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.
- Cultural distance