1. Foreign Languages and Trade Jan FidrmucJarko Fidrmuc Brunel UniversityUniversity of Munich

2. Introduction Impact of economic/monetary integration well explored Gravity models of trade Free-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

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

4. Introduction (cont’d) Mélitz (2000): indigenous languages based on Ethnologue database Open-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)

5. Our Contribution Effect of native and foreign (learned) languages alike Unique recent data set on language proficiency in the EU Native and up to 3 foreign languages Self-assessed proficiency level All major and all EU languages included

6. 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

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

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

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

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

11. Data (cont’d) Probability that two random individuals from two different EU27 countries speak the same language EU27MeanMinMax English 17197 German 5089 French 3098 Spanish 007 Italian 0034

12. Data: Example Communication probability NL-SNL-PL English5214 German75 French10 Spanish00 Italian00

13. Gravity Model Trade between i and j determined by Economic mass of i and j, y it and y jt Distance between i and j, d ij Common border, b ij Common language dummies, DL di and communication probabilities, DL fi

14. 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 *** Border0.489 *** 0.643 *** 0.533 *** 0.504 *** 0.300 *** 0.509 *** 0.306 *** Official Languages: English0.929 *** 0.488 *** 0.499 *** 0.607 *** 0.741 *** 0.607 *** 0.745 *** German-0.0090.216 * 0.679 *** 0.668 *** French0.0120.628 ** -0.260-0.185 Swedish0.544 *** 0.563 *** 0.293 *** 0.290 *** Dutch0.695 *** 0.782 *** -0.082-0.081 Proficiency: English0.549 *** 0.610 *** 1.040 *** 0.970 *** 1.043 *** 0.960 *** French-0.6611.115 ** 1.018 * German-0.174-0.012-0.042 Spanish6.581 *** 9.931 *** 10.094 *** Italian-2.316 * 9.682 *** 9.714 *** TDyes no CDno yes no CTDno yes N1800 R2bar0.9170.9180.9210.9690.9720.9710.975

15. Results: EU15, 1995-03 Common official language raises trade Especially 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

16. 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

17. 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%

18. 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)

19. Results: EU 15, Quantile Regressions Q10Q25Q50Q75Q90 GDP (US$) 0.962 *** 0.931 *** 0.874 *** 0.836 *** 0.795 *** Distance-0.464 *** -0.695 *** -0.709 *** -0.787 *** -0.852 *** Border0.673 *** 0.483 *** 0.687 *** 0.591 *** 0.319 *** English official language1.088 *** 0.890 *** 0.433 ** 0.426 *** 0.400 *** English proficiency0.3040.340 *** 0.697 *** 0.426 *** 0.272 *** Intercept-27.083 *** -23.557 *** -20.109 *** -17.209 *** -14.193 *** N 1800 Pseudo R 2 0.7380.7350.7220.7160.714

20. Results: EU15, Quantile Regression Effect of English proficiency highest for 50 th percentile  outlier-free regression ???

21. 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

22. Conclusions (cont’d) Universal proficiency in English would raise trade 2.5 times Rose: estimated effect of monetary unions  2-3 fold increase in trade Common currency costly (OCA theory) Improving English proficiency does not require abandoning national languages Large gains possible at little cost