Merchanting and Current Account Balances

• Author: Barbara Döbeli,Andreas M. Fischer,Elisabeth Beusch,Pinar Yeşin
• Published date: 01 January 2017
• DOI: http://doi.org/10.1111/twec.12355
• Date: 01 January 2017

Merchanting and Current Account

Balances

Elisabeth Beusch, Barbara Döbeli, Andreas M. Fischer and Pinar Yes

ßin

Swiss National Bank, Zurich, Switzerland

1. INTRODUCTION

MERCHANT trade is an offshore business in services for homogenous goods such as

commodities, microprocessors and pharmaceuticals. A merchanting firm purchases

goods from a supplier abroad and sells these to a buyer abroad without the goods entering or

leaving the firm’s country of residence. These goods do not undergo any transformation in

processing between purchase and resale. Thus, a merchanting firm acts as an intermediary

between companies located abroad that produce a good and companies located abroad that

demand the good by providing storage and transportation services. The difference between

revenues from the sale of the merchanter’s goods and the purchase of the goods together with

the incurred expenses to finance, insure, store and transport them is recorded as (net) mer-

chanting. The asymmetrical accounting of merchanting is special in that the service is

recorded as a positive entry in the balance of payments (BoP).

1

Merchanting has recently become an important export in several European countries.

Figure 1 plots merchanting as a share of GDP since 1990 for the four largest merchanting

countries: Finland, Ireland, Sweden and Switzerland. The dynamics for Ireland are particularly

striking: the merchanting-to-GDP ratio grew rapidly from 1.7 per cent in 2004 to 4.7 per cent

in 2010. Similarly, Switzerland’s merchanting-to-GDP ratio of 3.8 per cent in 2011 is not triv-

ial. The same figure also shows that merchanting grew steadily after 2000 and continued to

expand even during the financial crisis. Part of this expansion is explained by the observation

that many merchanting firms continued to relocate to merchanting countries during the global

economic downturn. In particular, Beusch and D€

obeli (2013) show that the number of mer-

chanting firms in Switzerland continued to increase during the financial crisis and this phe-

nomenon contributed to the continued growth of merchanting receipts while trade in goods

collapsed globally. At a time when the Swiss franc appreciated strongly, firm relocation cush-

ioned adjustments in the current account (CA). Such a development makes it difficult to iden-

tify merchanting’s effects for current account adjustment even in the face of large global

The authors would like to thank participants of the Ninth Annual Workshop on Macroeconomics of Glo-

bal Interdependence – Barcelona, the Swiss National Bank’s Brown Bag Workshop, and the SSES

Annual Meeting 2013 for helpful comments. An anonymous referee, Katrin Assenmacher, Raphael Auer,

Menzie Chinn, Gian Carlo Corestti, Joseph Gagnon, Gian Maria Milesi-Ferretti and Cedric Tille offered

helpful comments and remarks on an earlier version of this paper. Irineu de Carvalho Filho, Hildegard

Muff, Thomas Schlup, Laurence Wicht and numerous central banks and statistical agencies provided

support and assistance in setting up this project. The views expressed in this paper are solely the respon-

sibility of the authors and should not be interpreted as reflecting the views of the Swiss National Bank.

1

The users of merchanting services record their transactions as either an imported or exported good.

Other components of the BoP are symmetric in that positive and negative entries are possible. Nega-

tive entries for merchanting in the BoP do arise; however, they are in general small and non-persistent

(i.e. a duration of negative profits for aggregated merchanting services is unlikely).

©2015 John Wiley & Sons Ltd

140

The World Economy (2017)

doi: 10.1111/twec.12355

The World Economy

shocks. Further, we know very little about the global scale of merchanting and its potential

impact on a country’s external balances.

This paper’s objective is to show that merchanting is coincident with movements in the

current account balance across a large set of countries over a long period of time. Presently,

we leave out the development of a theoretical model for future research; instead, we focus on

an empirical medium-term current account model. Based on our observations in the data, we

argue that the linkages between merchanting and current account balances may occur through

two channels. First, the relocation of merchanting firms may contribute positively or nega-

tively to the current account. There is limited evidence that merchanting firms specialise in

specific sectors and tend to cluster in particular countries. This channel is motivated in partic-

ular by the Swiss case during the global financial crisis. The second channel lies in the nature

of merchanting’s international activities. To expand their international activities in logistic

and storage services, merchanting firms have to undertake capital-intensive investments

abroad. Assuming that a portion of merchanting’s retained earnings contribute to national sav-

ings in the home country without increasing domestic investment, this increase in the sav-

ings–investment gap impacts the current account. This channel is motivated by the fact that

many merchanting firms are in the ownership of relatively few shareholders, are self-financed

and are engaged in a capital-intensive business.

2

To show the empirical linkages between merchanting and the current account, the savings

impact of merchanting countries is estimated in empirical models of the medium-term current

account. In regression models that control for a range of fundamental variables, merchanting

0 1 2 3 4 5

Merchanting/GDP (%)

1990 1995 2000 2005 2010

Ireland Switzerland Sweden Finland

FIGURE 1

Merchanting/GDP

Source: IMF BOPS, national institutions, WDI.

2

These private firms do not publish financial statements. Thus, their earned earnings and dividend pol-

icy is not publicly available. See, for example, Swiss National Bank (2012) and Pirrong (2014) for more

information on merchanting.

©2015 John Wiley & Sons Ltd

MERCHANTING AND CURRENT ACCOUNT BALANCES 141