International services: new information on U.S. transactions with unaffiliated foreigners.

Whichard, Obie G.

A new BEA benchmark survey of selected U.S. international services transactions indicates that, for the services covered, including several newer ones such as computer and data base services, the United States sold more to unaffiliated foreigners than it purchased from them in 1986. For 16 services for which data were collected on both U.S. sales and U.S. purchases, sales exceeded purchases-$4,418 million compared with $3,692 million (table 1). In contrast, for telecommunications services, which accounted for the largest share of both sales and purchases, sales were less than purchases-$1,890 million compared with $3,069 million. For the other 15 services combined, sales, at $2,528 million, were much larger than purchases, at $623 million.

For two services-(l) primary insurance and (2) construction, engineering, architectural, and mining services-only data on U.S. purchases were collected; data on U.S. sales are being collected in other BEA surveys. U.S. purchases of these services were $1,693 million, over one-half of which was insurance. Comparable data on sales are not available for 1986, but they are available for 1987. Judging from the 1987 data, sales of both services were likely to have been much larger than purchases in 1986.

The benchmark survey was conducted mainly in response to the increased emphasis on services in U.S. trade policy initiatives. It will also close a gap in information on services in the U.S. balance of payments accounts. A less detailed annual survey is being instituted to maintain the data series between benchmark survey is which will be taken every 5 years. The new surveys are part of a larger effort by BEA to improve and expand the information it provides on U.S. international trade and investment in services.1

The benchmark survey covered transactions between U.S. persons and foreign persons other than the U.S. person's foreign affiliates or foreign parent company. These transactions are only a part of total U.S. international services transactions in the balance of payments accounts. They exclude some services transactions with unaffiliated foreigners, such as travel and transportation, that tend to be much larger but for which information is already available. They also exclude transactions between U.S. persons and their own foreign affiliates or foreign parent companies. Finally, they exclude sales of services made through affiliates in another country-that is, sales abroad by foreign affiliates of U.S. companies and sales in the United States by U.S. affiliates of foreign companies. These sales are not included in the U.S. balance of payments accounts because they are not transactions between U.S. and foreign persons; they are, however, a common means of delivering services to foreign markets. (See the accompanying box for a fuller discussion of how the survey data are related to other data series on international services.)

The remainder of this article summarizes the survey results. A technical note at the end of the article describes the survey and indicates how a number of special reporting situations were handled.

Summary of Results

U.S. sales

Total sales of services are disaggregated in three ways-by type of service, by country of foreign customer, and by industry of the U.S. company reporting the sale.

By type of service.-Total sales of services were $4,418 million. Telecommunications services, at $1,890 million, accounted for by far the largest share-43 percent of the total. Most of the telecommunications services were message telephone services; "telex, telegram, and other jointly provided (basic) services" were also significant. Both groups of services are generally subject to government regulation, involve the point-to-point transmission of voice or data, and are jointly provided to customers by U.S. and foreign carriers. The sales represent U.S. carriers' receipts from foreign communications companies and from postal, telephone, and telegraph agencies for the U.S. carriers' share of revenues for transmitting tbe following: (1) Messages originating in foreign countries to U.S. destinations, (2) messages originating in foreign countries and routed through the United States (for example, from Caribbean countries via the United States to Western Europe), and (3) messages between foreign countries and not routed through tbe United States.

Sales of other types of telecommunications services-private leased channel services, value-added services, and support services-were small. They were largest for value-added services, which are telecommunications services that add value or function to the telecommunications transport services that deliver the value-added services to end users. Examples of such services include electronic mail, voice mail, code and protocol processing, management and operation of data networks, facsimile services, and videoconferencing. These services are not uncommon, but international transactions involving them may tend to be structured in such a way that they were not covered by the benchmark survey.

Sales of services other than telecommunications were largely accounted for by four services: Computer and data processing; industrial maintenance, repair, installation, and training; research, development, and testing; and management, consulting, and public relations. Sales of computer and data processing services were $985 million. Software services, excluding custom programming, accounted for two-thirds of the total. This category consists of both prepackaged software and rights to use, reproduce, or distribute such software; a major portion of the funds received in 1986 were for the use, in prior years as well as in 1986, of programs on mainframe computers. Other sales of computer and data processing services were largely accounted for by integrated hardware-software systems and by systems analysis, design, engineering, and custom programming services.

Sales of industrial maintenance, repair, installation, and training services were $448 million. Maintenance, repair, and training services provided by U.S. aircraft manufacturers accounted for a large share of the total.

Sales of research, development, and testing services were $305 million. Government-sponsored research and development and consumer product testing accounted for significant shares of the total. Sales of management, consulting, and public relations services were $272 million; consulting services accounted for the largest share of the total.

By country of foreign customer.-Of total sales of services, 55 percent were to developed countries, and 33 percent to developing countries (table 2). The remaining 12 percent consisted of small transactions (less than $250,000) reported on a voluntary basis and not allocated by country.

In both developed and developing countries, telecommunications services accounted for a considerably larger share of sales than any other service. In many countries, sales of telecommunications services were larger than sales of all other services combined.

Of total sales of telecommunications services, 59 percent were to developed countries and 38 percent were to developing countries; the remaining 3 percent were not allocated by country. Among developed countries, sales to Canada, the United Kingdom, Japan, and Germany were largest. Among developing countries, sales to Mexico, Hong Kong, Taiwan, and South Korea were largest.

Of total sales of services otherthan telecommunications, 52 percent were to developed countries and 29 percent were to developing countries; 19 percent were not allocated by country.

Among developed countries, sales to Japan, the United Kingdom, and Canada were largest. A large share of the sales to Japan was of computer and data processing services, which included tbe previously mentioned payments for tbe use of programs for mainframe computers.

Among developing countries, sales to Saudi Arabia were considerably larger than those to any other country. These sales were largely of research, development, and testing services and of industrial maintenance, repair, installation, and training services.

Sales not allocated by country were largest in computer and data processing services. As a percentage of total sales within a category, however, they were largest in three other categories: Data base and otber information services (68 percent of which were unallocated); management, consulting, and public relations services (30 percent unallocated); and legal services (29 percent unallocated). Apparently, transactions in these types of services tend to be relatively small-below tbe $250,000 threshold for mandatory reporting by country; the response rate to the request for voluntary information on such transactions is unknown.

By industry of U.S. company.-U.S. companies in communications, manufacturing, and "services," as narrowly defined in the Standard Industrial Classification (SIC), accounted for over 90 percent of total sales (table 3). For companies in servicesproducing industries (broadly defined), the services sold were generally those characteristic of the industry of the seller: Communications companies sold telecommunications services; advertising agencies sold advertising services; law firms sold legal services, and so on. Sales of services by manufacturing companies tended to be related to the companies' primary activities. They consisted mainly of computer and data processing services provided by computer manufacturers and of industrial maintenance, repair, installation, and training services sold by the manufacturers of the goods maintained, repaired, installed, or for which personnel were being trained to operate or to service (for example, maintenance and training services provided by aircraft manufacturers).

U.S. purchases

As noted earlier, purchases data were collected both on the 16 services for which sales data were also collected and on 2 additional services-(l) primary insurance and (2) construction, engineering, architectural, and mining services. This section first discusses the 16 services for which both sales and purchases data were collected, and then it discusses the 2 additional services.

By type of service.-Total purchases of the 16 services were $3,692 million (table 4). Telecommunications services accounted for 83 percent, or $3,069 million, of the total. The remainder was spread among several services. The largest purchases, each falling in the range of from $60 million to $150 million, were in industrial maintenance, repair, installation, and training; advertising; research, development, and testing; industrial engineering; and management, consulting, and public relations services.

Mesage telephone services accounted for most of the purchases of telecommunications services; "telex, telegram, and other jointly provided (basic) services" also were significant. Purchases of these services represent payouts to foreign communications companies and to postal, telephone, and telegraph agencies for the foreign carriers' share of the revenues for transmitting messages originating in, or routed through, the United States to foreign destinations. Private leased channel services and telecommunications support servces almost entirely accounted for other purchases of telecommunications services. Reported purchases of value-added services were negligible ($2 million). As noted in the section on sales, this result may reflect the manner of which these transactions are structured, rather than a lack of activities that would add value or function to the basic services.

By country of seller.--Of total purchases of the 16 services, 50 percent were from developed countries, and 45 percent were from developing countries. The remaining 5 percent consisted of small transactions not allocated by country.

In both developed and developing countries, purchases of telecommunications services were considerably larger than the combined total for the other 15 services. Of total purchases of telecommunications services, 45 percent were from developed countries, and 53 percent were from developing countries; the remaining 2 percent were not allocated by country. Among developed countries, purchases from Canada, Germany, Japan, and the United Kingdom were largest. Among developing countries, purchases from Mexico, South Korea, and the Philippines were largest.

Of $623 million in purchases of services other than telecommunications, 75 percent were from developed countries, and 7 percent were from developing countries; 18 percent were not allocated by country. Among developed countries, purchases from the United Kingdom, Canada, and Japan were largest. Purchases from the United Kingdom were largest in management, consulting, and public relations services; industrial maintenance, repair, installation, and training; and industrial engineering. Purchases from both Canada and Japan were largest in industrial maintenance, repair, installation, and training. Among developing countries, purchases from Saudi Arabia, India, and Hong Kong were largest.

Purchases not allocated by country were largest in advertising and legal services. Unallocated Purchases accounted for 20 percent or more of the total reported purchases of five types of services shown in table 4-advertising services; data base and other information services; research, development, and testing services; legal services; and "other" selected services. The unallocated share was particularly high-51 percent-for legal services. As was the case for sales, the response rate to the request for voluntary information on smaller purchases transactions is unknown.

By industry of U.S. company.-By industry of U.S. company, a pattern similar to that for sales tended to hold: Services companies tended to purchase services of their own industry, and manufacturing companies tended to purchase services needed to support their own operations (table 5).

Services companies' purchases in their own industry often reflected operations in which U.S. and foreign companies jointly provide services to clients. Thus, the U.S. company reporting a purchase often would not be the ultimate user of the service. For example, payments by a U.S. advertising agency to a foreign advertising agency would typically reflect, not payments for promoting the services of the U.S. agency abroad, but rather, payments to the foreign agency for its share in billings for an advertising campaign conducted jointly by the U.S. and foreign agencies on behalf of a U.S. client.

Purchases of services by manufacturing companies were largest in industrial engineering services; research, development, and testing services; and management, consulting, and public relations services. Such purchases occur when a manufacturer calls upon specialized outside firms for assistance in designing or testing products or in managing, operating, or promoting the company.

Two additional services.--Only purchases data were collected for primary insurance and for construction, engineering, architectural, and mining services, because sales data for these services are collected in other BEA surveys. These services can be purchased by many different types of companies and were included in the benchmark survey because of its wide distribution. (The sales surveys, in contrast, are sent only to tbe firms that sell the particular services covered.) For these services, preliminary data on U.S. sales comparable with the data on purchases collected in the benchmark survey are available for the year 1987. They suggest that, in 1986, sales of both services were probably much larger than a U.S. company provided to, or purchased from, an unaffiliated foreign company were covered, but expenditures of individual students studying in another country were not. Similarly, fees that a U.S. company received from, or paid to, an unaffiliated foreign company for the management of health care facilities were covered, but expenditures of individual patients seeking medical treatment in another country were not.

The survey did not collect information on financial services. Financial institutions did, however, report any sales or purchases transactions of the types covered. For example, a bank did not report fees and commissions related to its international lending activities, but it did report any sales of data processing services to unaffiliated foreigners.

For three services-computer and data processing services, data base and other information services, and telecommunications-added detail by type of service was requested. For telecommunications, the added detail was requested for both sales and purchases; for the other two, it was requested only for sales. Added detail was also requested for sales of advertising services, not by type of service, but by the type of entity making the sale; that is, whether the sale was made by an advertising agency or by a media company, such as a newspaper, magazine, or broadcaster.

Respondents were required to report, by type of service and by country, any transaction that exceeded $250,000; a "transaction" was defined as a respondent's total sales to, or purchases from, an unaffiliated foreign person of a given service during the year. The reporting threshold of $250,000 was established to reduce the reporting burden on companies that do not have the requested information readily available; at this threshold, the recall of knowledgeable persons within the company, rather than an exhaustive records search, could generally be used in identifying reportable transactions. Respondents were requested, but not required, to report smaller transactions if their aggregate value exceeded $500,000. These transactions were disaggregated by type of service, but not by country. As discussed in the text, transactions reported on this basis were not large in the aggregate, but they did account for a significant share of reported sales or purchases of a number of individual services.

Report forms were mailed to over 20,000 U.S. companies. The selection of companies to be surveyed was based on size, industry classification, and, in a limited number of cases, knowledge about the activities of individual companies. Almost 800 companies reported transactions. The ones that did not were required to certify that they had nothing to report.

In a few instances, either to ensure that the conceptually correct measure was reported or to make the administration of the survey more efficient, companies were required to report other data in addition to their own sales and purchases. These other data were for four types of services-advertising, telecommunications, sports and performing arts, and personnel supply-and for transactions involving intermediaries.

Advertising agencies reported gross billings to unaffiliated foreign clients, including funds passed through to media companies and not included in their own income statements. The reporting of billings permitted most of the information on sales of advertising to be collected from a few large advertising agencies, rather than from a large number of media companies that often would not have had direct contact with the foreign client and may not have been aware of the client's country of residence.

U.S. telecommunications carriers reported receipts from foreign carriers for messages or leased lines originating abroad and payouts to foreign carriers for messages or leased lines originating in the United States. The payouts provide a measure of U.S. purchases of telecommunications services from foreign carriers; however, the U.S. carriers that reported them were not themselves the "purchasers." Rather, they acted as intermediaries who collected revenues from customers and passed on the foreign carriers' shares. (The latter shares, not the entire amounts received by the U.S. carriers, constitute the cross-border transactions reportable in the benchmark survey; the shares retained by the U.S. carriers constitute intra-U.S., not international, transactions.)

For sports and performing arts, fees were defined net of allowances for expenses, because the allowances were deemed to be spent in the country in which the performance occurred. Although the fees could have been recorded gross of expense allowances and the allowances recorded separately as purchases of services, the net method was chosen to simplify reporting.

For personnel supply services, receipts and payments were defined to include agency fees and any funds for compensation of workers carried on the payroll of the company supplying the service, This provision permitted information on wages paid to foreign workers through such services companies to be obtained, although the provision turned out to have little practical significance due to the small value of transactions reported under this category.

Transactions arranged by, billed through, or otherwise facilitated by an intermediary (e.g., an insurance broker) could, depending upon circumstances, be reported either by the intermediary or by the ultimate provider or end user of the services. The company that reported depended upon whom the U.S. person considered itself to have a claim on for payment (for a sale) or to whom it had a liability (for a purchase). For a sale facilitated by a U.S. intermediary, if the U.S. seller looked to the unaffiliated foreign customer for payment, then the transaction was deemed to be between tbe U.S. seller and the foreign customer and was reportable by the seller. If the seller looked to the intermediary for payment, however, the transaction was deemed to be between the intermediary and the foreign party and was reportable by the intermediary. Reporting requirements were parallel for U.S. purchases of services.

Relationship of the New Data to Other Series

The data collected in the benchmark survey are U.S. balance of payments transactions; that is, they are transactions between U.S. persons and foreign persons. When incorporated into the U.S. balance of payments accounts, the data on sales will be recorded as U.S. exports of "other private services' to unaffiliated foreigners (line 10 in tables 1, 2, and 10 of the quarterly SURVEY OF CURRENT BUSINESS articles on U.S. international transactions) and the data on purchases as U.S. imports of 'other private services' from unaffiliated foreigners (line 25).

Most of the services covered by the benchmark survey have not previously been included in the balance of payments accounts. The major exception is basic telecommunications transport services, on which information on both sales and purchases was previously provided to BEA by selected common carriers. Also, limited information on sales of industrial engineering services and industrial maintenance, repair, installation, and training services was obtained in a sur-%,ey that also collected information on sales of construction, engineering, architectural, and mining services. (Beginning with 1987, the former services have been removed from that survey and are being reported in the benchmark and annual follow-on surveys of selected services transactions.)

In two cases, the information reported in the benchmark survey will need to be supplemented by estimates of related transactions that the survey did not cover but that are required for the balance of payments accounts. The transactions are: (1) Losses recovered from unaffiliated foreign insurance carriers on primary insurance, and (2) foreign contractors' exports to, and expenses in, the United States associated with U.S. purchases of construction, engineering, architectural, and mining services. These transactions will partly offset the gross purchasestransactions in these services collected in the benchmark survey. The details of the balance of payments treatment of the benchmark survey data will appear in the SURVEY in June 1989, when available data will be incorporated into the accounts.

The services covered by the benchmark survey account for a relatively small portion of total private services transactions in the U.S. balance of payments accounts. These transactions are accounted for largely by such traditional services as travel and transportation. In 1986, travel, passenger fares, and other transportation accounted for $32.1 billion of U.S. exports of goods and services and for $41.4 billion of imports-amounts much larger than for ser-vices reported in the benchmark survey. The survey excluded services transactions between U.S. persons and their own foreign affiliates or foreign parent company. In 1986, U.S. sales of services to affiliated foreigners were $8.2 billion, and U.S. purchases of services from affiliated foreigners were $3.9 billion.1

The survey also excluded sales of services abroad by foreign affiliates of U.S. companies and sales of services in the United States by U.S. affiliates of foreign companies. These sales are not included in the U.S. balance of payments accounts because they are not between U.S. persons and foreign persons. (Affiliates are considered residents of their country of location, rather than of their parent company's countries.) Data on these sales are collected in BEA's direct investment surveys. Affiliates are often used to deliver services to foreign markets because they can communicate more easily with, and respond more quickly to, customers located in those markets than could a company located in another country. Thus, affiliate sales in foreign markets typically are much larger than the cross-border transactions covered by the benchmark survey. For example, in 1986, sales of services to foreign (non-U.S.) persons by majority-owned foreign affiliates of U.S. companies were $72.9 billion, of which $62.7 billion were to unaffiliated foreigners. These figures pertain to all services, not just the ones on the benchmark survey, and they cannot be disaggregated by type of service. However, it is apparent from their overall magnitude and distribution by industry that, for the services covered, sales by foreign affiliates to unaffiliated foreigners were much larger than sales made directly by U.S. persons to unaffiliated foreigners." Comparable data on sales of services in the United States by U.S. affiliates of foreign companies will become available beginning with 1987.

1. The sales figure is the sum of $5.4 billion in U.S. parents' receipts from their foreign affiliates and $2.8 billion in U.S. affiliates' receipts from their foreign parents. The purchases figure is the sum of $2.4 billion in U.S. parents' payments to their foreign affiliates and $1.5 billion in U.S. affiliates' payments to their foreign parents. See "U.S. International Transactions, First Quarter 1988," SURVEY 68 (June 1988): 55.

2. A major exception is basic telecommunications services. Foreign ownership of telecommunications carriers is uncommon, and carriers in both the sending and receiving countries must be involved in a transmission for it to cross national boundaries.

3. Data on total sales of services by majority-owned foreign affiliates to foreign persons in 1986 are in 'U.S. Multinational Companies: Operations in 1986," SURVEY 68 (June 1988): 96. Data disaggregated by industry of affiliate are in table 42 of BEA's publication U.S. Direct Investment Abroad: Operations or us. Parent Companies and Their Foreign Affiliates, Preliminary 1986 Estimates. (This publication may be obtained from Economic and Statistical Analysis/BEA, U.S. Department of Commerce, Citizens and Southern National Bank, 222 Mitchell Street, P.O. Box 100606, Atlanta, CA 30384. The price is $5.00, and the accession number, which should be included when ordering, is BEA IID 88-104.)