Nation brand distance and trade flows: A structural gravity model approach

Abstract

This study examines how differences in nation brand strength affect trade between two countries, how it influences the association between geographic distance and trade, and how it impacts the effects of trade agreements on trade. This study uses panel data on export and import flows between the United States and its 36 major trading partners from 1993 to 2016. A gravity model is developed using a first-order Taylor approximation of multilateral resistance terms and estimated by OLS and PPML. The paper constructs a Nation Brand Distance (NBD) measure, measuring the degree to which nation brand strength scores differ between the United States and its trading partners. NBD is calculated based on differences in the Country Brand Strength Index (CBSI) developed by Fetscherin (2010), consisting of per capita values of exports, tourism, foreign direct investment, immigration, and the government environment. The NBD enters the gravity model by itself and through NBD-geographic distance and NBD-trade agreement interaction terms. The findings suggest that NBD mitigates the negative impact of geographic distance on trade, implying that NBD is a significant factor in explaining bilateral trade and overcoming geographic distance. Moreover, NBD mitigates the positive influence of free trade agreements on exports. This means that free trade agreements are less effective when the NBD between trading partners is significant. Countries must develop their nation’s brand strength to enhance trade. Policymakers should prioritize the development of a strong nation brand to make trade agreements more effective and help overcome the barriers of geographic distance. This means that trade policy strategies should integrate different nation branding initiatives, such as public diplomacy, cultural exchanges, and promoting a positive country image abroad. This study contributes to international trade research, particularly to the stream of New Trade Theory (NTT) studies on different types of distances affecting trade. We introduce a new type of distance, the NBD, to complement the development of NTT.

JEL Classification: F14