Cultural Differences Impede Trade for Most Countries — But Not China

July 3, 2024

© Kalyakan / Adobe Stock
© Kalyakan / Adobe Stock

It’s a widely accepted notion among economists that cultural differences can pose a significant barrier to trade. The larger the cultural gap between two countries – judging by differences in language, customs, values and business norms – the more challenging and costly trade relations become. This is a recurring theme in research.

But there’s one big exception to the rule: China.

As an applied economist with a keen interest in how culture influences trade, I’ve conducted several studies of the dynamic. In one such effort, two colleagues and I meticulously analyzed China’s trade relationships with nearly 90 countries over 16 years.

Our research uncovered a distinctive pattern: Unlike many other nations, cultural differences rarely influence the scale of China’s trade activities.

Bridging cultural gaps: Strategies and successes
Countries have various tools to minimize the effects of cultural differences on their trade. Cultural exchange programs, bilateral trade agreements and international trade shows have shown remarkable success in fostering mutual understanding, easing trade negotiations and overcoming cultural barriers.

However, these options are available to all countries. What makes China unique?

I suspect that China’s national trading strategy, involving state-backed export industries and substantial global infrastructure investment, is a big part of the answer.

By aligning itself with the economic development needs of its trading partners, China has been able to minimize the negative effects of cultural differences on its trade. It’s a strategy that has proved to be remarkably effective.

A closer examination of China’s trade ventures in Africa, the Middle East and Latin America — all regions with significant cultural differences from China — paints a vivid picture of this observation.

Despite its cultural differences with nations on the African continent, each with its own unique traditions, languages and customs, China has built a multibillion-dollar trade network in the region that spans industries from mining to telecom. China’s engagement in Africa is facilitated by a combination of local infrastructure investment, affordable technology provision and favorable loan terms. These partnerships are more about creating symbiotic relationships and less about efficiency. This facilitates market access and helps China to overcome cultural barriers.

In the Middle East, too, China has made significant inroads by aligning itself with the region’s development goals, such as those outlined in Saudi Arabia’s Vision 2030 and the United Arab Emirates’ Centennial 2071. China’s Belt and Road Initiative complements these long-term development plans, offering the capital investment and construction expertise needed to bring ambitious infrastructure projects to life.

China’s presence in Latin America has also grown substantially over the past decade. Despite the geographical and cultural distance, China has become one of the top trade partners for countries such as Brazil, Chile and Peru. This relationship is built on reciprocity: Latin American countries supply raw materials and agricultural products in exchange for Chinese investment in the infrastructure and manufacturing sectors.

Again, this is a strategy that hinges on pragmatic economic interactions focused on mutual benefits and development goals.

The need for strategic adaptability
Some might argue that trading with China is an obvious choice due to its size and influence. The economic incentives include access to China’s population of over 1.4 billion and its significant role in global value chains, especially in electronics, textiles and machinery. As China’s influence in global markets grows, U.S. companies also face competitive pressures to maintain their market positions.

However, China’s trade practices, frequently entangled with governmental intervention, potentially undermine market efficiency — an established economic objective — in numerous ways.

In international trade, market efficiency refers to the extent to which prices in the global market reflect all available information, allowing resources to be allocated optimally across countries.

China has been known to require foreign companies to transfer technology to local firms as a condition for market access. This practice may distort market efficiency by forcing companies to share proprietary technology rather than compete on a level playing field.

Intellectual property theft and insufficient protection of intellectual property rights in China have also been major concerns for Western companies. The lack of robust intellectual property enforcement can lead to inefficiencies, as it discourages innovation and investment by foreign firms who fear their inventions and technologies may be copied without adequate legal recourse.

Western companies also face various market-access barriers in China, such as joint venture requirements, limits on foreign ownership and regulatory hurdles. These barriers can prevent the efficient allocation of resources and limit competition and innovation, resulting in a less efficient market overall.

Despite these concerns, Western firms continue to do business with China.

China’s adeptness in transcending cultural barriers, combined with Western firms’ continued engagement, pose a significant challenge for Western economies, notably the United States’. The challenge is heightened as the U.S. maintains a focus on traditional efficiency approaches in forging trade relationships across diverse regions such as Africa, Latin America and the Middle East.

Since traditional market efficiency approaches might not always suffice, Western economies may need to reconsider their strategies.


The author
Bedassa Tadesse, Professor of Economics, University of Minnesota Duluth


(Source: The Conversation)

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