The Causal Impact of Common Language on International Trade: Evidence from a Spatial Regression Discontinuity Design Peter H. Egger1,2 , Andrea Lassmann1 1 2

ETH Zurich CEPR, CESifo

Workshop Presentation at NTU Singapore, August 14, 2013

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Language and culture Language in the humanities & social sciences Language differences as cultural barriers to human interaction [philosophy (Herder, Wittgenstein); sociology (Gumperz 82); psychology (Matser et al. 10); economics (Falck et al. 12)]

Common culture by way of common language as a robust driver of cross-border activity [migration (Chiswick 92); multinational firm activity (Bergstrand & Egger 07); international trade]

Common language drives bilateral trade [Head & Ries 98; Rauch & Trindade 02; Melitz 08; Firdmuc & Fidrmuc 09; Melitz & Toubal 12]

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Language and cross-border transactions Channels of influence Common language lowers transaction costs (common spoken language, CSL) Common culture entails knowledge of social norms (common native language/cultural traits, CNL) Problem Cultural element of common native language is correlated with vast number of confounding country-specific factors: cultural, economic, institutional, legal, and political There is a quest for identification

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Language and trade Effect of language on pattern of trade Modern gravity models of bilateral trade have this form Mij = e 𝜆langij dij 𝜇i mj uij

(1)

Mij ∼imports; langij ∼binary common language indicator; 𝜆 ∼direct effect of common language on imports; dij ∼non-language trade cost effects (distance, borders, tariffs, trade agreements); mj ∼importer stuff (GDP, consumer price index); 𝜇i ∼exporter stuff (productivity, factor costs, endowments, etc.); uij ∼stochastic term Vast quantitative evidence on overall language effect in cross-country studies (Egger & Lassmann 12) ˆ is very sensitive to in-/exclusion of control variables ⇒ 𝜆 endogenous common culture Egger, Lassmann

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Interpretation of 𝜆

Facets of common language (Melitz & Toubal 12): Common Spoken Language (CSL) Common Native Language (CNL) Common Official language (COL)

𝜆 reflects weighted impact of CSL as mere communication means and CNL as contextual cultural factor (Melitz & Toubal 12) ˆ is difficult: e 𝜆langij ∼ e 𝜆CSL CSLij e 𝜆CNL CNLij Interpretation of 𝜆 Earlier estimates can not be interpreted as evidence of causal effect of common culture on trade

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Roadmap for the talk

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Identifying assumptions for the causal effect of the common cultural aspect of common native language

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Data on trade patterns and language use in Switzerland

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Technique – a fuzzy RDD for estimating the LATE of common native language on trade

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Main results for various margins of trade

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Sensitivity analysis and extensions

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Conclusions

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Identification strategy Imports of j from i and of k from i: Mij Mik

= e 𝜆CNL CNLij +𝜆CSL CSLij dij 𝜇i mj uij , = e

𝜆CNL CNLik +𝜆CSL CSLik

dik 𝜇i mk uik

(2) (3)

Pick countries and zip codes such that CNLij = 1 while CNLik = 0, CSLij ≈ CSLik and dij ≈ dik . Then, uij Mij = e 𝜆CNL Mik uik

(4)

𝜆CNL estimated as a constant to log-transformed relation ship u in (4) requires independence of (CNLij − CNLik ) and ln uikij

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Figure: Languages spoken in Switzerland by majority

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Causal effect of CNL on trade This paper: causal impact of CNL on international trade from spatial Regression Discontinuity Design (RDD) Consider three official (spoken and understood) languages of Switzerland spoken in adjacent countries, German, French, Italian CNL as cultural proximity rather than CSL Compare to na¨ıve gravity regressions for Swiss regions using equ. (1): 0.99 for import value and 0.81 for import transactions Consider various margins of trade and a number of extensions

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Data Determine CNL shares at Swiss zip code level (2 language borders, 3 languages: German, French, Italian) using 2000 Census data (Swiss Federal Statistical Office) Combine with Swiss transaction-level data on external goods imports transactions (> 100m observations) from border countries of Swiss Federal Customs Administration (averaged over years 2006-2011, aggregated by zip code and destination) Determine nearest road (1482 zip codes) and great circle distance (1700 zip codes) of every zip code centroid to respective internal (≤ 50 km) and international CNL border (1990 Census and spatial data from Swisstopo/“Die Post”) Language borders largely unchanged since centuries

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Figure: Share of German-speaking population in Switzerland

German language share (Equal intervals) 0.00 - 0.20 0.21 - 0.40 0.41 - 0.60 0.61 - 0.80 0.81 - 1.00

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Figure: Share of French-speaking population in Switzerland

French language share (Equal intervals) 0.00 - 0.20 0.21 - 0.40 0.41 - 0.60 0.61 - 0.80 0.81 - 1.00

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Figure: Share of Italian-speaking population in Switzerland

Italian language share (Equal intervals) 0.00 - 0.20 0.21 - 0.40 0.41 - 0.59 0.60 - 0.79 0.80 - 0.99

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Share of language population .2 .6 .8 .4

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Native language share in %

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Figure: Transactions from German-speaking countries in % of total imports

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Figure: Transactions from French-speaking countries in % of total imports

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Figure: Transactions from Italian-speaking countries in % of total imports

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Figure: Transactions from ROW in % of total imports

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Fuzzy RDD

Quasi-experimental design [Thistlewaite & Campbell 60; Imbens & Lemieux 08; Angrist & Pischke 09, Lee & Lemieux 10]

Use discontinuous determination of treatment status through forcing variable (xij ) which otherwise determines outcome (yij ) continuously Flexible parametric/nonparametric control function about xij Sharp RDD (Br¨ ugger, Lalive & Zweimueller 09; Eugster & Parchet 11) versus fuzzy: discontinuity in CNL is about 0.65 ⇒ Fuzzy RDD

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Fuzzy RDD Difference at limit in space (internal distance to CNL border → 0) of outcomes on ”left” (non-CNL with exporter) and ”right” (CNL language with exporter) at internal border Outcome yij : CNL as fixed (values and transactions shares, # products traded) vs variable trade cost (unit value, value per transaction, quantity per transaction) Fuzzy treatment CNLij : language shares by zip-code; grouped data Instrument Ruleij : binary historical language zone by zip-code (∼ 1 if share > 50%, 0 else) Forcing variable xij : distance to language border (< 0 for non-CNL and ≥ 0 for CNL) Covariate zij : demeaned distance to national border Samples: all versus intra-cantonal language borders only (homogeneous institutions) within 50km from borders Egger, Lassmann

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Fuzzy RDD

Define sufficiently smooth polynomial/nonparametric functions: f0 (xij ) at CNLij < 0, f1 (xij ) at CNLij ≥ 0.5, f1∗ (xij ) ≡ f1 (xij ) − f0 (xij ). Conditional expectations of yij : E [yij ∣xij , CNLij < 0.5] = 𝛼 + f0 (xij ) E [yij ∣xij , CNLij =≥ 0.5] = 𝛼 + 𝜆CNL + f1 (xij ) E [yij ∣xij , CNLij ≥ 0.5] − E [yij ∣xij , CNLij < 0.5] = 𝜆CNL + f1∗ (xij )

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Fuzzy RDD Definition of fuzzy Local Average Treatment Effect (LATE) Estimate by 2SLS: ≡

ATE

=

E [yij ∣xij , 0 ≤ xij ] − E [yij ∣xij , xij < 0] [CNLij ∣0 ≤ xij ] − [CNLij ∣xij < 0] [ ] f1∗ (xij ) 𝜆CNL + E [CNLij ∣0 ≤ xij ] − E [CNLij ∣xij < 0]

(5)

Nonparametric version in small neighborhood around discontinuity: LATE

≡ =

(E [yij ∣0 ≤ xij < Δ] − E [yij ∣ − Δ < xij < 0]) ([CNLij ∣0 ≤ xij < Δ] − [CNLij ∣ − Δ < xij < 0]) 𝜆CNL . lim

Δ→0

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(6)

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Share of import value 40 30

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Share of import transactions 30 40 20

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Number of imported products (HS 8) 200 400 600

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Log import unit value 5 4.5

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Log intensive margin of imports 8 8.2 8.4 8.6

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Log average value per transaction

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Log import quantity per transaction 6.5 7 7.5

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Results: Great-circle distance (all borders)

Value share Obs. Trans. share Obs. # Products Obs. Value/Quant. Obs. Value/Trans. Obs. Quant./Trans. Obs.

Parametric 1st 2nd ∗∗∗ 0.231 0.173∗∗∗ 3414 3414 0.227∗∗∗ 0.191∗∗∗ 3414 3414 169∗∗∗ 124∗∗ 3414 3414 0.148 0.085 3395 3395 –0.004 –0.060 3395 3395 –0.026 –0.085 3395 3395 Egger, Lassmann

Nonp. 3rd 0.131∗∗∗ 3414 0.163∗∗∗ 3414 118 3414 –0.194 3395 –0.037 3395 –0.310 3395

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0.160∗∗∗ 1304/19 0.159∗∗∗ 1227/18 164∗∗∗ 1249/18 –0.008 1689/24 –0.044 1859/27 -0.083 2731/39

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Results: Cont’d (intra-cantonal borders)

Value share Obs. Trans. share Obs. # Products Obs. Value/Quant. Obs. Value/Trans. Obs. Quant./Trans. Obs.

Parametric 1st 2nd ∗∗∗ 0.202 0.126∗∗∗ 1872 1872 0.209∗∗∗ 0.157∗∗∗ 1872 1872 149∗∗∗ 115∗ 1872 1872 0.092 0.099 1858 1858 –0.120 –0.171 1858 1858 –0.098 –0.279 1858 1858 Egger, Lassmann

Nonp. 3rd 0.096∗ 1872 0.145∗∗∗ 1872 203∗∗ 1872 –0.256 1858 –0.279 1858 –0.256 1858

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0.136∗∗∗ 890/21 0.168∗∗∗ 779/18 178∗∗∗ 1007/24 –0.008 1224/29 –0.181 1420/34 –0.182 1084/25

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Results: Road distance (all borders)

Value share Obs. Trans. share Obs. # Products Obs. Value/Quant. Obs. Value/Trans. Obs. Quant./Trans. Obs.

Parametric 1st 2nd ∗∗∗ 0.194 0.184∗∗∗ 2968 2968 0.209∗∗∗ 0.201∗∗∗ 2968 2968 184∗∗∗ 85 2968 2968 0.088 0.085 2954 2954 –0.067 –0.083 2954 2954 –0.023 –0.260 2954 2954 Egger, Lassmann

Nonp. 3rd 0.134∗∗∗ 2968 0.187∗∗∗ 2968 90 2968 –0.112 2954 –0.227 2954 –0.275 2954

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0.130∗∗∗ 1061/19 0.188∗∗∗ 1133/21 145∗∗∗ 2928/50 –0.229 855/16 –0.150 1436/25 –0.194 1754/30

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Results: Cont’d (intra-cantonal borders)

Value share Obs. Trans. share Obs. # Products Obs. Value/Quant. Obs. Value/Trans. Obs. Quant./Trans. Obs.

Parametric 1st 2nd ∗∗∗ 0.163 0.162∗∗∗ 1644 1644 0.187∗∗∗ 0.186∗∗∗ 1644 1644 186∗∗∗ 101 1644 1644 0.059 0.134 1633 1633 –0.180 –0.174 1633 1633 –0.146 –0.208 1633 1633 Egger, Lassmann

Nonp. 3rd 0.137∗∗∗ 1644 0.215∗∗∗ 1644 136 1644 –0.065 1633 –0.417 1633 –0.154 1633

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0.138∗∗∗ 720/21 0.204∗∗∗ 696/20 150∗∗ 1602/49 –0.108 704/20 –0.329 742/21 –0.138 1033/29

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Sensitivity analysis and extensions Sensitivity of nonparametric estimates to choice of bandwidth No discontinuities for imports from rest-of-world No placebo discontinuities (at median distance of ≈ ±25 km; and at 15 km) No discontinuities for zip code-specific effects (mj )!!!

return

LATE for additional (product intensive) margins of trade confirms discontinuity for extensive margins LATE across transaction size quartiles: increasing up to third quartile, lowest in fourth quartile (cross-border selling) LATE at distance from language border: increases to > 0.2 with exclusion of 5, 10, 15 km from border (cross-border shopping & working) Egger, Lassmann

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Sensitivity analysis and extensions LATE across product categories (97 HS 2-digit industries, Rauch goods classification, selected products): Dispersed across industries Matters particularly for reference-priced and differentiated goods rather than homogeneous goods Strong discontinuity for selected differentiated goods (suits, cars)

LATE by border (French-German versus Italian-German language border): 0.284 (value share) and 0.300 (transactions share) at German-Italian language border 0.114 (value share) and 0.150 (transactions share) at French-German language border Importance of geographical barriers (St. Gotthard, Bernina)

LATE for specific native languages (not borders!) Egger, Lassmann

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Conclusion What is the causal effect of CNL on trade? CNL raises import volume share by 13 pp., transactions share by 19 pp., and number of products by 145. No significant effect on log unit value, log transaction value and log quantity per transaction CNL matters for fixed trade costs rather than variable trade costs (Helpman, Melitz & Rubinstein 08?) Corresponding semi-elasticities of CNL are 0.28 for log value and 0.31 for log number of transactions Much lower than effect of COL found in na¨ıve gravity regressions for Switzerland (0.99 for import value and 0.81 for import transactions) CNL effect is heterogeneous: matters for reference-priced and differentiated goods rather than for homogeneous goods; hump-shaped effect across transaction quartiles; dispersed across industries Egger, Lassmann

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The END

Thanks a lot for your attention!

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