Culture and Trade in the European Union

Abstract

Since its origin, the European Union has focused on removing barriers to the full integration of its members’ economies. While formal institutions have been adapted, informal social norms may have also changed. In this paper, variables from the World Values Survey are used to estimate the cultural distance between countries to examine the extent to which cultural distance and bilateral trade are related. Cultural distance reflects the differences between two countries’ norms and beliefs. It is predicted that cultural distance reduces trade while trade reduces cultural distance. Fixed-effects regressions for exports and cultural distance show that, contrary to the prediction, cultural distance raises trade and trade raises cultural distance. However, these results are questionable due to the potential problem of endogeneity. Once the problem of endogeneity is addressed with the use of simultaneous equations, the results show that, in fact, cultural distance has no effect on trade, while trade reduces cultural distance.