One day, around the time the United States invaded Iraq, Paola Sapienza was browsing a wine store near her home in Evanston, Illinois. She noticed something odd: all of the French wines were on sale. When she asked the sales clerk why, he told her, “These days, Americans don’t like anything French.” France had loudly opposed military action in Iraq, and everybody was buzzing about it.

The experience got Sapienza, a professor of finance at the Kellogg School of Management, thinking—just how much do cultural biases affect the way goods are traded?

As it turns out, quite a lot, according to a study of European countries that she published in The Quarterly Journal of Economics with longtime collaborators Luigi Guiso, a professor at the European University Institute in Italy, and Luigi Zingales, a professor at the University of Chicago. This trio of Italians found that the extent to which people trust citizens of another country plays a surprisingly large role in how much countries trade with each other and invest in one another.

Countries in the European Union (EU) that trust each other for cultural reasons tend to trade and invest with each other more than they do with other EU partners, the study found. If cultural biases are skewing economic patterns even within the EU—where education levels are high and where a common market has been expanding for decades—they could be even more important in less prosperous and more fractured parts of the world, the researchers say.

It makes intuitive sense that trust is important in financial transactions. Take investing in the stock market. “In order to invest, you have to trust the broker to execute the order. It eventually goes in a firm, and you have to trust the manager. Each stage relies on me trusting that you’re going to do what you say,” Sapienza points out.

Nevertheless, this is one of the few economic studies to dive into cultural trust. “Most economists believe that economics affects culture, not the other way around,” Sapienza says. “But our assumption is that culture is quite persistent.”

Testing Bilateral Trust

Part of the problem in studying cultural trust is that it is a slippery concept and comes in many flavors. For this study, Sapienza and colleagues gleaned trust data from a survey of thousands of people from 17 European countries, called Eurobarometer. This survey periodically asks responders, among many other questions, how much trust they have in people from other countries: a lot, some, not very much, or none at all? After coding these responses, Sapienza’s team calculated so-called “bilateral trust”: the extent to which people from one country trust people from another particular country.

The results indicate that the most trusted people are the Swedes and the least trusted the Italians (Figure 1). The Portuguese and Greeks trust the least, and the Swedes trust the most. But the most interesting aspect of the data is that people in different countries give different answers regarding whom they trust. For instance, Germans trust the British more than the French do. Also, even though Swedes are highly trusting, they tend to trust neighboring countries like Norway and Denmark more than those farther away. British people trust the French even less than the Italians, and the feeling is mutual: French people put England toward the bottom of the trust scale. When two sets of people gauge a country’s reliability differently, cultural preconceptions may be at work.

Figure 1. Average level of trust citizens in one country (rows) have in citizens of another (columns). Range is from 1–4, where 1 = “No trust at all” and 4 = “A lot of trust”.

“Prior biases are generally rooted in culture. So we wanted to figure out, what are the specific cultural traits that drive bilateral trust?” Sapienza says. One is religion. When two countries have 90 percent of their citizens sharing a religion—such as Italy and Spain, which are predominantly Catholic—they may trust each other significantly more than do two countries that practice different religions.

The researchers probed less obvious cultural variables as well. For example, they compared the trust rankings to measures of “genetic distance”—how similar a population’s genes are—and “somatic distance,” which is a measure of physical similarities such as hair color, face shape, and height. For both genetic and somatic measures, the more similar the citizens of two countries, the higher their bilateral trust.

Finally, the researchers considered the history of war between two countries. When Sapienza was growing up in Italy, most of her history classes centered on the Italian unification of the late 19th century, a period in which Italy frequently faced off against Austria. Italian children tend to have a grudge against Austria, Sapienza says. “It’s just a gut feeling you grow up with.” Sure enough, her data shows that countries with a long history of war—such as England and France, and Italy and Austria—trust each other less.

More Than Just Sore Feelings

These patterns are interesting in themselves, but as Sapienza realized in the wine shop, they can also bring real economic consequences. Analyzing the World Trade Database, a collection of statistics showing patterns of importing and exporting between different countries over time, she found that the higher the bilateral trust, the more likely those countries will trade with each other. The effect is robust: one standard deviation increase in trust increases exports to a country by 10 percentage points. What’s more, she found that bilateral trust tilts portfolio allocation toward stocks of another country.

The findings are even more striking considering that, when compared with the rest of the world, European countries have fairly homogenous ethnic populations and similar cultures. The researchers suspect that when countries have more striking differences, the effects of culture on economics would be even more pronounced.

Intriguingly, Sapienza says that cultural factors are not likely to have much of an impact on the trading of commodities, such as oil or sugar. In these cases, basic supply-and-demand considerations tend to drive trade. The United States, for instance, eagerly buys oil from the Middle East, despite enormous cultural and political hurdles. But when quality matters, cultural factors do, too: Americans buy lots of German cars and French bottles of wine—unless, of course, the cultural tide turns.

Translating these findings into policy discussions is not easy. “It’s very difficult to change people’s biases, especially when it’s a collective bias,” Sapienza says. “Still, I think it’s important for managers to know that a negative image could have a big impact on the ability to sell goods.”