North America (Change)

On March 23, 2021, the Ever Given ran aground in the Suez Canal. Although the Canal was
blocked for a relatively short amount of time, the event disrupted supply chains around
the world and altered maritime traffic patterns.1 The episode served as a reminder of the
obvious: the world’s great man-made waterways, which have not always been there, play
a central role in today’s economy. Perhaps more importantly, they may have shaped the
spatial distribution of economic activity. The construction of the Suez and Panama Canals
led to reductions in transportation costs that dramatically widened the range of economic
opportunities available to what were, then, remote places. Recent research by Brancaccio
et al. (2020) indicates that closing the Panama Canal today would reduce global welfare
by 3.28%. This leads us to ask: How do changes in transportation costs affect the location
of economic activity and productivity dynamics?

We study how Canada’s economic geography changed after the completion of the
Panama Canal and estimate the market access gains obtained by different counties after
the Canal began commercial operations.2 Counties in the eastern part of Canada already
had suitable transportation infrastructure in place to allow them to reach markets in the
United States and Western Europe. However, counties in the western part of the country
saw their trade opportunities expand significantly after 1920. We show that changes in
market access had led to increases in manufacturing activity by 1939. Firms’ revenues and
their use of factor inputs rose as a result. Moreover, we find that manufacturing indus-
tries in counties that benefited from the opening of the Canal also realized productivity
gains. We decompose those gains as coming from either increases in revenue obtained
while using the same level of inputs given the existing production technology (total factor
revenue productivity (TFPR)) or increases in the use of inputs in locations where they
yield a different productive use (allocative efficiency (AE)). We find that the bulk of these
productivity gains were attributable to increased AE.

To read the full paper, please visit: http://www.nber.org/papers/w30402

Sebastian Galiani, Luis F. Jaramillo, Mateo Uribe-Castro, August 2022, “Free-Riding Yankees: Canada and the Panama Canal”, http://www.nber.org