Reconciliation study: Canada–South Korea merchandise trade, 2001 and 2002

The first-ever trade reconciliation study between Canada and South Korea began early in 2001 and covered trade for the years 2001 and 2002.

The study investigated the main causes of differences in the trade data, for both eastbound and westbound directions, and estimated the impact of these differences on imports and exports.

Because of the nature of the available data, new trade estimates calculated by the study were not sufficiently robust to permit adjustments to the officially published numbers of either country.

It is important to note that the results of this study do not constitute revisions to either country's official statistics. However, the additional information helps both nations recognize limitations of the published data.

The study determined that the two major differences in the trade data between Canada and South Korea in 2001 and 2002 were due to indirect trade and export undercoverage. Re-exports and valuation differences also played minor roles.

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Indirect trade main source of discrepancy

The main source of discrepancies in trade figures between Canada and South Korea was indirect trade.

In 2001, the reconciliation indirect adjustment explained 82% of the adjustments in the eastbound trade statistics and 37% of the adjustments in the westbound trade statistics. In 2002, indirect trade accounted for 90% of the eastbound adjustments and 38% of the westbound.

Attributing trade to a country that is not the final destination of goods results in a situation in which the two partner countries credit trade to different countries. This is known as country misallocation.

For example, Canada may ship goods through the United States to South Korea, the final destination. If these goods are landed and declared for consumption in the United States and subsequently re-exported to South Korea with no change to the merchandise, this will appear in the Canadian statistics as trade with the United States. In the South Korean figures, it will appear as trade with Canada. This creates a statistical imbalance.

The assumption is that in most cases this indirect trade results in country misallocation. The intermediate country is attributed as the trading partner in the officially published export statistics of either Canada or South Korea.

Therefore, based on the findings of this reconciliation study it can be assumed, for example, that Canada's export trade with South Korea is understated.

Instances in which import records show the country of origin as either Canada or South Korea and the country of shipment or seller as another country are shown as indirect trade. The indirect trade adjustments were derived by adding indirect import figures to the partner country's export figures. The amount of indirect trade is assumed to be the amount of misallocated trade.

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Control estimate resolves problem of double counting

When determining the indirect trade adjustments in both the eastbound and westbound trade flow, an assumption was made that the import data better reflected the indirect trade between the two countries, while the export data captured only part of it.

Exports are adjusted for a number of factors. Occasionally, the adjustment values added result in sums that exceed reported imports, implying that its export adjustment is too large because of double counting. Accordingly, the adjustments are reduced by a 'control' factor to ensure that adjusted exports do not exceed imports.

In the eastbound flow, the estimates for the 'control' values were $3 million in 2001 and $14 million in 2002. In the opposite direction, the westbound 'control' values totalled $11 million in 2001 and $24 million the following year.

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Goods re-exported from the partner country are not included in import statistics

In both directions of trade, adjustments for re-exports were also made. Export statistics are based on the country of final destination. This includes both domestic goods, that is, goods of country origin. It also includes re-exports, that is, goods of foreign origin that have entered a country's consumption and are then sold without any substantial transformation occurring in that country.

Import data are based on the country of origin principle; goods re-exported from the partner country are not included in import statistics. Both Canada and South Korea keep track of goods they re-export. These numbers were used for this adjustment.

In 2001, the reconciliation adjustment for re-exports explained less than 1% of the adjustments in the eastbound trade statistics and 13% of the adjustments in the westbound trade statistics.

In 2002, re-exports again accounted for less than 1% of the eastbound and 14% of the westbound adjustment respectively.

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Valuation differences between countries

Another adjustment is based on valuation differences between the two countries. Goods can be reported on a Free on Board (FOB) basis or on the Cost, Insurance and Freight (CIF) basis.

FOB basis means that the cost of insurance and freight to ship the goods from the point of exit to the destination are not included in the reported value of the goods exported. CIF based refers to the incorporation of the costs of insurance and freight for transporting goods up to a specified place into the value of the traded goods.

Canadian exports are collected and published on an FOB point of exit basis which excludes insurance and freight beyond that point. On the other hand, South Korean imports are valued CIF which includes insurance and freight from factory to destination.

Therefore, an adjustment was made to compensate for the valuation differences between the two nations. In the westbound direction, the insurance and freight are removed from South Korea's import statistics. This modification accounted for 13% of the adjustment in 2001 and 9% the following year.

In eastbound trade, both Canada and South Korea report on an FOB basis, so no adjustment was necessary.

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Missing export data create statistical imbalance

The final major discrepancy is the situation in which the export trade is not reported to the compiling country and consequently does not appear in the country's officially published trade statistics.

In the case of Canada , the Canada-U.S. data exchange agreement¹ does not require Canadian exporters to file an export document for trade to the United States if the goods are destined for U.S. consumption.

The situation is further complicated by the possibility of in-bond movements through the United States. For example, Canadian goods passing through the United States to South Korea may be placed in-bond for the portion of the U.S. travel and Canadian exporters may fail to report the outbound movement. Exporters may treat the export to South Korea via the United States in the same way they treat an export to the United States; that is, the supporting customs documents will not be filed.

A U.S. import document will not be needed since the ultimate destination of the goods is South Korea. South Korea will capture the import trade of the good from Canada and this will again result in a statistical imbalance; Canada's trade with South Korea will be understated in the Canadian export figures.

In other cases, goods exported directly from Canada to South Korea may not be reported at all. In either case, a rough measure of this occurrence is included in the 'export undercoverage' category².

In the eastbound trade flow, the export undercoverage accounted for 17% of the adjustments in 2001 and 8% in 2002. Westbound, export undercoverage accounted for 36% in 2001 and 38% in 2002.

The two principal causes for discrepancies in the trade data between Canada and South Korea for 2001 and 2002 were indirect trade and export undercoverage. The following tables summarize the various adjustments that were calculated in an attempt to better reflect the trade between Canada and South Korea.

	Table 5a. Reconcilation of Canada-South Korea eastbound merchandise trade, 2001
	Table 5b. Reconcilation of Canada-South Korea eastbound merchandise trade, 2002
	Table 6a. Reconcilation of Canada-South Korea westbound merchandise trade, 2001
	Table 6b. Reconcilation of Canada-South Korea westbound merchandise trade, 2002

1. In 1987, Canada and the United States signed a Memorandum of Understanding (MOU) to exchange import statistics starting with January 1990 data. Each country now uses the other country's import data to derive their export statistics.

2. This category could also include other unexplained differences including those discrepancies not fully investigated and any revisions made during the 2001/02 reconciliation study period. It is assumed that the bulk of this category is export undercoverage.