) that cover sales of services abroad by their foreign affiliates, but not by type. The quarterly reporting system (BE-577) provides the continuing basis for the regular quarterly revisions of the balance-of-payments accounts. This form is limited to entries directly pertinent to the balance-of-payments accounts. For the royalties, fees, and other intracorporate services relevant to this discussion, the data are given in items 17, 18, 19.1, and 19.2. These items follow the comparable items in the benchmark reports; they cover only transactions with the parent company, and some types of transactions or charges for services are not required in detail. In processing these incoming quarterly reports, BEA “ blows up” the sample data for each industry/country cell to yield universe estimates. As the incoming reports accumulate, the amount of blow-up required is reduced; when the full sample is in, the amount of blow-up across cells averages about 10 percent. It should be noted that this is not a random sample: essentially all known significant direct investors are required to report quarterly. Services Transactions Related to Foreign Direct Investment in the United States For foreign direct investments in the United States, a similar reporting structure has evolved. For these transactions, the most recent benchmark survey (BE-12) covered 1987; the preliminary results were published in the July 1989 issue of the Survey of Current Business, and the final results in the July 1990 issue.

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BEHIND THE NUMBERS: U.S. Trade in the World Economy More detailed results were published in separate data publications. To speed the tabulation process, the larger returns are tabulated first. The final count of such affiliates for 1987 was 8,577. Given the mandatory filing requirement and the extensive efforts by BEA to search out all potential respondents, it is reasonable to consider the benchmark totals as effectively complete. BEA estimates that more than 80 percent of the balance-of-payments entries or assets of foreign direct investments in the United States is accounted for by majority-owned affiliates. The basic benchmark form (BE-12(LF)) is filed by each U.S. affiliate with $20 million or more of assets, sales, or net income. Information on international services transactions is rather limited. Lines 75-79 give data on sales of services, not differentiated by type, separately for sales to foreign parents and affiliates and sales to unrelated foreign persons. These data can serve in part to check other data collected on overall sales of services to nonresidents. Lines 253-257 provide greater detail on transactions in services between a reporting U.S. affiliate and its foreign parent, covering all types of services. Moreover, there is an extensive section (Part IV) devoted to gathering information on transactions of a U.S. affiliate with foreign affiliates of the foreign parent company, which yields considerable amounts of information. It appears that in the benchmark years there is complete coverage of services transactions with nonresidents carried out by U.S. affiliates of foreign firms. The annual report form (BE-15) has two reporting levels: for sales, assets, or net income exceeding $20 million, a long form is required; between $10-20 million, a short form must be filed. At these levels, the annual long form would cover about 95 percent of the benchmark level of assets. The information collected on services only partly parallels the coverage of the benchmark surveys: lines 70-73 cover all sales of services by the U.S. affiliate, but not in detail, although the industry classification of the affiliate may indicate the nature of the services sold. However, no information on services is collected that is relevant to the balance-of-payments accounts. This form is intended primarily to compile data on operational aspects of the U.S. affiliates of foreign firms in the United States. The quarterly report forms (BE-605 and BE-606B for branch banks) provide basic information for the ongoing entries on services in the balance-of-payments accounts. The reporting requirement (over $20 million) is the same as for the benchmark long form. On average, the coverage of current-account transactions, including

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BEHIND THE NUMBERS: U.S. Trade in the World Economy both receipts and payments. Given the weaknesses in the BEA procedure, probably some large changes could be expected, but a test for possible biases in the new system and a detailed review of the estimated daily expenditure rates would certainly help to shore up the credibility of the expenditure data. There are similar problems when dealing with expenditures in the United States by foreign air travelers, and here, too, a test of the consistency of daily expenditures data would seem to be in order. However, these travelers do report on the basis of their actual expenditures. As noted above, the questionnaire cards are also used to derive data on average fares paid by U.S. and foreign travelers. These average fares are combined with data available to BEA on the nationalities of travelers and the ownership of airlines to derive estimates of total fares paid by U.S. travelers to foreign airlines and by foreign travelers to U.S. airlines. The average fare data derived from the cards have not been checked for consistency with generally available data on air fares. Such a check might be worth doing on a spot basis for a sample of flights for which BEA would have specific information. One major difficulty reported by BEA is that the necessary data on the number of travelers by nationality and airline, provided by Department of Transportation, are very late in arriving, so the published fare data for the most recent two to four quarters are extrapolations based on earlier data. Also, the fare data received from cards for U.S. airlines alone, or for foreign airlines alone, yield questionable results, given what is known about air fares in general, so that the two data sets are merged to smooth out the result. This result also suggests some difficulties in the sampling process. Travel With Canada For data on overland travel to and from Canada, the standard procedure for some years has been that BEA, through the Customs Service, carries out a questionnaire card survey of U.S. residents returning from Canada, and Statistics Canada surveys Canadians returning from the United States. The agencies then exchange the data on expenditures and length of stay, to be combined with data on the number of border crossings. This system seemed to be efficient and adequate, but the Canadians decided that they wanted a wider range of information on the expenditures of U.S. travelers in Canada and that the number of travelers covered on the U.S. side was insufficient. Starting in 1990, Statistics Canada has also been covering U.S. travel in Canada by giving questionnaires to Americans entering Canada and asking that they be mailed back, in Canada, before the traveler re-

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BEHIND THE NUMBERS: U.S. Trade in the World Economy turns to the United States. The results will be made available to BEA. It remains to be seen what the new system will reveal and whether any revisions of the older data will be needed. Travel With Mexico To cover most U.S. overland travel in Mexico, BEA uses a card (handed out by the Customs Service according to a program designed by BEA) covering U.S. travelers returning across the border. It is assumed that nearly all such travel takes place within a 3-mile wide border area. The INS provides data on the number of border crossings. For this segment of travel, the statistical routine is similar to the sampling technique for Canada, described above. The data on border travel is supplemented by data collected by the Bank of Mexico from U.S. travelers who travel farther than 3 miles into Mexico. The resulting estimates are supplied to BEA. There is, however, no procedure for checking the validity of the information provided. For data on travel by Mexicans in the United States, BEA depends entirely on estimates developed by the Bank of Mexico. These estimates are based on personal interviews with returning visitors conducted by representatives of the Bank of Mexico. There is no independent check on these travel expenditure estimates. FINANCIAL SERVICES AND EDUCATIONAL AND MEDICAL TRANSACTIONS Financial Services The rapid growth of the international activities of banks and other financial institutions and the introduction of new financial instruments and new services performed for investors and borrowers should result in a considerable escalation of the fees and commissions earned by resident financial institutions from non-residents and in payments for services performed by foreign institutions for U.S. residents. In practice, however, it has been proved very difficult to establish procedures for obtaining information on international receipts and payments for financial services. This is not only a U.S. problem —most countries are having similar problems. As shown in Table 5-2 (above), the coverage of U.S. receipts for financial services was improved in the mid-1980s, and the level of such receipts has risen slowly to nearly $4 billion. Nearly one-half of the amount now recorded as receipts for financial services had been entered earlier as part of portfolio income receipts. Much work remains to be done before the coverage of financial services can be considered to be comprehensive.

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BEHIND THE NUMBERS: U.S. Trade in the World Economy At present, the major element in financial fees is the commissions generated in connection with transactions in securities between U.S. and foreign residents. The principal data on the turnover in these transactions are provided by the monthly Treasury S forms, which show purchases and sales, for an extended list of countries, in U.S. bonds, U.S. equities, foreign bonds, and foreign equities. The amounts reported in the S forms include the value of the securities and fees and commissions. Until recently, no effort was made to adjust the capital flow data by subtracting an estimate of the implicit services component. At present, the S form data are adjusted for fees and commissions estimated by BEA before being entered in the capital accounts. To estimate the services component of securities transactions, BEA takes into account many aspects of the trades taking place: the nature of the security and the market where traded, the residence of the transactors, the size and other characteristics of the reported trades (for example, separating new issues and redemptions from trading in the secondary market), and the changes in the fee structure that are occurring. Information on fee structures is kept up to date by the use of a variety of published sources and discussions with market participants. For foreigners purchasing U.S. securities, separate fee structures are developed for each type of security, and separate account is taken of trade in U.S. government issues for which the fee may take the form of a markup on purchases. Fees paid on sales of new U.S. issues in foreign markets are also calculated. In short, BEA attempts to develop the estimates carefully. For U.S. trading in foreign securities, it is assumed that most transactions are effected abroad, and an estimated fee paid to foreign financial institutions is deducted from the gross trading prices reflected in the S form data. There are many peculiarities of the fee structures—such as intercompany trading to adjust inventories or wholesale trading of certain kinds—that must be taken into account in constructing the fee structure applicable to these trades. In addition, there remains the difficulty that the S form data system is not capturing many kinds of transactions under present market conditions, such as ready direct access by investors to foreign markets and increased activity in these markets of mutual funds or pension funds that may by-pass the usual financial intermediaries. To the extent that portfolio capital flow data are deficient, there is also a deficiency in estimating the fees connected with such trading. Difficult though it is to develop estimates for fees and commissions connected with transactions in securities, there are much

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BEHIND THE NUMBERS: U.S. Trade in the World Economy greater obstacles in doing so for the various kinds of financial services performed by commercial banks. Certain kinds of bank fees can be covered fairly easily (though not with great confidence) because data on the volume of business are available or can be estimated —including fees on acceptances and on commercial and standby letters of credit, commitment fees from potential borrowers, and charges for collections. In all these cases a fee structure can be established by consultations with a sample of large banks. The situation is much more difficult, however, for other important types of transactions —including foreign exchange trading, fees related to the rescheduling or renegotiation of loans, and syndication fees. For foreign exchange trading, it is believed that nearly all trading in foreign exchange for U.S. customer accounts takes place in markets abroad, and any fees that are earned are booked to the foreign branches of the U.S. bank or broker. Most trading in the U.S. market is believed to be resident-to-resident, so no international fee payment is involve. Consequently, there is no balance-of-payments entry in the United States for earnings on foreign exchange trading. In principle, the accounts of the countries in which the trading occurs should be picking up a financial services receipt that, from the U.S. point of view, is part of the revenue of a direct investment establishment abroad. This is an illustration of the difficulty of comparing data on specific services transactions across countries. For fees related to loan reschedulings or the conduct of financial deals (for example, takeover bids) that involve many kinds of services, the complexity of the internal organization of major financial institutions creates barriers to the extraction of the pieces of the transaction that can be accounted for as fees earned from nonresidents. Even when that can be done, the fees may be parceled out arbitrarily between the U.S. and foreign components of the organization, confusing the national residency basis for international data collection. In addition to sorting out the relevant data from these complex operations, there are other kinds of transactions and transactors that are not now covered by any data collection—including the business of U.S.-resident foreign banks with nonresidents, certain major operations of investment bankers or merchant banks, income of banks' custody or trust departments, and fees charged for financial consulting. There are serious definitional and theoretical problems connected with trading in financial assets that are under consider-

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BEHIND THE NUMBERS: U.S. Trade in the World Economy ation in the context of the revision of the U.N. systems of national accounts and the revision of the IMF Balance of Payments Manual on balance-of-payments accounting. These considerations may lead to further modifications of the distinctions between capital gains, investment income, and returns for the provision of financial services. Some convention is likely to be adopted that will come to terms with the kinds of accounts maintained by financial institutions. Other difficulties that need to be overcome arise from the complexity of these operations and of the organization of financial institutions. BEA is currently studying the problems of collecting data on noninterest income of U.S. financial firms and has requested funding for fiscal 1992 to develop a survey to collect such information. Medical Services Receipts Estimates for U.S. receipts for medical services are based on a special informal inquiry conducted in 1985, in which hospital administrators at medical centers and university hospitals were asked to analyze their records to determine how many of their patients were nonresidents and to provide data on average hospital costs and on associated physicians ' fees. The hospitals covered were estimated to account for about two-thirds of the medical treatment services for foreigners, and the reported totals were raised by 50 percent to reflect the missing one-third. It was also estimated that about 10 percent of the gross foreign payments for medical care was paid by U.S. charitable or other sources. The estimates prepared for 1985 were carried back to 1981 and are being carried forward, based essentially on changes in relevant costs as measured in the Consumer Price Index. There has not been a repeated attempt to collect data from hospital administrators, primarily because the necessary records identifying the nationality of patients are very difficult to obtain and analyze, so that an effort of this magnitude cannot be undertaken frequently. Although the apparent magnitude of the receipts (about $550 million annually) would not seem to justify a more intensive effort, the 1985 effort is becoming increasingly dated as a basis for current estimates. In the future, BEA may want to consider investigating whether questions on sales of medical services to foreign patients can be added to existing surveys of health care providers. There are no similar data for medical expenditures abroad by U.S. residents. It is believed that the amount is not large, and it would be extremely difficult, in any case, to arrive at a satisfactory estimate.

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BEHIND THE NUMBERS: U.S. Trade in the World Economy Education Services As shown in Table 5-2, Table 5-3, Table 5-4 (above), the introduction of estimates for expenditures by foreign students in the United States resulted in a significant increase (over $4 billion in 1988) in services receipts. These estimates are developed by BEA from several sources (for a detailed description of the methodology used, see Survey of Current Business [June 1989:58]). Statistics on the population of foreign students at U.S. institutions of higher learning are developed by the Institute for International Education, including considerable detail about the characteristics of the population. Estimates of expenditures for tuition and room and board come through the U.S. Department of Education and are refined by BEA to match the profile of the foreign student population. Data on living expenses are derived from Bureau of Labor Statistics budget data. Some of this gross expenditure figure is offset elsewhere in the international accounts to allow for financing received by foreign students from U.S. private and public sources and for earnings by the students. A similar process is used to estimate the much smaller amount of expenditures abroad by U.S. students. Again, a student population figure is obtained through the Institute for International Education. Estimates of expenditures per student come from U.S. institutions that are the sponsors of most of the foreign study programs. Estimates of living expenses abroad are based on data on living costs abroad. The coverage of U.S. students abroad is smaller than the coverage for foreign students in the United States, and BEA makes estimates for nonresponse cases. The coverage of U.S. study abroad is narrowly confined to those students who receive academic credit from a U.S. institution. There is no coverage of the large population of students following independent casual courses; some of their expenditures are included in the tourist expenditure and fare estimates. LIMITATIONS OF THE DATA Although the coverage and accuracy of the data on U.S. international services transactions have been improved in recent years, the considerable range in the quality of the data now available warrants significant additional attention. A major concern about international services data is the difficulty of developing a complete sampling frame. BEA can use the press or other publicity avenues to call to the attention of the

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BEHIND THE NUMBERS: U.S. Trade in the World Economy public the existence of the reporting requirements and especially to bring to the attention of businesses that may be participants in the services transactions the importance of accurate and comprehensive U.S. international services data. To enhance the usefulness and reliability of the data, BEA needs to work closely with industry representatives and trade associations in developing new inquiries, conferring with them on kinds of records that are available in firms and the kinds of information that can and cannot be reported. This should be done because complete and consistent reporting of transactions depends on the manner in which records are kept by respondents as well as clear and uniform understanding of the types of transactions to be included. BEA should also conduct periodic reviews of the quality of the incoming data to assure their quality. Cooperation from the services industries in providing accurate and timely information is critical to enhancing the usefulness of data on U.S. international services transactions. Another concern relates to the fact that the size and complexity of services transactions are growing, requiring constant effort just to keep up with more or less routine development. This leaves little opportunity for new initiatives. Additional efforts are needed to improve concepts and methodologies, especially to determine, by sector, how trade in services should be measured, develop appropriate sampling frames and sample sizes, and refine survey questionnaires. There is also need to broaden coverage to reach new respondents and new services and to produce estimates providing greater detail by industry. Exemption levels also need to be reviewed because the present exemption level is adversely affecting the validity of some of the data being sought. Other limitations pertaining to specific services data are discussed below. TRANSACTIONS BETWEEN AFFILIATED PARTIES OF MULTINATIONAL CORPORATIONS The most reliable U.S. international services data appear to be those derived from long-standing mandatory surveys of multilateral corporations, covering intracorporate service receipts and payments. As indicated in Table 5-1 (above), revisions in intracorporate data for royalties, fees, and other services have been relatively small. Nonetheless, given the present interest in data on international services, there are inadequate detailed breakdowns of the types of services between affiliated parties, and more precision is required in defining royalties, fees, and charges for the use of intangible property.

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BEHIND THE NUMBERS: U.S. Trade in the World Economy Also, although the reporting systems for these transactions are well developed, there are some reasons for concern. Most important is the less than satisfactory compliance by filers with the reporting requirements, especially by certain U.S. affiliates of foreign firms in the United States. When there are increasing delays in filing reports, the blow-up procedures used by BEA involve more potential error and larger revisions between preliminary and final estimates. Part of the problem of tardy returns may reflect the rather demanding questionnaires, which represents a formidable reporting burden. To a large extent, the details of the questionnaires, in turn, reflect the rising interests in aspects of the operations of the multinational corporations that are not covered by the balance-of-payments accounts. OTHER PRIVATE SERVICES, UNAFFILIATED Great strides have been made by BEA in recent years in improving coverage of other services and in covering services that were previously not covered. The new mandatory reporting requirements have helped. Nonetheless, the present exemption levels for some services are so high that some types of transactions (for example, legal services) are substantially underreported or simply not represented. In addition, in the specialized survey on royalties and fees with nonaffiliated foreign persons, which covers services for which there are many widely dispersed potential filers and for which individual transactions are typically small, omissions are possible. The estimates now being published seem low on both the receipts and payments sides. The less than satisfactory response rate to this mandatory questionnaire also poses a problem. The other two specialized surveys—on reinsurance and primary insurance and on construction, engineering, architectural, and mining services—cover relatively specific and well-identified industries, and coverage is believed to be reasonably complete. There are technical problems with both surveys, however. In particular, the insurance sector does not have adequate data on insurance claims paid. It is also difficult to separately identify investment activities and services transactions undertaken by insurance companies. Likewise, for the engineering industry, the main problem is the possible duplication of trade data and direct investment data. Some of these definitional problems are currently being reviewed under the U.N.'s efforts on the system of national accounts.

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BEHIND THE NUMBERS: U.S. Trade in the World Economy TRADITIONAL SERVICES: SHIPPING AND TOURISM There are classic problems with the data on shipping and tourism. In the case of the shipping account, the identification of the “ U.S. fleet” by residence of operator is difficult, although the number of potential filers is small. It is also extremely difficult to check the data being reported as port expenditures abroad. Similar obstacles exist for ascertaining the accuracy of freight earnings, especially in cross-trades. For freight payments to foreign carriers, however, the existence of both c.i.f. and f.o.b. valuations of imports helps to confine any error within reasonable limits. There is the possibility of major errors or biases in the travel account, in which major revisions of expenditures and fares have been made in recent years. The samples used to establish levels for land expenditures and fares are small; there is no assurance of consistency of the data collected from the respondent; and there is also no standard procedure to monitor for biases. In addition, steps are needed to revise the present questionnaire so as to present the balance-of-payments data up front, rather than buried in a rather lengthy inquiry. A better procedure would be to separate the balance-of-payments questions on a separate card, or a detachable part of the card, and urge flight attendants to give more emphasis to having these cards turned in. Since there are serious misgivings about the quality of the tourist and fare data now entering the travel account, benchmarks for daily expenditure levels and average fares can be used to check the validity of the sample responses and guard against major biases or arbitrary quarter-to-quarter or year-to-year variations. FINANCIAL SERVICES AND EDUCATIONAL AND MEDICAL TRANSACTIONS For financial services, the main data problem is that there are substantial sectors in the financial industry, and certain kinds of transactions, for which little or no data or estimates are available. To some degree this results from the inherent complexity of the industry and the arbitrariness of the allocations of earnings from the provision of financial services. However, it is clear that BEA does not have adequate resources to conduct the exploratory work needed to form a basis for designing a reporting or estimating system—or even for testing the feasibility of establishing such a system. In view of the growing importance of international sales of financial services by U.S. firms and substantial funds involved,

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BEHIND THE NUMBERS: U.S. Trade in the World Economy accurate reporting of these transactions will substantially enhance the quality of U.S. international services data. In addition to BEA, the agencies responsible for oversight of the financial system, notably the Treasury Department and the Federal Reserve, should have a role in closely studying this feature of the activities of banks and other financial institutions. For medical services in the United States purchased by foreigners, the present estimates depend on a single survey in 1985. The quality of current estimates is inevitably affected by the dated information. There is no information on medical expenditures abroad by U.S. residents. The estimates of expenditures in the United States by foreign students are probably as well done as can be expected, given the inherent difficulty in covering such a diffuse population. There is a possible understatement of expenditures abroad by the floating population of U.S. “students.” RECOMMENDATIONS Our recommendations for improving data on U.S. international services data are listed in the order of their relative importance, with the most important one listed first. 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 for the balance-of-payments tabulations, the Bureau of Eco-

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BEHIND THE NUMBERS: U.S. Trade in the World Economy nomic 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. Recommendation 5-5 To maintain and enhance the quality of services data, the Bureau of Economic Analysis should allocate additional resources to improving the analytical usefulness of the data. BEA should also enhance its capacity to analyze the statistics compiled and to present the analyses in ways that contribute to public understanding of this growing component of U.S. international transactions. At the same time, public access to detailed information should be as free as possible. Efforts to establish comparability with Census Bureau industry data should be encouraged. Recommendation 5-6 The Bureau of Economic Analysis should be given the authority to establish appropriate exemption levels for reporting requirements for various services categories consistent with the nature of the data to be collected. Recommendation 5-7 The Bureau of Economic Analysis should take further steps to obtain better information on payments to foreigners for services performed for U.S. residents abroad.