Cultural Distance and Trade Within Europe

Economic integration and collaboration have eliminated almost all formal barriers to trade within the European Union and created a common currency for nineteen countries. However, the individual countries in this common market area still differ widely in cultural values and believes. Culture plays an important role in international business and trade, therefore this paper studies the effects of cultural distance on trade within Europe. With data from the World Values Survey on cultural values and believes as well as trade flows between thirty-two European countries over the years 1995 to 2014, a panel data set is constructed. Analysing this data within a gravity model context, this paper shows that differences in values and beliefs reduce trade between countries. Even when controlling for cultural similarities and instrumenting cultural affinity with tourism data, the effect of cultural distance on trade is negative.