Foreign Languages and Trade

Jan Fidrmuc Jarko Fidrmuc

Brunel University University of Munich

Introduction

Impact of economic/monetary integration well exploredGravity models of tradeFree-trade areas, customs unions

and monetary unions increase trade Sharing the same language also

increases trade Rose (2000): common language

increases trade by 50%; cf. common currency increases trade by factor of 3

Introduction (cont’d)

Common language facilitates communication and lowers costs

Gravity models typically account only for official languages

Effect of languages measured with dummy variables E.g. French official language in

Canada

Introduction (cont’d)

Mélitz (2000): indigenous languages based on Ethnologue databaseOpen-circuit communication: if

official or spoken by more than 20% dummy variable

Direct communication: if spoken by more than 4% sum of products of percentages (capped at 1)

Our Contribution

Effect of native and foreign (learned) languages alike

Unique recent data set on language proficiency in the EUNative and up to 3 foreign

languagesSelf-assessed proficiency levelAll major and all EU languages

included

Data

Special Eurobaromenter 255: Europeans and their Languages, November - December 2005

Nationally representative surveys; only EU nationals included

Mother’s tongue and up to 3 other languages that they speak well enough to have a conversation

Self-assessed proficiency: basic, good, very good

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

IRE

LAN

D

UN

ITE

D K

ING

DO

M

NE

DE

RLA

ND

MA

LTA

SV

ER

IGE

DA

NM

AR

K

KY

PR

OS

ÖS

TE

RR

EIC

H

BE

LGIQ

UE

SLO

VE

NIJ

A

LUX

EM

BO

UR

G

DE

UTS

CH

LAN

D

EU

27

ELL

AD

A

SU

OM

I

HR

VA

TS

KA

EE

STI

ITA

LIA

FR

AN

CE

PO

LSK

A

SLO

VE

NS

KA

CE

SK

A R

EP

.

BA

LGA

RIJ

A

ES

PA

NA

PO

RTU

GA

L

LATV

IA

LIE

TU

VA

RO

MA

NIA

MA

GY

AR

OR

SZA

G

TU

RK

IYE

English: Native and Foreign Language (good/very good skills)

German: Native and Foreign Language (good/very good skills)

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

ÖSTER

REIC

H

DEU

TSC

HLA

ND

LUXEM

BO

UR

G

NED

ER

LAN

D

DAN

MAR

K

EU

27

SLO

VEN

IJA

CESKA R

EP.

SLO

VEN

SKA R

EP.

HR

VATSKA

BELG

IQU

E

SVER

IGE

PO

LSKA

MAG

YAR

OR

SZAG

EESTI

ELL

AD

A

BALG

AR

IJA

SU

OM

I

FR

AN

CE

LIETU

VA

ITALI

A

LATVIA

RO

MAN

IA

UN

ITED

KIN

GD

OM

IRELA

ND

KYPR

OS

TU

RKIY

E

ESPAN

A

PO

RTU

GAL

MALT

A

French: Native and Foreign Language (good/very good skills)

0.0%10.0%

20.0%30.0%

40.0%50.0%60.0%

70.0%80.0%

90.0%100.0%

FR

AN

CE

LUXEM

BO

UR

G

BELG

IQU

E

EU

27

NED

ER

LAN

D

ITALI

A

RO

MAN

IA

PO

RTU

GAL

UN

ITED

KIN

GD

OM

IRELA

ND

DEU

TSC

HLA

ND

ÖSTER

REIC

H

ESPAN

A

KYPR

OS

ELL

AD

A

MALT

A

BALG

AR

IJA

SVER

IGE

DAN

MAR

K

SLO

VEN

IJA

CESKA R

EP.

PO

LSKA

HR

VATSKA

SU

OM

I

SLO

VEN

SKA R

EP.

LIETU

VA

TU

RKIY

E

MAG

YAR

OR

SZAG

LATVIA

EESTI

Russian: Native and Foreign Language (good/very good skills)

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%

100.0%

LATVIA

LIETU

VA

EESTI

BALG

AR

IJA

SLO

VEN

SKA R

EP.

CESKA R

EP.

PO

LSKA

DEU

TSC

HLA

ND

EU

27

ELL

AD

A

RO

MAN

IA

KYPR

OS

MAG

YAR

OR

SZAG

SU

OM

I

HR

VATSKA

ÖSTER

REIC

H

IRELA

ND

SLO

VEN

IJA

DAN

MAR

K

SVER

IGE

ESPAN

A

UN

ITED

KIN

GD

OM

ITALI

A

LUXEM

BO

UR

G

TU

RKIY

E

NED

ER

LAN

D

BELG

IQU

E

FR

AN

CE

PO

RTU

GAL

MALT

A

Data (cont’d)

Probability that two random individuals from two different EU27 countries speak the same languageEU27 Mean Min Max

English 17 1 97

German 5 0 89

French 3 0 98

Spanish 0 0 7

Italian 0 0 34

Data: Example

Communication probability

NL-S NL-PL

English 52 14

German 7 5

French 1 0

Spanish 0 0

Italian 0 0

Gravity Model

Trade between i and j determined byEconomic mass of i and j, yit and yjt

Distance between i and j, dij

Common border, bij

Common language dummies, DLdi and communication probabilities, DLfi

ijt

F

fif

D

didijijjtittijijt

FLDLbdyyT ,,321

Results: EU 15, 1995-03(1) (2) (3) (4) (5) (6) (7)

Intercept -20.993 *** -21.313 *** -21.445 *** 15.138 *** 13.833 *** -29.521 *** -32.022 ***

GDP (US$) 0.897 *** 0.895 *** 0.896 *** 0.260 *** 0.278 *** 1.046 *** 1.086 ***

Distance -0.739 *** -0.694 *** -0.691 *** -0.733 *** -0.691 *** -0.730 *** -0.690 ***

Border 0.489 *** 0.643 *** 0.533 *** 0.504 *** 0.300 *** 0.509 *** 0.306 ***

Official Languages:

English 0.929 *** 0.488 *** 0.499 *** 0.607 *** 0.741 *** 0.607 *** 0.745 ***

German -0.009 0.216 * 0.679 *** 0.668 ***

French 0.012 0.628 ** -0.260 -0.185

Swedish 0.544 *** 0.563 *** 0.293 *** 0.290 ***

Dutch 0.695 *** 0.782 *** -0.082 -0.081

Proficiency:

English 0.549 *** 0.610 *** 1.040 *** 0.970 *** 1.043 *** 0.960 ***

French -0.661 1.115 ** 1.018 *

German -0.174 -0.012 -0.042

Spanish 6.581 *** 9.931 *** 10.094 ***

Italian -2.316 * 9.682 *** 9.714 ***

TD yes yes yes yes yes no no

CD no no no yes yes no no

CTD no no no no no yes yes

N 1800 1800 1800 1800 1800 1800 1800

R2bar 0.917 0.918 0.921 0.969 0.972 0.971 0.975

Results: EU15, 1995-03

Common official language raises tradeEspecially English

English proficiency raises trade Accounting for proficiency in English

lowers common-language effect French/ German: weak/mixed results Spanish/Italian: seemingly strong effect

Most country pairs’ values close to zero

Results: EU15, 1995-03 Example 1 Consider column (7)

UK-IRL trade increased 2.1 times because English is official language

2.5 times because of English proficiency

Overall effect of English on UK-IRL trade: 5.3 fold increase

NL-S trade is increased 1.6 times and NL-UK trade is doubled

Average effect in EU15: 25% increase due to English proficiency

Results: EU15, 1995-03 Example 2 English proficiency increased by

10% in all EU15 countries (except UK & IRL)Average increase in trade by 12%Range: +8% (FR & PT) and +18%

(NL); UK & IRL trade +14%

Results: EU15, 1995-03 Example 3 English proficiency increased to NL

level in EU15 (except UK & IRL)Average increase in trade by 61%Range +39% (NL) to +75% (PT)

Results: EU 15, Quantile Regressions

Q10 Q25 Q50 Q75 Q90

GDP (US$) 0.962 *** 0.931 *** 0.874 *** 0.836 *** 0.795 ***

Distance -0.464 *** -0.695 *** -0.709 *** -0.787 *** -0.852 ***

Border 0.673 *** 0.483 *** 0.687 *** 0.591 *** 0.319 ***

English official language 1.088 *** 0.890 *** 0.433 ** 0.426 *** 0.400 ***

English proficiency 0.304 0.340 *** 0.697 *** 0.426 *** 0.272 ***

Intercept -27.083 *** -23.557 *** -20.109 *** -17.209 *** -14.193 ***

N 1800 1800 1800 1800 1800

Pseudo R2 0.738 0.735 0.722 0.716 0.714

Results: EU15, Quantile Regression Effect of English proficiency

highest for 50th percentile outlier-free regression

???

Conclusions

Language has a strong effect on trade

Countries with common official language trade more with each other

Proficiency in foreign languages also raises trade

English plays leading role On average, trade in EU15 is higher

by ¼ because of average proficiency in English

Conclusions (cont’d)

Universal proficiency in English would raise trade 2.5 times

Rose: estimated effect of monetary unions 2-3 fold increase in tradeCommon currency costly (OCA

theory) Improving English proficiency does

not require abandoning national languages

Large gains possible at little cost