Intensification of geo-cultural homophily in global trade: Evidence from the gravity model

Abstract

This article extends the homophily principle (similarity breeds connection) found in many social networks to the study of global trade. Using a large data set about global bilateral trade from 1950 through 2000, analyzed by the gravity model borrowed from international economics, this study identifies increased geographic and cultural homophily in global trade, suggesting that countries increasingly favor their geographically and culturally proximate counterparts in global trade. Another analysis of bilateral trade data at the sector level produces an explanation for this observed intensification of geo-cultural homophily. The technological and institutional improvements facilitate disintegration of productive activities and product differentiation, thereby intensifying geo-cultural homophily in the intermediate input and finished manufacture sectors; moreover, trade expansion in these geo-culturally sensitive sectors outpaces geo-culturally less sensitive sectors such as the raw material sector. This differential expansion of trade across sectors shifts the composition of the overall global trade and makes it more subject to geo-cultural influences. Taken together, global trade has become more geo-culturally embedded. Instead of eliminating geo-cultural homophily in global economic activities, ironically, the improved technologies provide better conditions for it to materialize and grow.