The gravity model of trade, the workhorse of trade theory, predicts that bigger economies that are close together will trade more with each other. Such factors are particularly relevant for trade in goods: the longer the distance that goods need to travel, the higher the trade cost, thus reducing trade flows.
However, given the growing importance of services in global trade flows, do the lessons of the gravity model still hold true?
Our latest research, which applies the gravity model framework to new experimental data from the ONS, shows that it does.
In fact, we find that distance matters as much for services as it does for goods. Doubling the distance between the UK and a trading partner would decrease trade in services by just under half (a 41% decrease).
These findings have important implications for the future of the UK’s trade relationships with the EU as well as other countries. Services trade will form a key part of the UK’s future success as a trading nation, but understanding which services are more or less susceptible to the forces of gravity must also inform the UK’s negotiation approach and priorities.