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Nicolas Sauter Munich Graduate School of Economis

Explore impact of language diversity on trade between Canadian provinces, analyzing communication intensity and direct vs. indirect communication barriers.

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Nicolas Sauter Munich Graduate School of Economis

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  1. Talking Trade Language Barriers in Intra-Canadian Commerce Nicolas Sauter Munich Graduate School of Economis FIW-Forschungskonferenz 2008 Nicolas Sauer: Talking Trade

  2. Outline 1. Motivation 2. Estimation • Data • Empirical Strategy 3. Results • Baseline Results • Instrumental Variables • Robustness/Sensitivity 4. Summary Nicolas Sauer: Talking Trade

  3. ● Motivation○ Estimation○ Results Is There a Language Barrier to Trade? • Ample empirical evidence from gravity models: • Sharing a common mother tongue as well as higher literacy increase trade (Mélitz, 2008, EER). • High bilateral calling tariffs reduce trade (Fink et al, 2005, JIE) • Problem 1: Poor proxies for “knowledge of language(s)”: • “Common official language”, “% speakers with a common mother tongue”, “% English speakers”. • Potentially biased in cross-section: institutional, cultural, legal effects. • Problem 2: Many goods do not require knowledge of the others’ language(s) for trade (e.g. oil, rice). • If they do, one translator should suffice! Nicolas Sauer: Talking Trade

  4. ● Motivation○ Estimation○ Results Hypotheses Hypothesis 1: Industries that require more cross-border communication in order to export their products trade more between Canadian provinces that know the other's language(s). Hypothesis 2: Direct (oral) communication imposes a larger barrier to trade than indirect (written) communication. Nicolas Sauer: Talking Trade

  5. ○ Motivation●Estimation○ Results Data Sources • Provincial trade flows at industry-level • 10 provinces & 3 territories, 36 industries • Census 2001: Knowledge of Languages • Language commonality: probability that two randomly chosen people are able to speak with each other in English, French, or ‘Chinese’. • Canadian Input-Output tables at industry-level • Communication-intensity: share of telecommunications as well as postal services inputs in total inputs. • These are proxies for the need to communicate directly / indirectly with the trading partner. Nicolas Sauer: Talking Trade

  6. Nicolas Sauer: Talking Trade

  7. ○ Motivation●Estimation○ Results Size of the Language-Trade Effect Bilateral trade (Tijk) between province i and j in industry k is modeled as: Nicolas Sauer: Talking Trade

  8. ○ Motivation○Estimation● Results Baseline Estimates Nicolas Sauer: Talking Trade

  9. ○ Motivation○Estimation● Results Size of the Language-Trade Effect When shifting from the 25th to the 75th percentile of the distribution of langij, trade volume increases for an average communication-intensive industry by: %ΔTijk≈ 100*β3*Δx = 100 *β3*(lang75ij –lang25ij)*telecomk=2.64%. For a communication-intensive industry like ‘health services’ the increase in trade amounts to 6.94%. Nicolas Sauer: Talking Trade

  10. ○ Motivation○Estimation● Results Instrumental Variables Approach Instrument: Legal language status(predetermined and unaffected by the trade flow in 2001) Nicolas Sauer: Talking Trade

  11. ○ Motivation○Estimation● Results IV Estimates Nicolas Sauer: Talking Trade

  12. ○ Motivation○Estimation● Results Sample Sensitivity Nicolas Sauer: Talking Trade

  13. ○ Motivation○Estimation● Results Bias from Zero Trade Flows? – Poisson Estimates Nicolas Sauer: Talking Trade

  14. Summary • I identify one mechanism that could justify the empirical evidence for the language barrier to trade in gravity models. • The language barrier is larger for industries, which require more direct communication in order to trade their products. • Particularly service industries trade more between provinces with a high proportion of same-language speakers. • Inability to speak the other’s language is a comparative disadvantage for exports and imports of services. Nicolas Sauer: Talking Trade

  15. References Anderson, James E. and Eric van Wincoop (2004): “Trade Costs," Journal of Economic Literature, 42:3, 691-751. Fink, Carsten, Aaditya Mattoo and Ileana Cristina Neagu (2005): “Assessing the Impact of Communication Cost on International Trade," Journal of International Economics, 67, 428-445. Melitz, Jacques (2008): Language and Foreign Trade," European Economic Review, 52:4,667-699. Nicolas Sauer: Talking Trade

  16. Mother Tongues vs. Knowledge of Languages Nicolas Sauer: Talking Trade

  17. Nicolas Sauer: Talking Trade

  18. Non-parametric scatterplot smoother Royston, Patrick and Nicholas J.Cox (2005): “A multivariable scatterplot smoother,“ Stata Journal, 5:3, 405-412. Nicolas Sauer: Talking Trade

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