The Impact of Language on Bilateral Trade

Abstract: This paper investigates the impact of different language factors on international bilateral trade from 1996 to 2020 through gravity model analysis. Sharing a common language has been proven to facilitate trade between countries and is often included as an indicator variable in the gravity model of trade. We expand on the results obtained by Melitz and Toubal (2014), who showed that the impact of language comes from three components, by extending the time frame of their analysis, as well as implementing updated language data. We find that Melitz and Toubal (2014) results hold with an extended dataset and confirm that the main influence of language on bilateral trade comes from ease of communication. We further explore changes over time and consider how the increased access to the internet globally influences the strength of the relationship of language on trade. We are interested in understanding how increased access to the internet and the subsequent decrease in communication barriers due to globalization impact this. We find that the importance of common official and native language increases over time, but that increased internet access in exporting countries reduces the importance of common language on trade.