Does geography matter in international trade?

A question from Yahoo! Answers:

Does geography matter in international trade?

You can make a case for either yes or no answer. On the one hand, a disproportionately large amount of international trade happens within one region, Europe, so geography must matter. On the other hand, China trades with the faraway U.S. as willingly as with the nearby Japan, so geography must not matter all that much…

A theoretically sound answer, though, would go something like this. Geography imposes transportation costs, so it matters (hence, the European countries, located close to each other and having a great transportation infrastructure, heavily trading with each other). But in many cases, the comparative advantage is large enough to cover the cost of transportation to virtually any location in the world (hence, China heavily trading with both U.S. and Japan).

This said, you might consider the fact that geography is not a very significant trade barrier compared to tariffs and non-tariff barriers erected by governments…

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