Reconciliation of the U.S.-Canadian current account, 2002 and 2003

Survey of Current Business, Nov, 2004 by Patricia Abaroa, Edward Dozier, Denis Caron

ON a reconciled basis, the U.S. deficit, or Canadian surplus, is $38.9 billion for 2002 and $41.7 billion for 2003 (chart 1, table 1). (1) The U.S.-published current-account balance with Canada is a U.S. deficit of $28.7 billion for 2002 and a U.S. deficit of $32.1 billion for 2003; the corresponding Canadian-published balance is a Canadian surplus of $39.5 billion for 2002 and a Canadian surplus of $44.7 billion for 2003. (2)

The results of the reconciliation of the bilateral current-account estimates of Canada and the United States for 2002 and 2003 are presented in this article. (3) The details of the current-account reconciliation for 2002 and 2003 are presented in the tables that follow this article. Tables 2.1 and 2.2 show the details of the major types of reconciliation adjustments--definitional, methodological, and statistical--that were made to the major current-account components. Tables 3.1 and 3.2 present the published estimates, the estimates on a common basis (after the estimates have been adjusted for definitional and methodological differences), the reconciled estimates, and the amounts of the adjustments for each major current-account component. Tables 4-7 present the reconciliation details for goods, services, and investment income)

Reconciled Current-Account Balances

In the U.S. current account, the reconciliation adjustments result in an increase of $10.2 billion in the U.S. deficit for 2002 and an increase of $9.6 billion in the U.S. deficit for 2003. For both years, the increases reflect larger upward adjustments to the U.S. southbound estimates than to the U.S. northbound estimates (tables 2.1 and 2.2). (5) For both years, the largest increases in the U.S. southbound estimates result from the addition of Canadian reexports to U.S. goods imports (a definitional adjustment), from the valuation of U.S. natural gas imports to include inland freight (a definitional adjustment), from an increase for undercoverage of some southbound services (a statistical adjustment), and for 2002, from adjustments for statistical differences in direct investment income. For both years, the largest increases in the U.S. northbound estimates result from upward adjustments to investment income for undercoverage of income on U.S. holdings of Canadian bonds (statistical adjustments), and for 2003, from adjustments for statistical differences in direct investment income and in "other" services.

In the Canadian current account, the reconciliation adjustments result in a decrease of $0.6 billion in the Canadian surplus for 2002 and in a decrease of $3.0 billion in the Canadian surplus for 2003. For both years, the decreases in the Canadian surplus reflect larger downward adjustments to the Canadian southbound estimates than to the Canadian northbound estimates. For both years, the largest downward adjustments to the Canadian southbound estimates are from valuation adjustments to goods (definitional), from revisions to the published estimates of direct investment income (definitional adjustment), from the elimination of the withholding tax in current unilateral transfers (definitional adjustment), and from methodological adjustments to net some income of Canadian banks in "other" investment income. In the Canadian northbound estimates, the largest downward adjustments are from "other" investment income to eliminate withholding tax (definitional adjustment), to net some income of Canadian banks (methodological adjustment), and to eliminate statistical differences in income on U.S. holdings of Canadian bonds. For 2003, the reconciled estimates also reflect a large statistical adjustment in "other" services. Though the methodological adjustments explain part of the total adjustments to the northbound and the southbound estimates of "other" investment income, they do not affect the current-account balance because the northbound and the southbound methodological adjustments are offsetting.

Summary of Reconciliation Methodology

In reconciling the U.S.- and Canadian-published bilateral current-account estimates, the estimates are first restated to a common basis--that is, they are adjusted for definitional and methodological differences; the remaining adjustments that are needed to reach the reconciled values are the statistical adjustments. The framework for reconciling the U.S. and Canadian estimates to a common basis mainly follows the international standards published in the International Monetary Fund's Balance of Payments Manual (fifth edition). The U.S.- and Canadian-published estimates now largely conform to the international standards, but some differences with the international standards--and between the U.S. and Canadian estimates--remain in the published estimates because of data limitations, difficulties in determining country attribution, and differences in classification and because in a few cases, international standards provide for more than one acceptable treatment.

The definitional adjustments mainly reflect data limitations and differences in country attribution. For example, as part of the reconciliation, U.S.-published estimates of imports of goods from Canada are adjusted to include Canadian reexports to the United States (goods imported by Canada from third countries and then reexported to the United States without substantial changes) because U.S. imports of goods are recorded on a country-of-origin basis. Another example of a definitional adjustment is that the Canadian estimates, mainly investment income, are adjusted to a basis that is net of withholding taxes because the U.S. withholding tax estimates--which are included on a global basis in the U.S.-published accounts--cannot be allocated by country for comparison with the Canadian estimates.