TRADE BENEFITS OF SHARING A NATIVE LANGUAGE: New evidence from micro-regions within Switzerland

Speaking a common native language gives a strong positive boost to trade between two countries, according to a study of the French- German- and Italian-speaking regions of Switzerland by Peter Egger and Andrea Lassmann. Their study, which is published in the May 2015 issue of the Economic Journal, finds that the trade benefits of native language commonality are bigger for more complex goods such as cars and chemical products than for homogeneous goods such as crude oils and metals.

The researchers identify the impact of native common languages from within country pairs. The identification design uses the discontinuities in majoritarian native languages at historical language borders between micro-regions within Switzerland, where other economic, institutional, and political factors are identical in the neighbourhood of the borders.

Even the degree to which different languages are spoken is continuous around these borders due to the intensive training in the various official languages of Switzerland provided at school. Accordingly, what the authors are able to identify is the (local, causal, partial) impact of common native language on bilateral trade in contrast to the role of language proficiency (or the extent to which common languages are spoken).

The role of common culture in general and common (native and/or spoken) language on trade is hard to identify from the aggregate bilateral trade data that are commonly employed for empirical assessments. The reason is that common language is correlated with a host of other determinants that vary across countries and country pairs. The new study overcomes this problem by using transaction-level bilateral trade data across postcodes for Switzerland and language borders between communities where the main native languages are French, German and Italian, respectively.

The analysis reveals that speaking a common native language induces a strong stimulus on bilateral imports. It explains about one quarter of the total partial language effect on Swiss imports. The latter includes the effect from speaking a secondary language (common spoken language) as well as other unmeasured factors.

Suppose one compares the imports of two similar postcodes that differ only by the native language majority with regard to their imports from the same foreign (French- German- or Italian-speaking) country that has common borders with Switzerland. One of these postcodes shares a common language majority with the foreign country whereas the other one does not.

On average, native language commonality for such a sample of postcodes raises the share of the nominal value of import transactions by 16.5%; it raises the share of numbers of import transactions by 19.6%; and it raises the number of products traded (product diversity) by 136 items. Hence, there are positive effects of native language commonality on extensive product and transaction margins of trade.

The researchers find no such effects on intensive transaction and product margins such as the value, quantity and price per transaction, or the value, quantity and price per product line. This suggests that common native language is a factor that reduces fixed market access costs at the transaction and product level rather than variable trade costs.

This is confirmed by the researchers'' additional finding that the effects are bigger for differentiated goods such as cars and reference-priced goods such as chemical products (where fixed transaction and information costs should be relatively important) than for homogeneous goods such as crude oils and metals.

''The Causal Impact of Common Native Language on International Trade: Evidence from a Spatial Regression Discontinuity Design'' by Peter Egger and Andrea Lassmann is published in the May 2015 issue of the Economic Journal. Peter Egger and Andrea Lassmann are at ETH Zurich.