Friendship is as Important as Neighborhood: The impact of Geopolitical Distance on Bilateral Trade

Newton's Law of gravitation, when applied to international trade, implies that just as particles attract each other in proportion to their size and mutual distance, trade flow between two bilateral pairs is proportional to their respective economic size and bilateral distance. The introduction of gravity models in economics has revealed the impact of physical distance on bilateral trade. However, distance might not be only physical. Considering the significant geopolitical changes affecting the world, this article examines whether geopolitical distance has an impact on bilateral trade. Using bilateral trade data for 141 countries between 1980 and 2021, the current study used a Pseudo-Poisson Maximum Likelihood and an Instrumental Variable approach to assess the impact of geopolitical distance between bilateral pairs on their bilateral trade flows. It provides evidence of the negative impact of geopolitical distance on bilateral trade. The study shows that in international relations, friendship between countries is as important as neighborhood. Furthermore, the results demonstrate that geopolitical distance exacerbates the negative impact of physical distance on bilateral trade. The results also show that the negative impact of geopolitical distance on bilateral trade is valid for trading partners from different income groups.