It's what you believe that ain't so that's dangerous

William Keegan tells us something - asserts as a foundational truth - something that just ain’t so. Which, as Mark Twain observed, is what really gets us into trouble:

What gets us into trouble is not what we don't know. It's what we know for sure that just ain't so.

The assertion is that geography is the determinant of trade volumes:

At present we do 43% of our trade with what I can still call the rest of the EU, and 15% with the US. All serious authorities on this subject, including the great Paul Krugman – who won his Nobel prize for research on trade – insist that geographical proximity to markets is the most important factor.

This is the gravity model of trade. The amount of trade between two economies is, observably, connected to how large the two of them are plus the distance between them. Larger, closer, economies trade more with each other than smaller more distant and so on through the variations of small, large, close, distant. The advantage of the model being that it’s empirically sound, we can see it every time we go and look at trade figures.

The error here - and while you might have to push Paul Krugman a bit to get him to assent to the correction he would once the question is correctly posed - is to think that it is geographic distance which is being talked about. It isn’t, it’s economic distance.

Trade between Newcastle and London used to be very much greater than between Newcastle and Carlisle. Ships down the coast meaning less economic distance between the first two than the absence of roads between the second pair.

Trade barriers - and we’ve been lowering them among European countries even as we’ve been raising them across the Atlantic - have changed the economic distance between the various economies even as the geographic distance has changed only by those inches a year of continental drift. Trade patterns have been following those changes in economic distance - tariffs and quotas - not geographic.

The geography model of trade is indeed true but only if it is understood what it is actually saying. Which isn’t that trade depends upon geographic distance, but upon economic distance. Failure to get this right will lead us into trouble for we could end up asserting for sure that which just ain’t so.