Week 6 lesson 2 Flashcards
The gravity model of trade, distance, borders and Trade costs
What does this section cover?
- The gravity model of trade, distance, borders and trade costs
- Logistics performance and transport network
- Cultural affinity
What is the Gravity Model of Trade?
Definition:
Gravity Model of Trade explains trade patterns based on economic size and distance between countries. It’s inspired by Newton’s Law of Gravity: Larger economies attract more trade, and closer countries trade more due to lower costs.
Key factors:
1. Size of Economy (Positive Impact on Trade):
Larger economies produce and consume more goods/services.
They have more to export and more income to buy imports.
2. Distance (Negative Impact on Trade):
Longer distances mean higher transport costs and weaker personal connections, which reduce trade.
3. Other Factors:
Borders: Tariffs, paperwork, and bureaucracy increase trade barriers.
Language & Culture: Shared language improves trade relations.
Empirical Evidence:
- A 1% increase in distance decreases trade volume by 0.7–1% (Disdier & Head, 2011).
- Old studies measured radial distance (as the crow flies), but modern tech like Google Maps provides more accurate route-based distance and travel times.
Limitations:
- Calculations often rely on bilateral trade data, usually measured between capital cities, which oversimplifies real trade flows.
Key Takeaway: The Gravity Model shows how economic size and distance are key drivers of trade, but factors like borders and language also play crucial roles.
The Persistent Effect of Distance
Core idea:
Despite advancements in technology and communication, distance still impacts global trade significantly
Why Distance Still Matters:
- Face-to-Face Interaction: Essential for building trust, negotiating sales contracts, and managing service agreements.
- Trade in Goods and Services: Distance affects both sectors, but services (e.g., consulting, marketing) rely heavily on personal connections.
Role of Borders in Trade:
- Regions within a Country: Trade more with each other than with regions in other countries, even at the same distance.
- Non-Tariff Barriers: Red tape, delays at borders, and bureaucratic requirements slow trade.
Post-Brexit Example:
- Increased border paperwork and delays made UK-EU trade more expensive and complex.
- Some UK companies relocated to the EU to bypass these barriers.
Key Takeaway:
Distance still limits trade due to trust, communication needs, and border inefficiencies, especially in services.
Trade Costs and Logistics
Definition:
Trade costs include transportation costs, border delays, and logistical inefficiencies.
Challenges in Developing Countries:
- Example: Democratic Republic of Congo: Takes 42 days to clear imports.
Pandemic Disruptions:
- Maritime Transport: Port closures, crew restrictions, and increased shipping costs
- Land Transport: Border closures, driver shortages, and sanitary inspections
- Air transport: Fewer cargo flights, delays due to documentation issues.
Costs of Delays:
- Every day in transit adds an ad-valorem tariff of 0.6–2.1%
Key takeaway:
Trade costs, especially in transportation and border formalities, significantly influence global trade efficiency.
Connectivity and Trading Routes
Importance of Connectivity:
Efficient global transport networks lower trade costs and increase international participation.
Key Insights:
Only 6% of container ports have direct shipping connections.
Most countries rely on hub ports for trade connections.
Hub Ports:
Act as major trade centers, similar to global airports.
Serve as connection points for smaller ports.
Trade Bottlenecks:
Some regions suffer delays because they lack direct access to major trading hubs.
Key Takeaway:
Smooth and connected trading routes are essential for efficient, cost-effective global trade.
Cultural Proximity
Definition:
Cultural proximity refers to shared identity, language, religion, and legal systems between countries, creating familiarity and trust.
Key Factors Influencing Cultural Proximity:
- Language: Shared language increases trade by +0.5%
- Religion: Shared religious practices build cultural trust.
- Ethnicity: Similar cultural backgrounds reduce trade friction.
- Legal Systems: Familiarity with legal processes smoothens trade contracts.
Impact on Trade:
- Boosts trade in differentiated goods (unique products).
- Less impactful for standardized goods traded on global exchanges.
Case Study: - eBay Machine Translation (eMT):
eMT (2014): AI-powered tool to translate product listings.
Impact Stronger For:
- Long product descriptions.
- Differentiated products.
- Less experienced buyers.
Key Takeaway: Shared language, culture, and advanced translation tools reduce trade barriers and improve global commerce.
Case Studies (Post-Brexit and Covid-19 challenges)
Post-Brexit Challenges:
- Tea Business Example: 8-week delays for shipments into Italy.
- Logistics Business Example: EU clients reluctant to bear delay costs.
Timlessness and Brexit:
- Before Brexit, UK acted as a land bridge between the Republic of Ireland and the rest of the EU
- Now many EU countries take routes to avoid the UK when exporting to Ireland due to the additional paperwork and red tape for delivering to the UK post Brexit
- Hence, consequently many truckers shun British ports
COVID-19 Disruptions:
- Maritime Trade: Supply chain breakdowns, port closures,
- Land Transport: Sanitary checks, lack of drivers, additional paperwork.
- Air Transport: Increased reliance on fewer cargo flights, paperwork bottlenecks.
Maritime Transport other issues:
- Typhoons in China
- Issues in the Red Sea
Key Insight:
Trade efficiency depends heavily on logistics networks, political stability, and border efficiency.
Key Takeaway:
Real-world examples show how politics, logistics, and global events directly impact trade efficiency.
GIRLYPOP Gravity Model of Trade
Okay babe, trade is like dating. The bigger the economy, the more it has to offer. The closer you are, the easier it is to visit. 💌
Big countries = More trade goodies. 🛍️
Distance = Higher delivery fees and fewer visits. 📦
Cultural vibes = Better communication. 🗣️
✨ Key Tea: Closer countries with big economies trade more because it’s cheaper and easier!
GIRLYPOP Distance & Borders Still Matter
Think of distance like a long-distance situationship. It’s hard to build trust, and delays can ruin plans. 🥲
FaceTime vibes: Trust needs face-to-face meetings.
Borders = Red tape headaches. 🚧
Brexit Drama: UK businesses got ghosted by EU clients because of too much paperwork.
✨ Key Tea: Long-distance trade is hard, and borders add drama.
GIRLYPOP Logistics Drama
Okay, logistics are like shipping your Shein haul. 🚚💸
Developing Countries: Your package is stuck at customs for 42 days.
Developed Countries: 1-hour customs clearance? Yes, queen! 💅
Pandemic Chaos: Ports closed, ships stuck, delivery fees skyrocketed. 🚢💥
✨ Key Tea: Smooth logistics = Faster, cheaper global shipping.
GIRLYPOP Connectivity & Trading Routes
Imagine a global airport network, but for shipping containers. 🛫✨
Hub Ports: The Heathrow Airports of shipping.
Direct Flights: Only 6% of ports have VIP direct routes.
✨ Key Tea: The smoother the trade routes, the cheaper and faster the trade.
GIRLYPOP Cultural Proximity
Trading with a bestie from another country hits different. 💬✨
Same Language = Instant Connection. 💖
eBay’s eMT: Basically Google Translate for shopping online. 🛒
✨ Key Tea: Shared language and culture = Easier trade deals.
GIRLYPOP RECAP
Gravity Model: Big, close economies trade more.
Distance Matters: Borders and distance cause trust issues.
Logistics: Customs delays = Delivery fee nightmares.
Trade Routes: Hub ports = VIP shipping lounges.
Cultural Proximity: Shared language = Shopping besties.
