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Scottish Economic Statistics 2005

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Issues with the estimation of trade statistics for Scotland

Catriona Hayes, Scottish Executive

Summary

This article describes the official data sources on Scottish trade, and discusses some of the issues connected with estimating the value of exports from and imports to Scotland.

Introduction

There is considerable demand for information on Scottish trade, from industry, government and from economic development agencies. This can inform strategies on industry promotion, trade development and other international relationships. There are several sources of information on exports available, but less on imports which are more difficult to quantify for Scotland because it is very difficult to track the final destination of goods that enter the UK.

This article introduces the different official estimates of trade information. The differing estimates available from the various sources reflect the practical and theoretical difficulties involved in measuring Scotland's trade. The main difficulty arises because taxes are collected at the UK level, and also since Scotland is a region of the UK in terms of National Accounts there is no legal requirement for companies to report financial information at a sub- UK level.

This, and other issues affecting exports statistics are discussed in this article. The approaches adopted to address these issues, and so produce the best possible trade estimates given the information available, are also outlined. Ongoing work to reconcile the different exports estimates that are produced by the Scottish Executive is also discussed.

Data sources for trade information

Global Connections Survey

The Executive currently produces annual estimates of the value of exports of all goods and services based on its Global Connections Survey ( GCS). These estimates are available by industry and by destination. Estimates for 2004 will be published in December 2005, along with revised figures for 2002 and 2003. The results will be available on the Scottish Executive website at www.scotland.gov.uk/exports . The estimates for 2002 and 2003 published last year can be found in chapter 1 of this publication.

Estimates of exports are produced from the survey data, supplemented with information for non-responding companies (the GCS is a voluntary survey) from UK surveys supplied by the Office for National Statistics. They are grossed up for all companies on the Inter-Departmental Business Register ( IDBR) based on turnover using iterative stratification by company size, industrial classification, location and whether they were sampled as a known or potential exporter. Estimates from UK surveys take a share of UK exports based on Scottish employment, unless additional information is available to adjust for Scottish activity.

Destinations of exports are estimated in a similar way, but there is little supplementary information available. Where data are missing from major companies in a sector, the reliability of the destination results can be compromised. Because of this, only estimates of exports to the top 20 destinations are published.

The Global Connections Survey also requests information on sales of goods and services to the rest of the UK - information that is not available elsewhere. This information, however, often proves difficult for companies to provide, for both practical and conceptual reasons. Companies trading throughout the UK often have no reason to consider Scotland separately, and destination of sales within the UK for a large company is often not recorded. Additionally, the destination may not be clear. For example, sales of food manufactured in Scotland might be sold to a supermarket chain based in England but be sold in Scottish branches.

The international exports estimates produced from the GCS can be supplemented with other data, but there is no other source of information on trade with the rest of the UK. Therefore, these estimates are likely to be less reliable because they are based on fewer companies. Experimental estimates for 2002 and 2003 have been published for comment on the Scottish Executive website at www.scotland.gov.uk/exports/RUKexport .

These are summarised in the table below.

Table A3.1: Experimental estimates of exports from Scotland to the rest of the UK

£million

2002

2003

Agriculture, Forestry & Fishing

340

300

Mining, Quarrying & Extraction of Petroleum

1,230

1,590

Manufacturing

11,070

10,200

Of which

Food & drink

2,660

2,610

Metals, metal goods, mechanical engineering & transport equipment

2,650

2,080

Electrical and instrument engineering

2,270

2,070

Electricity, Gas & Water Supply, Construction

2,350

2,650

Services

18,370

21,060

Of which

Financial services

7,320

7,500

Wholesale, retail, hotels & restaurants

4,220

5,140

Business services

3,660

4,830

Total

33,910

36,380

Quarterly Index of Manufactured Exports

The Scottish Executive produces a quarterly index of manufactured exports ( IME), which is adjusted for price changes and is designed to provide a timely short-term indicator of growth. It is based on the ONS Monthly Production Inquiry, and the analysis includes all companies falling within manufacturing industry classifications. Estimates for companies operating throughout the UK tend to be based on the Scottish share of employment, although adjustments have been made to large companies where the Global Connections Survey provided different results. Work is underway to further align the estimates underlying the index with the Global Connections Survey data. This involves ensuring that sales and exports information for individual companies corresponds between the two sources, as well as making some adjustments to the methodology. For example, the IME data has historically categorised companies based on their industry classification at the UK level, whereas the GCS considers the main activity in Scotland when allocating to an industry. Harmonising classification processes will ensure that all companies are included in the same SIC and remove some anomalies.

Quarterly Index of Manufactured Exports figures that are aligned with the GCS are scheduled for publication on 11 January 2006. ( www.scotland.gov.uk/exports .)

HM Revenue and Customs

HM Revenue & Customs ( HMRC) produce estimates of trade in goods with the rest of the world for the UK countries (which include Scotland) and regions. In contrast with the quarterly exports series described above, which covers the manufacturing industries, HMRC figures include trade in all tangible products regardless of industry sector. The estimates are produced by allocating UK totals to a country or region where possible. The UK totals are reliable, as these are based on imports/exports declaration data, which traders or their agents are legally obliged to return. However, regionalisation can be problematic, especially for large companies that operate throughout the UK.

Companies operating over more than one UK country or region may make a trade declaration from their national head office on behalf of the whole company. For estimates of exports, an adjustment is made to correct for this head office distortion based on extra data gained from surveys of the top 200 traders (by value of exports). These surveys provide information on the values and proportions of trade generated by each branch of the company, which is then used to split UK totals into regions where possible. Such adjustments are not made for imports because it is very difficult to produce a reasonable assessment of the final regional location of goods. This is especially the case for finished goods, which are disseminated to sales sites all over the UK, many of which are different to the locations of the importing company.

The HMRC regional figures include a large 'unknown' category where trade cannot be allocated to a UK region. Included in this category, amongst others, are all trade by private individuals, overseas traders registered in the UK and the UK government. For both imports and exports the unknown total is larger than the Scotland total - these are shown in tables A3.2 and A3.3 below. In addition, table A3.3 shows that the unknown region imports and the UK imports have increased each year, whilst the Scottish imports have decreased. It is possible that this is not actually the case, but that more imports to Scotland have remained unidentified.

Table A3.2: Exports of goods to the rest of the world, 2000 - 2004

£million

2000

2001

2002

2003

2004

Scotland

20,228

16,686

15,616

13,200

11,932

UK total

187,159

189,376

186,978

188,382

190,548

Scottish % of UK

10.8%

8.8%

8.4%

7.0%

6.3%

Unknown region

24,562

28,685

26,362

22,828

22,564

% unknown

13.1%

15.1%

14.1%

12.1%

11.8%

Source: HMRC

Table A3.3: Imports of goods from the rest of the world, 2000 - 2004

£million

2000

2001

2002

2003

2004

Scotland

11,388

10,405

8,911

8,274

8,634

UK total

221,665

227,630

227,798

236,364

252,728

Scottish % of UK

5.1%

4.6%

3.9%

3.5%

3.4%

Unknown region

15,951

16,482

18,693

19,671

24,332

% unknown

7.2%

7.2%

8.2%

8.3%

9.6%

Source: HMRC

Scottish input-output tables

The Scottish input-output ( IO) tables provide an account of supply and demand within the Scottish economy. As part of this, estimates of the value of imports and exports of all goods and services between Scotland and the rest of the UK and rest of the world are shown.

In the 2001 IO tables (and earlier years), information on exports to the rest of the world was gathered from a variety of sources, including the Scottish Council for Development and Industry ( SCDI) 1 manufacturing and service exports surveys, IO Trade Flow Surveys and other industry sources. The Trade Flow Surveys were carried out to obtain information about the purchasing patterns of Scottish businesses and to measure the extent of trade between Scotland, the rest of the UK and the rest of the world. Information on exports to the rest of the UK and on imports was derived mainly from these surveys. Different sectors were surveyed each year on a rolling programme - the last survey was for 2000 and surveyed the Scottish Services and Transport & Communications sectors. Due to the need to release resources for the redevelopment of the input-output system, the more recent tables have rolled forward trade flow survey information.

The exports data in the IO tables for 2002 will be based on detailed analysis of the Global Connections Survey. However, the exports estimates used in the IO tables do not necessarily correspond with the GCS estimates due to differences in definitions. GCS data are collected on an industry basis, but the IO tables require the exports data on a commodity basis, and therefore the GCS data are converted before any further analysis is carried out. In addition, there is a separate column for tourism in the IO tables, so the GCS exports estimates are also adjusted for tourism before being incorporated within the tables. Due to the fact that the IO tables are based on the Annual Business Inquiry, on occasion companies are classified differently than in the GCS data. A method has been set up to adjust the GCS figures to account for this. The method to estimate imports in the 2002 IO tables will combine trade flow information with data from the 2002 UK Input-Output tables and adjusted HMRC data on imports of goods from the rest of the world.

The 2002 input-output tables, containing new exports estimates based on the Global Connections Survey, will be published on 30 November 2005 ( www.scotland.gov.uk/input-output ).

1 SCDI was the only source available before the Global Connections Survey was introduced, and they still produce annual estimates of manufactured exports. This year's report can be accessed here:http://www.scdi.org.uk/file.php?id=2255

Issues with estimating Scottish international trade

Scotland is part of the UK

Most large companies that operate throughout the UK do not record activity separately for Scotland; all that is legally required is for them to report for the UK as a whole. It can be very difficult, if not impossible, to extract financial information for Scotland from their UK figures. This means they often cannot provide information about the trade of goods and services ( i.e. imports and exports) between Scotland and the rest of the UK and rest of the world, and do not need to for UK taxation or National Accounting purposes, and so some do not provide information for the Global Connections Survey. In these cases, data from the ONS Monthly Production Inquiry and International Trade in Services Inquiry are used to supplement the Scottish information. Scottish employment share can be applied to the UK export figures to get the best Scottish estimate, although these are adjusted if information is available to suggest that either all, or none, of a company's UK exports originate in Scotland.

An additional related definitional issue with trade figures can arise if the situation exists that companies produce goods in Scotland, but sell them on to a trading company in England, say, who then export them. For imports, a company based near one of the main English ports might do the actual importing, but sell the goods on directly to Scotland. In both cases, these might be picked up as intra- UK trade but not as international trade from Scotland. The GCS requests information on first destination of sales, as this is easier for companies to provide, so the resulting figures cover direct exports only. It should therefore be borne in mind that exports figures from Scotland for a particular sector may not cover all goods that are eventually exported - depending on the exporting mechanisms for that sector.

Globalisation

Many international companies no longer function on a geographical basis and the trend is towards multinational teams working on projects. This is particularly an issue in the business services sectors ( e.g. management consultants) where large companies are less able to disaggregate their activity geographically - either where it takes place or where the customers are based. The concept of an export from Scotland is therefore not clear in a practical sense for some sectors, although it still exists theoretically.

Additionally some large companies produce goods in Scotland which are transferred at internally determined prices to the parent company elsewhere. The level of this type of activity - and the transfer prices set - can influence the value of exports, while volume estimates would be less affected. Likewise, if companies engage in 'toll processing' (produce products for a fee with ownership of the inputs and outputs remaining with the customer) for overseas companies, the value of exports will be the total charges received for the processing activity as opposed to the full value of the goods. Changes from manufacturing using purchased raw materials to this type of activity could affect the overall value of exports while the products being exported remained unchanged.

Standard Industrial Classifications ( SIC)

The sampling and analysis in the Global Connections Survey is done on the basis of SICs as provided on the IDBR. Where a company has various premises performing different functions, it is classified to the industry under which it has the most employees in Scotland. As mentioned above, this is different from other surveys, which can result in different results for some industries. Work is now underway to align the classifications in the IME with the GCS.

Much of the interest in exports tends to be in products and not in industries. GCS respondents are asked to separate goods and services, but apart from that no information is gathered on a product basis, and reporting is done by SIC. This is the usual approach to economic statistics. However, for the input-output analysis the GCS data has to be transformed from an industry to a commodity basis. This is done using known relationships between industries and products, as well as accounting for differences in the classifications used in different surveys as mentioned above.

The SIC basis also means that it is under the SIC of the exporting company rather than the producing company that the exports are counted. This results, for example, in large exports for the wholesale sector and very small amounts attributed to agriculture. Therefore the wholesale sector is a fairly large exporter. In the case of the whisky industry, companies in the GCS are reclassified to the spirits manufacturing sector, but for other sectors the companies are currently left within wholesale. The retail sector has exports either due to visitors to Scotland (tourists) or mail order sales. As with wholesale, this does not give an indication of the types of product being exported. For the 2002 input-output tables, the detailed SICs are used to allocate the wholesale and retail industries back to commodities.

Tourism

Expenditure by visitors to Scotland is included in exports, as it involves the sale of goods and/or services to non-residents and thus represents a flow of income to Scotland. Likewise, Scottish tourists will buy products abroad (including in the rest of the UK) and thus will import goods and services into Scotland. In the GCS, businesses are asked to identify their sales to customers from overseas and the rest of the UK. However, many companies cannot for obvious reasons do this. In the case of hotels and restaurants, retail and car rental, adjustments are made based on information from the International Passenger Survey and UK Tourism Survey to account for this. The estimates in these sectors are therefore a combination of actual company data and imputed data from tourism surveys. No adjustments for tourism spending are currently made in other sectors, as the relative impact of tourist expenditure is likely to be small.

Finance sector

It is difficult to estimate financial sector estimates due to some of the issues outlined above, for example companies have activity throughout the whole UK and there are definitional issues due to globalisation. In addition, financial variables for this sector are difficult to measure accurately and are not provided via the usual ONS business surveys ( ABI and IDBR). Data provided by the Scottish Clearing Banks are used as the basis for the banking sector estimates in the GCS, however they cannot provide details about the international destinations, and so banking is not included in the country analysis. Various sources of information including the Clearing Banks, published company reports and actual survey returns are used to provide best estimates of turnover and exports for the rest of the financial sector. Although international trade in, for example, insurance, is not as high as in banking, the sales to the rest of the UK are significant. Again, however, the large companies do not record information on this basis so assumptions are made about sales patterns based on talking to companies, and other published industry information.

Conclusion

Estimates of the imports and exports of goods and services are widely used. This article provides users with background information about the different data sources available on the trade of products to and from Scotland, together with an understanding of the issues which should be considered when using trade estimates. While a range of practical and conceptual difficulties are acknowledged, it is also the case that the estimates published by the Scottish Executive are the best currently available which follow the framework of the System of National Accounts. They are derived from the same business register as other Scottish economic statistics therefore providing some consistency. Revisions do occur, however, due to new information on companies becoming available, as well as more detailed analysis after publication highlighting areas for improvement.

There is an ongoing programme of work to improve exports statistics, along with all economic statistics in the Scottish Executive. Inclusion of Global Connections results in the input-output system improves the estimates in the IO tables and consistency between the sources, and also provides valuable feedback to the exports estimation process in GCS resulting in improved estimates there. The reconciliation of GCS and IME has also been described, and this also benefits both sources. This triangulation of the three official sources means that a more coherent set of statistics will be available, each with its own purpose but all derived from compatible underlying sources.