The American Presence Aborad 

and U.S. Exports 

John Mutti 

U.S. Treasury Department 

OTA Paper 33 October 1978 

OTA Papers are circulated so that the preliminary findings of 

tax research conducted by Staff members and others associated 

with the Office of Tax Analysis may reach a wider audience. 

The views expressed are those of the author, and do not 

reflect Treasury policy. Comments are invited, but OTA 

Papers should not be quoted without permission from the 

authors. MaRaging editors are Michael Kaufman and Gary Robbins. 

Office of Tax Analysis

U.S. Treasury Department, Room 1104 

Washington, D. C. 20220 

Issued: October 1978 
a 

G 

TABLE OF CONTENTS 

Page 

I. Introduction and Summary ...................... 1 

11. A Basic Model of International Trade .......... 7 

111. The Estimated Export Equation ................. 17 

IV. The Simultaneous Determination of 

Exports and the Number of Americans 

Abroad ........................................ 23 

V. Policy Implications and Conclusions ........... 27 

i 
I. Introduction and Summary 

Seldom do technical tax matters receive the widespread 

and often colorful publicity which has been generated by the 

t 

ebate over the tax f income ear 

+ Americans. 

the pamperin 

Department s 

Fleece of the Year Aw 

treatment for Americans abroad dis 

cockroaches. 

On a less sensational level, 

ana modifications to the tax law w 

working overseas (section 911 of t 

would have resulted in a substanti 

-1/

burdens. Congress has voted to delay implementing the 1976 

reform of section 911 while a new measure is developed that 

will allow special deductions for some of the additional 

costs incurred from living overseas. 

This turnabout has been a response, in part, to the 

claim that higher taxation of U.S. citizens working abroad 

will result in a weakened competitive position for U.S. 

exports vis a vis those of other countries. If higher taxes 

are reimbursed by employers and passed on to foreign buyers, 

O.S. export and subsidiary sales will be less than they 

1 
-2-

otherwise would have been. As U.S. subsidiary sales decline 

and employment of Americans overseas falls, the effect on 

U.S. exports may be compounded. Because Americans may be 

more familiar with American products, they are more likely 

to order the purchase of American goods. That is, they can 

more readily determine the character of U.S. goods, the 

reliability of any maintenance service to be provided, or 

the certainty of delivery dates specified, etc. 

Consequently, fewer Americans abroad would result in fewer 

export sales. 

Quantitative analysis of these claims has been limited. 

A recent report by Data Resources Incorporated (DRI) for the 

General Accounting Office (1978) recognizes that both the 

cost and marketing factors mentioned above may be relevant, 

but only cost considerations are allowed for in projecting 

the possible decline in U.S. exports due to increased 

taxation of Americans abroad. The DRI approach assumes that 

all Americans living abroad promote exports, that their 

increased taxes will be reimbursed by their U.S. employers, 

and that these additional costs will be passed on to foreign 

buyers through higher export prices. DRI finds that 

complete repeal of section 911 would result in less than a 

one percent increase in average export prices. They estimate 

that the value of exports actually would rise due to the 

relatively low elasticity of demand for U.S. exports. 

. 

c 
-3-

(That is to say, the decline in the quantity of U.S. exports 

would be more than offset by the price increase.) 

This focus on the price effect represents only part of 

# the total effect because it ignores the likelihood that J 

Americans abroad have a greater tendency than foreigners to 

"buy American" in their business and household purchases. 

The present study attempts to quantify this additional 

influence by estimating the contribution that Americans 

abroad make to U.S. exports, while controlling for other 

relevent factors affecting export patterns. The other 

factors included here are income per capita in foreign 

countries, distance to foreign markets, productive capacity 

abroad, potential to achieve the advantages of large scale 

production abroad, assets of foreign subsidiaries of U.S. 

corporations, and cultural- communication ties with foreign 

countries, Allowing for the role of all these variables in 

a multiple regression framework acrcss countries indicates 

that Americans abroad do make an independent and 

statistically significant contribution to U.S. exports. 

This effect is not negligible either; a one percent deline 

in Americans abroad is projected to result in slightly over 

a half percent decline in the value of U.S. exports. Thus, 

if the number of Americans abroad were to decline by 10 

percent, the value of U.S. exports would be projected to 

decline by 5 percent. 
-- 

-4-

These findings do not have a clear tax policy 

implication because the single equation estimated does not 

indicate the extent to which any tax increase might result 

in fewer American workers abroad. That point is best dealt 

with in a broader analysis considering explicitly the 

demand for and supply of Americans working abroad. This 

approach also captures the simultaneous nature of the 

relation between exports and Americans abroad which results 

if greater U.S. exports require more American service 

personnel. The single export equation estimates cited above 

may be misleading since they do not allow for this 

interdependence. That is to sayI one cannot be sure from 

the single-equation analysis whether Americans abroad 

promote U.S. exportsl or vice versa. 

Analysis based on a more complete specification of the 

causal relationships suggests that: 

(1) Americans abroad still appear to be an important 

determinant of U.S. exports, even after the role of exports 

in determining the number of Americans abroad is taken into 

account. 

(2) The demand for Americans abroad is positively 

related to U.S. exportsl negatively related to U.S. 

subisidiary operations, and negatively related to the wage 

received. The paradoxical result with respect to subsidiary 

t 

c 
-5-

operations is probably an artifact of the data or the 

statistical methods. 

(3) The willingness of Americans to work abroad in 

response to higher wages is two to three times as great as 

1 

* the reduction in the demand for their services when wages 

rise. Consequently, more than half of any tax increase 

facing Americans abroad will be offset by an increase in 

their before-tax wages. Still, the value of the supply 

elasticity is quite small, and therefore any tax increase 

is estimated to have a small effect on the number of 

Americans working abroad. As a result, even a major policy 

change, such as eliminating all special preferences for 

foreign earned income, would result in only a two to three 

percent decrease in the value of U.S. manufactured exports. 

Conversely, additional tax breaks for Americans abroad would 

not lead to any significant substitution of American workers 

for other factors of production and consequently would not 

greatly alter U.S. export performance. 

These findings are based on a preliminary attempt to 

analyze more thoroughly the ways Americans working abroad 

may influence U.S. exports. Because the analysis is being 

made just as greater attention is being paid to how income 

earned abroad should be taxed, Congressionally mandated 

reporting may greatly increase the chance that these initial 
-6-

findings can be re-examined with more complete data. 

Section I1 of this paper explains the rationale behind 

the single equation export model, and empirical estimates 

based on this model are reported in Section 111. In Section 

IV, a more complete model is developed which includes the 

determinants of the number of Americans abroad. The policy 

implications suggested by this model are elaborated in 

Section V. 
-7-

11. A Basic Model of International Trade 

A model commonly used in cross-sectional studies of 

international trade patterns relates the value of trade 

c 

between two countries to their income levels, tastes, 

endowments of factors of production, and trade resistance 

* 

variables such as transportation costs and tariffs. 

Leamer and Stern (1970) suggest three alternative rationales 

for such a formulation. 

One alternative is referred to as a gravity model, 

based on the same principle from physics. In its most 

mechanistic application, this approach projects the flow of 

goods between two countries as dependent upon the product 

of their economic size divided by the square of the distance 

between them. Regardless of its merits in the context of 

total trade, this explanation seems considerably less 

appropriate for trade in specific products, since 

differences between export and import flows are likely to be 

much larger at a disaggregated level. The theory 

provides no explanation for specialization in the production 

of certain goods, and the consequent unbalanced trade for 

any given good. 

Another alternative is based on a probalistic model of 

commercial contacts (Savage and Deutsch 1960). Trade 

between two countries is projected from the product of 

one country's share of world exports and the other country's 
-8-

share of world imports, modified by trade resistance 

variables such as tariffs and transportation costs. 

A third approach which rests on specifying the 

underlying supply and demand equations demonstrates more 

clearly the determination of these probabilities and the 

allowance of modifying factors. A country's demand for 

imports will depend upon its income, the price demanded by 

the seller, and the price of competing goods produced at 

home or in other countries. Because part of the price of 

imported goods is due to tariffs and transport costs, those 

factors affect relative prices and enter the demand 

equation. The quantity supplied by the exporting country 

will depend upon the price offered and the availability of 

necessary factor inputs. In equilibrium where quantity 

supplied equals quantity demanded, these two expressions are 

equal. The endogenous price term is eliminated, and a 

reduced form expression is derived for the flow of trade 

between two countries as a function of the exogenous income, 

population, tariff, distance, and resource variables. This 

approach has been explored in some detail by Linnemann 

(1966), and is extended further in the present study. 

Consider first the demand for U.S. goods in foreign 

markets. If U.S. goods, Xusl and foreign domestic goods, 

xf I 

and competing goods from other countries, 'row, are 

. 

8 
-9-

imperfect substitutes, then a simplified form of the export 

demand facing U.S. goods is 

xus = a Yf [Pus(l + T + K 1 1A2 PfA3 

us 

['row (1 + T + K row)iA4 

where Yf is foreign income, all Pi are prices of the 

competing goods expressed in country f's currency, T is an 

ad valorem tariff rate, and K is transportation cost as a 

percentage of price. The demand for other goods will be a 

function of the same variables. Although foreign income 

represents the scale of economic activity or stage of 

economic development abroad, two separate variables, income 

per capita and population, capture the same effect in a more 

general way, and could be entered instead. This distinction 

can be particulary important when the goods traded are 

luxury goods, with an income elasticity of demand greater 

than one. lf two countries have the same national income, 

but one has a higher per capita income, it will demand more 

of the luxury good. , 
-10-

Consider the supply relation ne,xt. In order to 

determine U.S. prices endogenously, a supply function for 

U.S. goods must be specified and demand functions for U.S. 

goods in all markets. Linnemann develops this argument, but 

suggests that it is intractable empirically. Instead, his 

numerical analysis rests on two simplifying assumptions: 

(a) delivered prices of rest-of-the world goods do not vary 

across countries; and (b) the trade flow from one country to 

another involves an unique good which differs from goods 

exported to other countries. Only the demand and supply 

functions relevant to the country pair being considered are 

-2/

solved simultaneously to yield a reduced form equation. 

Linnemann specifies quantity supplied as a function of price 

and capacity, and further simplifies the system by 

constraining capacity to be proportional to income. 

Consequently, the set of variables which appear in the 

reduced form equation to be estimated is income, population, 

and trade resistance variables. 

A less extreme approach is followed here. Prices of 

goods from rest of the world countries are not excluded from 

the model, since competing foreign exporters may provide the 

greatest competition to U.S. exporters. That is 

likely in lesser developed country markets where domestic 

production of many advanced goods is non-existent. Also, 

Linnemann's artificial condition that a country will export 
-11-

J 

a different good to each foreign market is rejected. To 

avoid the problem of determining prices simultaneously, 

which prompted Linneman's approach, the assumption made here 

is that a country's f.0.b. export price is set irrespective 

of the quantity sold in any single foreign market. Thus, 

the supply curve is assumed to be infinitely elastic. This 

simplification has been made quite uniformly in studies that 

estimate elasticities of substitution in international 

trade. 

Prices do not appear in the present model because they 

are replaced by the resource variables that determine them. 

A starting point suggested by the neoclassical 

Heckscher-Ohlin model is to consider capital-labor 

endowments across countries. More recent theories that rest 

on neo-factors of production, such as human capital and 

technology or on product cycle developments, are more 

consistent with the framework of product differentiation 

assumed here. An indication of the potential importance of 

these distinctions is given in the cross-sectional analysis 

of disaggregated imports developed by Leamer (1974). He 

concludes that among the 3 general groups of explanatory 

variables (stage of development variables such as income, 

resistance variables such as tariffs and transport, and 

resource variables), the resource variables as a group 

are not significant. That finding suggests that an 

elaborate treatment of these variables probably is not 
-12-

warranted, and that alternative steps should be taken to 

improve data sources. 

Only two resource-production variables are included in 

the present study, productive capacity and research and 

development expenditures. The variable used to represent 

capacity is income. Greater income reflects both greater 

productive capacity and the likelihood that products would 

have been developed for the home market that successfully 

exploit potential economies of scale. As a consequence, more 

attractive prices will exist in the country with the larger 

capacity. The research and development variable (RD) 

represents a stock of knowledge that makes the availability 

of high technology goods at attractive prices more likely. 

Combining these factors, tne price equation is 

P = b RDB1 yB2 . (2) 

This expression is substituted into equation (1) to yield 

a reduced form model 

['fRDf1 

e4 

['row RD row 

(1 + T + K 

row )Ic5 (3) 
-13-

where Yf/Pop is income per capita and Pop is population 

in the foreign country. 

In explaining U.S. exports, U.S. income and R&D 

expenditures will be the same in all bilateral flows, and 

they can be considered as part of the constant term. This 

simplification is reflected in the expression above. Note 

that the more general demand formulation, including both 

income per capita and population, has been used. Because 

these two variables and the foreign income variable 

introduced in the price equation are not independent of each 

other, one of them must be suppressed. In the estimated 

equations the income and population variables were included; 

the coefficient for income corresponds to Cl-C4, and the 

coefficient for population to C2-Cl. 

What justifies the introduction into this equation of 

variables representing the U.S. presence abroad? American 

individuals and corporations abroad might be regarded as 

altering tastes in foreign markets in favor of U.S. goods. 

This demonstration effect seems plausible both for final 

consumer goods and intermediate inputs. 

In the framework suggested by Roemer (1977), a 

country will export proportionately more of its weakest 
-14-

! 

manufacturing sectors in its economic sphere of influence 

than outside of that sphere. Alternatively stated, for 

those goods where the U.S. market position is weak worldwide 

relative to competing exporters, the U.S. market share will 

be higher in countries where U.S. influence is greatest. 

The empirical measures of this influence used in the present 

study are the presence of U.S. individuals and corporations 

-3/

abroad. 

Another explanation is that the effective price of U.S. 

goods for foreign buyers includes more than U.S. production 

costs, transportation charges and import levies. An 

additional information cost is entailed to determine the 

quality of the good sold, the reliability of any maintenance 

service to be provided, the certainty of delivery dates 

specified, etc. Because American businesses and businessmen 

already have greater familiarity with U.S. goods, 

identically priced U.S. and foreign goods result in a lower 

effective price of the U.S. good to the American buyer. The 

complete expression to estimate becomes 
-15-

m 

& 

* 

xu s = c (Yf/Pop)c1 Popc2 [(l+ T + KUs)l c3 . 

LYfRDf1 

c4 

['row RDrow (1 + T + K 

row )lC5 . 

USAC6 (4) 

where USA represents factors that reflect the American 

presence abroad. In terms of the issues raised by Roemer, 

the coefficient of the USA term will be larger for those 

goods which are relatively less competitive in world export 

markets. Such goods will command a larger market share in 

countries where American influence is greater. More 

competitive U.S. exports will sell themselves and therefore 

be less dependent on this U.S influence. Instead, they are 

likely to gain a high market share in all markets, regardless

-4,5/

of the American presence. 

The American sphere of influence may depend on a common 

language and cultural heritage, factors that will be left 

unchanged even if tax practices are modified. If these other 

factors are omitted but they also are correlated with the number 

of Americans abroad, the influence attributed to the physical 

presence of Americans abroad may be overstated. One way of 

I 
-16-

meeting this objection is to use a dummy variable to reflect 

a common language. The proxy adopted here is U.S. tourist 

expenditures in a country. The implicit assumption that 

tourism depends upon common culture and language does not 

appear too unrealistic; U.S. expenditures in the U.K. are 

nearly twice the amount they are in France, and roughly five 

times the amount in Brazil, despite such attractions as the 

Louvre and carnival in Rio. 
-17-

1 

1 

* 

c 

111. The Estimated Export Equation 

The model described by equation (4) was estimated using 

cross-sectional data for the year 1974. The sample consists 

of U.S. exports of 14 three and four-digit SITC industry 

goods to 26 countries. The particular industries chosen are 

intended to reflect a representative sample of U.S. 

manufactured exports. Comparable data are not available for 

service industries such as contract construction, where U.S. 

personnel costs may be a higher share of total costs than in 

manufacturing. No attempt is made to analyze trade in 

agricultural products. These products are an important 

component of total U.S. exports, but such trade appears to 

be more dependent on specific natural resource endowments 

and government restrictions and subsidies, than on the 

factors analyzed here. Consequently, the applicability of 

the present results is limited to manufactured products. 

A highly disaggregated approach is adopted in order to 

reduce the extent to which any export category is 

composed of very heterogeneous goods. Otherwise, U.S. 

exports to some countries may be much more advanced 

technologically than exports of the same general 

category of goods to other countries. If the U.S. 

share of all world markets is quite strong in the first 

instance but relatively weak in the second case, the 

differential importance of the American sphere of 
-18-

influence suggested by Roemer will be lost due to the 

aggregation of dissimilar goods. 

The 14 goods are chosen to reflect a range of 

industries with both strong and weaker U.S. market-positions 

worldwide. In addition, the goods selected must also be 

important enough in world trade that the reported flows to 

different countries will not include a large random 

component due to reporting and rounding errors. Table 1 

shows the industries used in this study. The countries 

chosen include all major developed countries with market 

economies and major developing countries from all 

-6/

continents. 

The data source for the GNP and population figures is 

from IMF, International Financial Statistics. Export flows 

and average exchange rates for 1974 are from the OECD, Trade 

Statistics, Series C and A, respectively. Nautical 

distances are calculated from Distances between Ports, U.S. 

Navel Oceanographic Office. Distances from ports to 

commercial centers are based on Linnemann's adjustments. A 

fixed distance component is added to reflect the 

nonlinearity of transport costs as a function of distance, 

due in part to fixed costs of loading and unloading. 

Aggregate R&D expenditures were collected from the OECD over 

8 years to represent a stock of knowledge available for 

F 

5, 

z 
i 

3 

-19-

producing technologically advanced goods. Two variables 

which reflect the U.S. presence in a given country, are the 

assets of controlled foreign subsidiaries of U.S. 

manufacturing corporations and the number of Americans 

working abroad. This information is available from Treasury 

Department compilations. 

The estimates are made by pooling all industry 

observations. Pooling does not force the behavioral 

coefficients to be the same for all goods, and in fact, 

whether the coefficients across goods are statistically 

different from each other emerges as an easily testable 

hypothesis. (Johnston 1972; for an extensive application 

see Ginsburg 1969). Often heteroskedasticity is a major 

problem in cross-sectional studies, which leads to misplaced 

confidence in the significance of the estimates made. Test 

statistics indicated that was not the case here. (See 

Goldfeld and Quandt). 

In Table 2 estimates of equation (4) are presented in 

summary form only, in order to focus on the estimated 

coefficients of the behavioral variables. Constant terms are 

omitted, although the separate dummies corresponding to each 

good were often significantly different from each other. 

These dummies also were used multiplicatively with the 

independent variables representing the U.S. presence abroad, 

to allow for possible differences in this behavioral parameter 
-20-

across goods. In no case did allowing for different 

coefficients across goods result in a significant reduction 

in the residual sum of squares, and the null hypothesis of 

homogeneous slopes could not be rejected. 

The numerical estimates show a surprising degree of 

agreement with previous studies. Attempts to distinguish 

among different explanations of the American sphere of 

influence, though, result in multicollinearity between the 

included variables and reduce the size and significance of 

the more traditional variables. The estimated values are 

similar to the priors specified by Leamer in his Bayesian 

analysis oi U.S. imports. From his review of previous 

studies, Leamer set the GNP elasticity equal to .a, the 

population elasticity to -.2 and the distance elasticity to , 

-1.0. The GNP elasticities reported here are slightly lower 

possibly due to the greater importance of economies of scale 

in the production of these goods. Since GNP is used to 

represent a country's productive capacity and the ability to 

exploit economies of scale at hoine, an important downward 

influence on the GNP coefficient is introduced. The 

population elasticities are somewhat greater in absolute 

value, probably because of the greater income elasticity of 

demand for these goods; this coefficient becomes more 

negative the more the income elasticity of demand exceeds 

one. The distance elasticities are smaller tnan reported by 

I.. 

b 

L 
-21-

Leamer, due to the smaller role of transportation costs 'in 

the sale of these goods than agricultural products and crude 

materials, which are included in more aggregative studies. 

The R&D variable and the income capacity variable are 

highly collinear. Due to this lack of independent 

L variation, their separate effects on exports cannot be 1 

distinguished and the R&D variable was dropped. The 

estimates do confirm that the U.S. exports proportionately 

more to countries whose other trading partners are less 

likely to exhaust potential economies of scale. 

Turning from these preliminary comments to the primary 

focus on the American sphere of influence and exports, two 

points stand out: 

(1) High levels of U.S. exports are associated 

with the presence of Americans abroad. Both the after-tax 

income and controlled foreign asset variables are 

statistically significant when entered either separately or 

together in the basic trade model. The magnitude of the 

estimated coefficients is not trivially small, either. A 

one percent decrease in Americans abroad, is estimated to 

decrease the value of exports by somewhat over half a 

-7 /

percent. 

An attempt was made to determine whether the effect of 

Americans abroad on export performance was not a simple 
-22-

proportional one. For instance, it might be necessary for 

some threshold level of business activity within a country 

to be American before any great effect on U.S. export 

performance would emerge. As the American presence 

increased beyond this point, its further effectiveness might 

become progressively smaller. Horst (1978) reports findings 

of this type with respect to foreign subsidiary production 

in a country and U.S. exports to it. In the present analysis 

this non-linear pattern was observed, but the estimated 

coefficients were statistically insignificant. 

(2) The importance of Americans abroad appears to be 

greater for weak exports, i.e., those goods where the U.S. 

has a relatively smaller share of the world market. This 

possibility is investigated by creating an interaction term, 

the number of Americans abroad multiplied by the U.S. share 

of the world market for a particular good. The negative 

sign obtained indicates that as the U.S. market share 

becomes larger, the importance of Americans abroad as a 

determinant of export sales becomes smaller. The estimated 

coefficient seems unreasonably large, and it also is 

sensitive to the exact specification of the estimated 

equation. Consequently, any definitive statement regarding 

the numerical importance of this effect is premature. 
-23-

IV. The Simultaneous Determination of Exports and the 

Number of Americans Abroad 

The reduced-form export equation estimated above cannot 

answer a critical policy-related question. To what extent 

would less favorable tax treatment of Americans working 

abroad worsen the U.S. balance of payments? A more explicit 

model of the determinants of Americans working abroad is 

necessary to indicate whether fewer Americans would be 

willing to work overseas if after-tax income were to fall, 

or whether U.S. employers would reimburse their employees 

and pass this additional cost on to foreign buyers. Such a 

model can also allow for the possibility that exports and 

the number of Americans abroad may be simultaneouslydetermined variables, due to increased export sales 

requiring greater skilled service personnel. 

Consider the demand equation first. Demand for 

Americans working abroad will be a function of the scale of 

operations that require the special skills which Americans 

offer and of the wage paid. The relevant expression to 

estimate is 

USA = F + F1 . EX + F2 . CFC + F3 . WAGE (5) 

where EX is total manufactured exports, and CFC is U.S. 

manufacturing subsidiary assets, and WAGE is the nominal 

wage rate. However, to the extent that citizens of other 

countries are very close substitutes for Americans abroad, 

the demand for Americans alone can be viewed as a residual 
-24-

function, derived froin the total demand for skilled labor. 

inputs less the quantity supplied by other nationals. 

The supply of Americans willing to work in a country 

may be influenced by a variety of factors, including a 

common language and cultural ties or a favorable climate, 

and the real return or monetary rewards from working there. 

The first factor may be captured by the tourism variable 

explained earlier. The second variable is the nominal wage 

rate adjusted downward for the higher cost of living in the 

given foreign country. That adjustment is calculated from 

the U.S. State Department cost of living and quarters 

allowances. Again expressing all variables in logarithms, 

the algebraic model is 

USA = G + G1 . TOURSM + G2 . (WAGE-COL) (6) 

where COL is the cost of living adjustment factor, TOURSM 

represents tourist expenditures in a given country. 

These two equations, together with the reduced form 

export equation analyzed in the preceeding section, 

constitute an overidentified, simultaneous system that can 

be estimated using two-stage least squares. With respect to 

the ordinary least squares estimates of the export equation 

reported above, the importance of Americans abroad may be 

understated due to the correlation of a regressor with the 

error term. For example, suppose a randomly caused 

reduction in the number of Americans abroad leads to a 

reduction in U.S. exports which causes a further reduction 
-25-

in the number of Americans required abroad. An estimate 

which picks up both pieces of the reduction in Americans 

abroad and correlates them with the decline in exports would 

understate the export impact of the initial exogenous 

decline in Americans abroad. 

Estimates of this simultaneous model are reported in 

Table 111. The coefficients of the reduced-form export 

equation are not altered greatly. The major difference is 

that the coefficient of the interaction term, which shows 

whether the importance of Americans abroad varies with the 

world market share of the good considered, is much smaller 

in magnitude and statistically insignificant. 

The demand for Americans abroad is a positive function 

of U.S. exports, a negative function of the wage rate, and 

unexpectedly, a negative function of U.S. manufacturing 

subsidiary assets abroad. This surprising result may be due 

to the omission of other relevant variables or to the fact 

that subsidiary assets may not be a good indication of the 

scale of foreign activities. No adjustment could be made 

for any qualitative differences of Americans working in 

different countries. This shortcoming undoubtedly limits the 

precision of the estimates and may bias the elasticity of 

demand downward. On the other hand, since the share of 

Americans abroad in the total cost of sales is so small, it 

is not surprising that the derived demand would be small. 

C 
-26-

The supply equation yields the expected result that as 

the average real wage increases, the number of Americans 

working in the country will rise. Because this result is 

obtained in a cross-sectional model, it requires further c 

b 

interpretation. Such a model provides a basis for 

projecting how a change in the French income tax could 

affect the number of Americans living in France; real wages 

in one country are changed, assuming that they remain 

constant elsewhere. Since a change in American tax laws may 

change real wages in all foreign countries, the estimated 

equation should not be construed as indicating the effect on 

Americans living abroad. Instead, the estimate does provide 

an upper bound projection of this responsiveness to changes 

in income. A reduction in real wages everywhere will lead 

to less movement out of France than when real wages fall 

only in France because other overseas locations become 

relatively more attractive. 
-27-

V. Policy Implications and Conclusions 

The estimates reported above from the more complete 

model allow a tentative response to the balance-of-tradetaxation-of-Americans-abroad issue raised at the outset. 

The estimates also address the distributional issue of the 

incidence of any increased tax liability of Americans 

abroad. 

Treating the incidence issue first, less than half of 

any increase in the tax liability of Americans abroad is 

-8/

likely to be borne by them. This result occurs because 

the effect of a tax increase is for some Americans to return 

to the U.S. As a consequence, before-tax wages rise for 

those who remain abroad and also for other nationals, who 

are attracted by the increased wages and can by substituted 

for Americans. An important feedback effect is that fewer 

Americans abroad lead to fewer U.S. exports and reduced 

demand for skilled sales and service personnel overseas. 

This factor depresses the wage paid and further reduces the 

after-tax wage received by Americans abroad. 

If the rather drastic step were taken of repealing all 

special treatment of foreign earned income under Section 

911, the initial impact would be to reduce after-tax income 

of Americans abroad by roughly 11 percent compared to the 

situation under 1975 law. This impact obviously varies 
-28-

across individuals and the countries where they work, but on 

average such a tax change would be estimated to result in an 

increase in before-tax wages rates of 6 percent and a 

decline in after-tax wages of 5 percent. (See Appendix A). 

This projection illustrates why Americans abroad have been 

particularly active in trying to reverse tne 1976 reforms 

which reduced the tax benefits applicable to income earned 

abroad. Because not all of any tax increase will be 

reimbursed by their U.S. employers as assumed in the DRI 

analysis, Americans abroad are not indifferent to the tax 

legislation adopted. 

From the same set of parameter estimates, the effect on 

the value of U.S. manufactured exports from repealing 

Section 911 is projected to be a decline of roughly 2.7 

percent. The effect differs from the improved trade balance 

predicted by DRI. This difference occurs because the 

present study does quantify the alleged buy-American 

practices of Americans abroad. The magnitude of the balance 

of trade change still is much less than that attributable to 

the annual rate of expansion of U.S. exports. 

These findings are based on a preliminary attempt to 

analyze more thoroughly the ways Americans abroad may 

influence U.S. exports. Efforts to improve the data used 

and the procedures applied are needed to confirm or negate 

the reported results. Since the results presented in this 
-29-

paper are preliminary, it is important to recognize the 

proper context in which to apply them and to do so with 

caution. 

\ 
-30-

Table 1 

U.S. Share of World Export Markets, 1974 

SITC : 

Number : Industry 

714.9 Office Machinery 

718.4 Construction and Mining Machinery 

861.7 Medical Instruments 

711.6 Gas Turbines 

541.3 Antibiotics 

712 Agricultural Machinery 

719.3 Mechanical Handling Equipment 

724.9 Telephone and Telegraph Equipment 

678.2 Seamless Tubes and Pipes 

694 Nails, Screws, Fasteners, etc. 

812.4 Lighting Fixtures 

717.1 Textile Machinery 

891.1 Phonographs and Tape Recorders 

673 Iron and Steel Bars, Rods, Angles, 

c 

: Percentage 

: of Market 

r 

53.7 

39.2 

34.0 

32.2 

30.5 

29.8 

26.6 

21.5 

17.9 

14.8 

11.4 

9.4 

8.7 

etc. 4.4 

/ 
3

'. 

m -

H 

z 

Ei

w 

I oe 

! .. I 

m 

4 

I -

rl 3 m 

a, 

N

. ro P0 wm m 

B .. N 

m 

[I) + - II 

0 

5 

d N 

a, w w 

C p: m - m ?+ 

c, rl 

d q - N 

m03 E [I)

2 *. u 

.I4 rlN n .I4 

m m I 4 c, 

I - 0 [I) 

a, a, U 

rl c d I c, 

P c, W w m 

m p: W 4J 

h u CI NfX [I) 

0 U '3: 

m - k 

m- c, 

ro ml- U rl n 0 . mN a, 

c, 

a, 

N W II co m 

b .. m m It d

. Nu E Y 

.rl PI N+ 

a,

[I) 

4J 0 + mL.r: [I) W

[I) p1 

E 

E m a, 

N - m H E 

m dd H !x 4J 

I4 .. p: 3 C 

VI d 3 0 a, 

N II 0 h k v B m *- m - a 

om m NW 

dm 

d

. .. 

C .. m *I+ 

+ U 

+ + -

ro 

e

. b 

m Q) m

. 03 P 

d 5 

II C 

II 

4 rl 

sc m rl 

0 3 4 
-- 

ww 

W ­

cow 

Nt- Nm -+-'"? 

I' 4 ;4I 

id 

I I V Y Y 

9?

t-O

Nz 

?? 

dco 

0-

2 

O- t-- m -

NW Pico *N d0 md '9? '95 '9? s

Y 

m 

. 

E z 

n n h 

InN Int- -In 

mm wt- Wt­ .. e . .. d* dm 

II Y IL 

In- d- d- w ­ dw wm ww NID 

wm In- Wt- 4:

IW 

.. I-; ;4I 

I* 

I I I Y Y V Y 

d- m -

InN mIn 

*t- ?5 

I' ;I-; I I-; I 

IN 

I I V U Y Y 

m - 0- dco Nt­

?? .. ?? 

z 2 2. 
-- 

-33-

Appendix A 

? 

From equations (4), (5) and (6) in the text, multiplier 

t 

relationships for the three endogenous variables (value of 

U.S. exports, number of Americans abroad and wages of 

Americans abroad) can be derived with respect to a change in 

U.S. tax policy. The expressions for these solutions are as 

follows: 

dEX - G2.F3.C6 dTax 

EX G2(1-Fl.C6)-F3 Wage 

dUSA F3-G2 -

dTax -= USA G2(l-Fl.C6)-F3 Wage 

dvJage = G2(1-FleC6) ­dTax 

Wage G2( l-Fl.C6)-F3 Wage 

I 
-34-

Footnotes 

* The author is an Associate Professor of Economics at the 

University of Wyoming and was on leave as an 

International Economist in the Office of International 

Tax Affairs of the U.S. Treasury Department from June 

1977 to August 1978. He wishes to thank Tom Horst, 

Marcia Field, tierry Gerardi and other members of the 

Office of International Tax Affairs for providing

constructive suggestions and for developing some of the 

underlying data. The opinions and conclusions expressed

in the paper are strictly those of the author and not of 

the Department of the Treasury. 

1/ The Tax Court ruled that allowances and expenses paid by - an employer on behalf of an employee, such as housing,

education, and travel expenses, are includable in the 

employee's gross income. The Tax Reform Act of 1976 

reduced the amount of income earned abroad that is 

excluded from taxation, taxed remaining income at the 

higher rate that would apply if excluded income were 

subject to tax, and disallowed a credit for foreign taxes 

attributable to the excluded income (U.S. Treasury,

1978). 

2/ This rationalization still seems incomplete - theoretically. Assuming that a different good is 

exported to each market does avoid the necessity of 

aggregating demand equations across all countries to give 

a total market demand function. However, while quantity

demanded in each market thereby depends on the relevant 

variables from a single country only, quantity supplied

by the U.S. to that market will depend upon what is 

supplied to other markets. This interdependence exists 

as long as resource requirements are not identical in the 

production of all goods. Different factor requirements

imply increasing opportunity cost as output of one good

expands. 

Roemer claims that multinational subsidiaries can be 

rejected as a possible deteminent of a country's sphere 

of influence, since eliminating intrafirm trade does not 

affect his non-parametric analysis of U.S. trade 

patterns. This interpretation a priori rules out the 

claims cited above that U.S. controlled foreign

corporations may have an economic incentive to buy

American in general, which other foreign corporations

would not have. 
-35-

I4/ To capture the effect of Americans abroad suggested in 

the DRI analysis requires an additional term. The supply

equation should be modified to include the wage rate of 

Americans abroad, since American labor is regarded as an 

input used in fixed proportions to make export sales. 7 This input concept may be particularly appropriate for 

high technology export goods which do require American 

, sales and service personnel. Such a term was included in 

I the analysis, but not surprisingly it was statistically 

insignificant. That result follows from the DRI estimate 

that the elasticity of demand for U.S. exports is 

approximately one, in which case either a higher or a 

lower wage rate will not affect the value of export

sales. 

Information on the number of other foreign nationals in a 

given country would be of interest too, but it is not 

available. Any bias from omitting it is not clear. If 

the foreign presence were closely correlated with a U.S. 

presence, as might be the case if large potential markets 

were to attract foreigners from all competing suppliers,

then the estimated coefficient for the U.S. variable 

would be biased downward. If instead the U.S. presence 

were weakest where foreign competitors were most active, 

the estimated coefficient for the U.S. would be biased 

upward. For an example of the econometric relationships 

that support these statements, see Johnston, pp.

168-169. 

6/ The countries included in the study are: Canada, Japan,

Australia, Belgium-Luxembourg, France, Germany, Italy, 

the Netherlands, Sweden, Switzerland, the United Kingdom,

Algeria, Nigeria, South Africa, Mexico, Venezuela, 

Brazil, Israel, Saudi Arabia, Iran, Pakistan, India, 

Indonesia, the Phillipines, South Korea and Taiwan. 

-7/ This interpretation ignores whether results obtained 

across countries at a given point in time can be used to 

explain responses in a particular country over time. The 

implicit claim is that if the American presence were 

scaled back in a particular country, the effect on 

exports could be inferred from the import behavior of 

countries where the U.S. presence is smaller, all else 

constant. To pursue this point further it would be 

desirable to allow for separate country dummies to test 
-36-

whether the behavioral coefficients did vary

significantly across countries. Doing so would require

that data be available for at least one other year;

otherwise, these additional variables would be colinear 

with the included set of variables. This extension may 

be possible in the future, since the increased economic 

importance of the issues involved has resulted in more 

complete data collection and compilation. 

This phrase more precisely refers to an increase in the 

U.S. tax liability of those working abroad after allowing

for the foreign tax credit. Subsequent references in 

this section also imply a net figure which includes the 

increased total U.S. tax liability less the increased 

ability to offset this liability with taxes paid to 

foreign governments. 
-37-

References 

Geraci, V. and W. Prewo, "Bilateral Trade Flows and 

1 Transport Costs," Review of Economics and Statistics, 59 1 

(February 1977), 67-74. 

Ginsburg, A., American and British and Regional Export 

Determinants (Amsterdam: North-Holland 1969). 

Goldfeld, S. and R. Quandt, "Some Tests for 

Homoscedasticity," Journal of the American Statistical 

Association, 60 (1965), 539-547. 

Horst, T., "The Impact of American Investment Abroad on U.S. 

Exports, Imports and Employment," Paper Presented to the 

Conference on the Impact of International Trade and 

Investment on Employment, Washington, December 2, 1976. 

Johnston, J., Econometric Methods, 2nd Edition, (new York: 

McGraw-Hill, 1972). 

Leamer, E. and R. Stern, Quantitative International 

Economics (Boston: Allyn and Bacon, 1970). 

Linnemann, H., An Econometric Study of International Trade 

Flows (Amsterdam: North-Holland, 1966). 

7 
-38-

Roemer, J., "The Effect of Sphere of Influence and Economic 

Distance on the Commodity Composition of Trade in 

Manufacturers," Review of Economics and Statistics, 59 

(August 1977), 318-327. 

Savage, R. and K. Deutsch, "A Statistical Model of the Gross 

Analysis of Transaction Flows," Econometrica, 28 (July 

1960), 551-70. 

U.S. Comptroller General, Impact on Trade of Changes in 

Taxation of U.S. Citizens Employed Overseas, Washington, 

1978. 

U.S. Treasury Department, Taxation of Americans Working 

Overseas, Washington, 1978.