Immigrants, Cultural Differences, and Trade Costs
| Author | Roger White,Bedassa Tadesse |
| Published date | 01 February 2017 |
| DOI | http://doi.org/10.1111/imig.12291 |
| Date | 01 February 2017 |
Immigrants, Cultural Differences, and Trade
Costs
Bedassa Tadesse* and Roger White**
ABSTRACT
We examine the effects of immigrants and cross-societal cultural differences on bilateral trade
costs using two alternative measures of cultural differences (i.e. cultural distance and genetic
distance). We find that bilateral trade costs generally increase with a rise in the cultural dis-
tance between trading partners but fall with a rise in the stock of immigrants. This implies that
immigrants counter bilateral trade costs that are associated with greater cultural differences.
Our observation is relevant from both migration and trade policy perspectives as it provides
further evidence that immigrants serve as conduits for bridging cultural differences, facilitate
international transactions, and enhance global economic integration.
INTRODUCTION
International trade involves interactions across borders and between cultures, and culture influences
how people think, communicate, and behave (Salacuse, 2005). Cultural differences may thus affect
the nature and costs of international transactions. Both anecdotal evidence and results from empiri-
cal studies indicate that cross-societal cultural differences have a negative influence on bilateral
trade flows (see, for example, Disdier et al., 2010; Tadesse and White, 2010a; White and Tadesse,
2008 and Linders et al., 2005). Given the inverse relationship between trade costs and the volume
of trade, it can therefore be inferred that, all else being equal, greater cultural differences between
country pairs correspond with higher trade-related transaction costs.
A growing literature documents that immigrants have the ability to serve as conduits for bridging
cultural differences by providing critical information about markets, consumer preferences, and
business practices that are often costly to obtain (Peri and Requena, 2009; Blanes-Cristobal, 2008;
Girma and Yu, 2002).
1
These observations suggest that immigrants may have the potential to coun-
ter, either in whole or in part, increases in trade costs that stem from cross-societal cultural differ-
ences. Direct examination of this relationship, however, has been hindered by a lack of data on
bilateral trade costs and, to some degree, by the absence of reliable measure of cultural differences,
thus creating a void in the literature.
Using comprehensive ad valorem tariff equivalent estimates of bilateral trade costs and two alter-
native measures of cross-societal cultural differences –specifically, the cultural distance and the
genetic distance between populations in immigrants’home and host countries –we attempt to fill
the void in the related literature by examining whether immigrants offset the rise in trade costs
associated with cultural differences and, if so, the extent to which the effect varies along the low
and high ends of the cultural divergence contour. White (2010) defines cultural distance as
* University of Minnesota, Duluth
** Whittier College, Whittier
doi: 10.1111/imig.12291
©2016 The Authors
International Migration ©2016 IOM
International Migration Vol. 55 (1) 2017
ISSN 0020-7985Published by John Wiley & Sons Ltd.
“differences in the behavior, beliefs, arts, institutions, and all other avenues by which a population,
community, or a class collectively expresses its values and attitudes”.
2
Genetic distance refers to “
... the divergence in the whole set of implicit beliefs, customs, habits, biases, conventions, etc. that
are transmitted across generations –biologically and/or culturally –with high persistence”(Spo-
laore and Wacziarg, 2009).
3
Our use of cultural distance and genetic distance as alternative mea-
sures of cultural differences makes our approach novel and our findings comprehensive, as the
observed effects can be directly compared.
Our results, obtained from interchangeably using both measures of cultural differences, indicate
that bilateral trade costs tend to rise as cultural differences widen and fall with increases in the
immigrant stock. The observed effect of immigrants on bilateral trade costs, however, increases
with a rise in cultural differences. It can therefore be inferred that the extent to which immigrants
offset bilateral trade costs attributable to cultural differences is higher the more culturally divergent
are the home and the host countries. Accordingly, we find that, all else being equal, a one per cent
increase in cultural differences, as measured by cultural distance between the typical pair of home
and host countries, is associated with a 0.1103 per cent average increase in bilateral trade costs,
with the marginal trade cost-reducing effects of immigrants (in absolute terms) rising from 0.0707
per cent to 0.0735 per cent as we move from the lowest to the highest observed points on the cul-
tural distance contour. Similarly, using genetic distance as our proxy measure of cultural differ-
ences, we find that a one per cent increase in genetic distance between the typical home and host
country pairs is associated with 0.0714 per cent (on average) increase in bilateral trade costs, with
the marginal trade cost-reducing effects of immigrants rising from 0.0698 per cent to 0.110 per cent
as we move from the lowest to highest observed points of the genetic distance contour.
We also find that the observed influences of both immigrants and cross-societal cultural differ-
ences persist across trade costs involving manufactures and agricultural products. Given the persis-
tence of the observed effects across product categories, our observation of relatively greater
marginal trade cost-reducing effects of immigrants, specifically among home and host country pairs
that are culturally more divergent, has important implications for two reasons. First, in the face of
declining trade costs associated with geographic distance, as developing countries continue to face
significant hurdles in integrating with in the global economy and internalizing the benefits of inter-
national trade, our observation implies that immigrants may play a significant role in enhancing the
economic integration of their home countries with the rest of the world. Second, as is noted by
Spolaore and Wacziarg (2013), given that inherited human characteristics transmitted from one gen-
eration to the next over the long run affect economic outcomes, our observation implies that the
existing literature underestimates the significance of the economic influences attributable to
immigrants.
The article proceeds as follows. Section 2 presents a review of the relevant literature. In Sec-
tion 3, we discuss the empirical specifications, variables, and sources of our data. Section 4 dis-
cusses our estimation results and their policy implications. Section 5 concludes.
RELEVANT LITERATURE
While few studies examine the direct influence of cultural differences on trade costs, several works
indirectly address the relationship. Boisso and Ferrantino (1997), for example, employ linguistic
distance as a proxy for cultural differences and examine the corresponding effect on bilateral trade
flows. While they find that greater cultural dissimilarity is negatively associated with the volume of
bilateral trade flows, the authors control neither for the effects of immigrants on trade flows nor for
their abilities to potentially offset the trade-inhibiting effects of cultural differences. Dunlevy (2006)
uses a dummy variable representing the commonality of official languages to address the effect of
52 Tadesse and White
©2016 The Authors. International Migration ©2016 IOM
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