Does Cultural Distance Hinder Trade in Goods? A Comparative Study of Nine OECD Member Nations

Abstract

We examine the effect of cultural distance, a proxy for the lack of a minimum reservoir of trust necessary to initiate and complete trade deals, on bilateral trade flows. Employing data for 67 countries that span the years 1996–2001, we estimate a series of modified gravity specifications and find that cultural dissimilarity between nations has an economically significant and consistently negative effect on aggregate and disaggregated trade flows; however, estimated effects vary in magnitude and economic significance across measures of trade and our cohort of OECD reference countries. The consistently negative influence of cultural distance indicates that policymakers may wish to consider mechanisms that enhance the build-up of trust and commitment when seeking to facilitate the initiation and completion of international trade deals. Our findings also imply that coefficient estimates from related studies that do not account for the trade-inhibiting effect of cultural distance may be biased.

Appendices

Appendix 1: country listing

Albania, Algeria, Argentina, Armenia, Australia, Austria, Azerbaijan, Bangladesh, Belgium, Brazil, Bulgaria, Canada, Chile, China, Colombia, Croatia, Czech Republic, Denmark, Dominican Republic, Egypt, El Salvador, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Jordan, Korea (Rep.), Latvia, Luxembourg, Macedonia, Mexico, Morocco, Netherlands, New Zealand, Nigeria, Norway, Pakistan, Peru, Philippines, Poland, Portugal, Romania, Russian Federation, Slovak Republic, Slovenia, South Africa, Spain, Sweden, Switzerland, Tanzania, Turkey, Uganda, Ukraine, United Kingdom, United States, Uruguay, Venezuela, Vietnam, Zimbabwe.

Appendix 2: immigrant stock data and estimate construction

Data for Australia, Canada, Denmark, the Netherlands, Norway, Sweden and the US represent foreign-born populations by country of birth, while data for Germany and Italy represent foreign-born populations by country of nationality. Immigrant stock data are from national statistic agencies and have been compiled by the Migration Policy Institute (2007). For six of the nine host countries in our data set, Denmark (Danmarks Statistik), Germany (Statistiches Bundesamt), Italy (Istituto Nazionale di Statistica), Norway (Statistisk Sentralbyrå), the Netherlands (Centraal Bureau voor de Statistiek) and the US (US Census Bureau), immigrant stock data are complete to the extent that the statistical agency provides annual immigrant stock values for the years 1996–2001. Due to a lack of data, immigrant stock values are estimated for 1997–2000, for Australia (Australian Bureau of Statistics) and Canada (Statistics Canada), and for 1996–1998 for Sweden (Statistiska Centralbyrån). Available immigrant stock values are accepted as correct and are employed as benchmark values. Inflow data (reported along with available stock data by the noted statistical agencies) is used to estimate stocks for all other years. For example, immigrant stocks for Canada, for the years 1997–2000, are constructed as $IM_{ijt} = IM_{ij1996} + \sum\limits_{1997}^t {IN_{ijt} + \rho _j }$. IN _ijt is the immigrant inflow from country j to country i (in this case, Canada) during year t. is an adjustment factor accounting for return migration and deaths of immigrants during non-benchmark years. The adjustment factor is the immigrant stock from country j in Canada during 2001 less the sum of immigrants from country j in Canada in 1996 and the inflow from country j during the years 1997–2001 divided by five: $\rho _j = \frac{{IM_{ij2001} - \left( {IM_{ij1996} + \sum\limits_{y = 1997}^{2001} {IN_{ijt} } } \right)}}{5}$. Immigrant stock variables for Australia and Sweden are estimated similarly.

Appendix 3

Table 7 Data sources/notes