With Whom Do Nations Trade? – The Fading Distance

Abstract

Distance has conventionally been considered a major determinant of the direction of international trade. This contrasts, intuitively, with the generally-acknowledged fact that transportation costs are only a minor component of prices in international trade. The present study estimates the impact of distance on mutual trade flows in alternative, more direct methods than those employed traditionally in the literature. In particular, it looks at the “intensity ratio” in mutual trade; and asks to what extent its deviation from the size expected under an assumption of “neutrality” may be explained by mutual distances. It is found that, by and large, distance is a minor determinant of the trade of nations with each other. It is of some significance when trade flows within quite short ranges are concerned; but beyond these, the impact of distance on trade largely fades away.