Cultural Distance and Bilateral Trade

This paper examines the extent to which cultural proximity influences, and is influenced by, bilateral trade flows. Variables measuring common language or religion, commonly considered to be measures of cultural proximity, have been found to be highly significant in explaining the volume of trade between countries, but these measures have the distinct disadvantage of being static; they do not change over time. In fact, however, culture does change, possibly in response to exposure to the foreign goods, methods, and ideas brought across borders by trade; the cultural "distance" between two countries can therefore be seen to fall or rise over time. In this paper, responses to World Values Survey questions regarding trust, respect, control, and obedience are used to create a measure of cultural distance. I use this cultural distance variable in gravity regressions and show that more culturally-distant countries trade less, but that more traditional measures of culture are more significant in explaining trade. I then explore the determinants of cultural distance, finding that exports reduce cultural distance.