In 2023, the UK-Australia Free Trade Agreement (FTA) came into force, eliminating tariffs on over 99% of goods. Australia boasts a massive GDP of roughly $1.7 trillion. Yet, the UK consistently trades roughly twice as much with the Republic of Ireland—an economy nearly a third of Australia's size. Why? Because the 15,000 km journey to Sydney introduces immense logistical friction. Conversely, Ireland offers physical adjacency, the Common Travel Area, and deeply integrated supply chains. The gravity model perfectly predicts this outcome: geographic proximity often trumps sheer market size.

Does distance still matter in an era of digital services with zero transport costs?

Surprisingly, yes. For digital trade—like financial consulting, law, or software—"distance" simply changes shape. It morphs into time zones and regulatory barriers. A nine-hour time difference between London and Tokyo creates massive friction for live B2B services, acting as a geographic barrier even when the internet makes those cities technically adjacent. Furthermore, differing data protection laws (like GDPR) act as the new digital tariffs.

The Bottom Line

Ultimately, the gravity model is an economist's ultimate baseline. Policymakers use it to calculate whether countries are over-trading or under-trading relative to geographic expectations, allowing us to quantify the true "trade creation" effects of customs unions and FTAs. It proves that even in a hyper-globalised world, geography is still destiny.