One of the great empirical results in economics is the gravity model of trade. Places close to each other trade more than places further away. Also, larger places do so more. So, trade tends to be with the large economies nearby. Seems logical enough after all.
However, there is a refinement here which it’s important to note when considering the political implications:
The second lesson is gravity. The flow of trade depends on both size and distance. The US and EU have similar GDPs, but we trade more with the EU because it is nearer. Indeed, our trade with individual EU countries is significantly greater than with many of the world’s largest economies. Our volume of trade with Ireland is more than 200% greater than that with India – 110% more with Germany than China.
As that doesn’t grasp the implication of this refinement. That being:
Relative size is determined by current GDP, and economic proximity is determined by trade costs – the more economically ‘distant’ the greater the trade costs.
It’s not geographic distance that we’re talking about. It’s economic distance. Which includes transport costs, obviously enough, but also such intangibles as language, habit, communications costs. We can and should also add in such things as extant trade law and tariff barriers. That last being rather important. One reason we trade more with Germany is that we’re in the Single Market where there are no legal or tariff barriers to such trade.
The implication of that is that we don’t naturally trade more with Germany, we’ve constructed the world so that we do. If we, at some point in the future, trade less with Germany that’s therefore not something unnatural, that’s again a construction.
It is economic distance that matters, not geographic.
Think on it. There was a time when Newcastle traded much more with London over sea coal - by, obviously, sea - than it did with the much closer Carlisle in anything at all over the hills and mountains. Given the transport technology of the Middle Ages Newcastle and London were economically closer to each other than Newcastle and Carlisle. Than Newcastle and Chester le Street to be honest about it. And there never would have been that North Sea economy between Frisia and our East Coast, or the Viking sea kingdoms, if land transport had been as cheap as ocean.
If we’re going to use an economic theory to enlighten our conversations about policy it’s important that we actually get the theory right. The gravity model of trade isn’t in fact about geographic proximity, it’s about economic such.