Realist, not conformist analysis of the latest financial, business and political news

Trade Deals And The Gravity Model Of Trade

Thanks for all the fish, obviously

The UK is trying to pull the country a few thousand miles closer to the Pacific Ocean. The aim is pure and reasonable, it is to make the people of the UK richer. Which is nice, I think we’ll all agree.

It is, of course, difficult to dig up the foundations and set sail, even as an island, so geographic distance isn’t what is being reduced. Rather, it is economic distance.

The British government is to formally apply to join a mammoth free-trade pact that includes Australia, Canada, Japan and New Zealand now that it has left the EU.

Liz Truss, the international trade secretary, will ask to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) when she speaks to ministers in Japan and New Zealand on Monday.

Negotiations are expected to start later this year, Truss’s department said, in announcing the move on the anniversary of the UK’s formal departure from the EU.

Joining the CPTPP will cut tariffs in trading with its members. UK trade with the group last year was worth £111bn, according to the Department for International Trade.

That will reduce the distance to the member countries of that pact (Oz, NZ, Japan, etc etc around the Pacific Ocean). This being the vital point to understand about the gravity model of trade.

You know, that thing that Remoaners keep screaming at us about. We should be trading lots with France because they’re right next door! Which is true – both parts of it – but not actually what the economic model used in support of the contention actually says.

The way that is is understood is that the gravity model of trade works like, well gravity. How much trade there is between two economies depends upon the sizes of the two economies – larger economies trade more – and the distance between them – closer ones trade more. This explanation has the merit of being true.

Which is what leads to the cries that we should trade lots with France which is 26 miles away. But that is to make the mistake of thinking that it is geographic distance which is being talked about here. It isn’t, it is economic distance.

Economic distance is a little bit of a mish mash. Sure, geogrpahic distance is a part of it. But then so are things like language which is why we buy a lot of N lamb. So are old colonial relationships (ditto NZ) which is why Senegal trades more with France than nearly next door Ghana. And so are things like membership of a trade pact and so on.

This means that sure, we should have less economic distance with France because more trade is better. But we should also have less economic distance with Japan because more trade is better. Or, as the politics around this goes sure, free trade within the EU is great. And we’d have stayed if we could also have had free trade with everyone else too. That is, it isn’t true that reducing the economic distance to France is the only economic distance we wish to reduce.

It’s the failure of the EU to be in favour of free trade, rather than being only a free trade area, which is the problem.

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3 years ago

Please research further; I have not, but one reason it was so easy for Trump to pull the USA out of the TPP is public opinion that, unlike NAFTA/USMCA, TPP would empower unelected foreign bureaucrats to dictate internal policy to American companies, holding hostage their international business – essentially another European Union. I presume Trump didn’t understand the technical details but his instinct was “nation first.”

John B
John B
3 years ago

Didn’t Britain 17th Century to 19th Century grow rich by trading with China, India, East Indies, West Indies, The Americas, Australia, New Zealand? And particularly during times when trade with Continental Countries was limited or prevented by war and their protectionist policies?

Is it gravity model, or membership of a customs Union which forced trade close at hand?

3 years ago
Reply to  John B

Symptom rather than cause imv. The Union States of America went from being a relative dump in the 1820s to the world’s number one in the 1880s by trading with itself.

Michael van der Riet
Michael van der Riet
3 years ago

Swapping one bureaucracy for another?

Michael Harper
Michael Harper
3 years ago

If the TPTP organisation was trying to organise vaccine rollouts you might have a point.

As long as it sticks to being a trade block it’ll be fine.

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