Home-biased gravity: The role of migrant tastes in international trade

Immigrants tend to buy products from their home countries. As a result, the more immigrants of a given ethnicity a country has, the more it will tend to import from those immigrants’ countries of origin. This effect of migrant heterogeneity is ignored by the standard gravity literature that assumes homogeneous preferences among resident consumers. This paper embeds that observed regularity into a structural gravity model. Gravity derived from the Almost Ideal Demand System generates bilateral trade shares with three distinct components: ethnic composition of the resident population, bilateral trade cost, and per capita income. Using international trade and transnational migration data among 40 countries, this paper estimates the home bias of each ethnic group in tastes. The results show that consumers’ tastes for products from their country of origin deviate from unbiased levels by 35 percent on average. Ethnic taste bias is found to explain half of the trade bias. Counterfactuals suggest that anti-immigration policy significantly impedes trade with immigrants’ countries of origin.