Trying to judge today's trade by the old rules


We have to admit that we quite like the mental image this conjures up:

The idea of buccaneer Britain trading freely outside the EU is a fantasy

Avast ye scurvy swabs and buy moi foine products!

Yes, yes, and given that one of us just dubbed a pirate's voice for a computer game, thrice yes. However, there is a slight fault in the argument being put forward here about trade:

The first is distance. Imagine if all of Britain's trade agreements were suddenly erased from history, and we had to restart our negotiations from scratch. Our first priority would be to reduce the cost of trade with big, nearby economies. Trade diminishes quite rapidly with distance: half of Britain’s exports go to the EU, which makes up a fifth of the world economy. Meanwhile, the non-European members of the OECD – although they comprise a third of the global economy – only buy a quarter of Britain’s exports, because on average, they are seven times further away.

This very definitely used to be true: the costs of trade were dominated by the simple transport costs of doing that trade. Given the general path dependency we see in the economy it's not all that surprising that the pattern persists. However, this is no longer true of new trade as a result of an invention made back in the 1950s: the shipping container.Certainly, it has taken a few decades to really work through the global economy but the costs of trade now are almost entirely divorced from simple physical distance. If you're on the container network then it costs something under $5,000 to ship 36 tonnes of anything anywhere. If you're not on that network then it is many multiples of that price.

More, a significant portion of that price is organisation, pick up and delivery, the container itself. The actual distance to be traveled doesn't make all that much difference. In this sense, in this transport sense, Chicago is as close to Coventry in geographic terms as Caligari is, as Cologne is. Not entirely you understand, but pretty much so.

The European Union idea, that we should be encouraging trade between close geographic neighbours even to the point of discouraging more long distance routes is a little like the work of the Reverend Malthus. Entirely true until the very date that someone sat down to write it all out. Traditional geography did matter and the system was designed to account for that. But that first container ship set sail 6 months before the Treaty of Rome was signed. The structures of trade based upon geographic proximity were thus being invalidated by the new technology at the very moment that policy tried to enact policies for that geographic proximity.

It has been true that, and current trading patterns still echo that it was true that, geographic proximity was important in trade. The actual distance traveled now is of near no importance at all. The world has changed since we set the rules, you see?