Cultural Distance On International Trade Disputes

Recent trade disputes of WTO reflect the growing cultural and social differences of the trading partners.Culturally distinct trade partners and their increasing participation in WTO dispute settlement reflect cultural conflicts disguised as trade conflicts.Countries’(regions’)trading practices,as well as their decision to participate in trade disputes,are influenced by their national culture.Although the effect of culture on international trade and economic relationships has been extensively investigated,the possible role of cultural distance on trade disputes has yet to be studied.The aim of the thesis is to investigate the role of cultural distance in trade disputes.Cultural distance is differences in beliefs,traditions,values,languages,behaviors,religions,activities,habits,and phrases.This thesis examines cultural distance from two perspectives in order to capture the broad implications of cultural disparities: cultural distance proxied by Hofstede cultural dimensions and Hofstede index(whole),cultural distance proxied by language dissimilarity and language barriers.The thesis focuses on two fundamental research questions:to what extent and in what ways cultural differences are contributing to the trading countries’(regions’)participation in trade disputes and trade complainant’s initiation.This thesis uses a specific and comprehensive hand-collect data set of 158 countries(regions)with 12,403 country(region)pairs,cultural distances measured by Geert Hofstede scores,common official languages(COL)and language barrier index(LBI),and 593 WTO trade disputes cases from 1995 to 2019.Cultural distance for a country(region)pair measured by Hofstede index,Euclidean formula,and Kogut and Singh Index.The common official language is used as a proxy of language dissimilarity representing countries(regions)using separate languages as COL different from their native and spoken language.The language barrier index is used as a proxy of language barriers indicating countries(regions)have no similarities in their official languages.The panel Probit model is used since the thesis seeks to investigate the effect of cultural distance in Trade Disputes(TD).Furthermore,treat the decision to involve in trade disputes(TD)as a binary variable and develop the Probit model.The dependent variable TD equals one if a country(region)is engaged in trade disputes with a trade partner in a given year.An individual variable’s marginal effect is interpreted as the effect of a unit variation in the independent variables of interest on the likelihood that a specific country(region)involvement in trade disputes with a trade partner.The thesis core findings indicate that cultural distance between trading countries(regions)has a significant and positive impact on trade disputes.Cultural costs and cultural protectionism play the possible underlying channels for a positive relationship between cultural distance and trade disputes.Cultural costs stem from the communication gap,misunderstanding,ambiguity,information costs,mistrust,and challenges interpreting laws and policies due to discrepancies in national culture.Cultural distance intensifies cultural protectionism due to reliance in imported goods,fear of losing the cultural identity,the need to shield national goods and industries from foreign competition.Cultural costs and cultural protectionism rise in tandem as the cultural distance grows.Hofstede cultural dimensions have a profound impact on trade disputes.Countries(regions)with high power distance,individualism,masculinity,and uncertainty avoidance are more likely to participate in trade disputes than long-term orientation and indulgence countries(regions).The empirical results suggest that an additional unit increase of a country’s(region’s)power distance,individualism,masculinity,and uncertainty avoidance scores increase trade disputes likelihood on an average 0.38%,0.21%,0.26%,and 0.22%,respectively.Therefore,empirical findings also indicate that a unit increase of long-term orientation and indulgence score decreases trade disputes likelihood by 0.24% and 0.28%.Hofstede’s six dimensions reflect cultural differences in a variety of ways,each of which has a distinct effect on trade disputes.Countries(regions)with greater cultural distance have more probability of participating in trade disputes and initiating trade complaints.The empirical results indicate that country(region)pairs with an additional unit of cultural distance measured by the Hofstede culture index have an average 0.18% higher probability of being involved in a trade dispute.A country(region)that has a unit higher cultural distance to its trade partner has an average0.18% higher probability of filing a trade complaint.Further,language dissimilarity has a significant positive effect on trade disputes.The empirical findings indicate that country(region)pairs using a common official language other than their spoken or native language have an average 0.67% higher probability of trade disputes and an average 0.42% higher probability of initiating a trade complaint against trade partners.Similarly,the empirical analysis regarding language barriers specifies that trading countries(regions)with language barriers,having no similarity in their official languages,has an average 0.17% higher probability of trade dispute and an average 0.11% higher probability of initiating a trade complaint against trade partners.The thesis key contribution is to shed light on the role of cultural distance in trade disputes by using a comprehensive hand-collected data set and different aspects of cultural distance.Therefore,a significant contribution of this study is to highlights the possible cultural cost and protectionism channels of cultural distance.This thesis introduces and empirically evidenced that common official language(COL)as language dissimilarity proxy when countries(regions)used a separate language as COL different from their native and spoken language.Finally,this thesis enables researchers to understand the diverse nuances of cultural distance effects on trade disputes.