Long-Distance Trade and Long-Term Persistence

Layer 1: Overview

This paper asks whether the location of economic activity adapts to changes in the location of trading opportunities, or whether historical patterns of trade permanently fix where cities emerge and grow. The question is fundamental to economic geography: many large cities owe their origins to access to long-distance trade that has since moved on, yet the cities persist. The empirical context is the staggered liberalization of direct transatlantic trade across the Spanish Empire in the second half of the 18th century. Before the reform, a mercantilist system confined legal trade to four American ports (Cartagena de Indias, Callao, Portobello/Nombre de Dios, and Veracruz) and a single European port (Seville, then Cadiz). Following Spain’s defeat in the Seven Years’ War, a sequence of decrees opened direct trade to an additional 40-plus ports between 1765 and the early 19th century. The reform was driven by European interstate competition and implemented from above, creating staggered, quasi-exogenous variation in transportation times to Europe across American cities.

The empirical strategy is a difference-in-differences design. The author constructs a novel panel of 62 cities in Spanish America observed every 50 years from 1600 to 1850 (372 observations), plus a settlement-level panel of 53,581 grid-cell-decade observations for 1710-1810. The key treatment variable is the time-varying transportation time to Europe, computed via a directed network using maritime logbooks (282,322 daily entries from the CLIWOC 2.1 database, 1750-1855) to estimate wind-conditional sailing speeds, and land travel models based on slope, elevation, landcover, and postal routes. The reduction in transportation time ranged from 0 to 38.3 days across locations, with an average pre-reform time of 93.5 days and an average reduction of 7.7 days - economically significant, representing 0 to 40 percent of the baseline average.

The paper documents four main empirical patterns, all within a city-and-time fixed-effects framework that absorbs time-invariant location fundamentals. First, the reform improved market integration: non-bullion Spanish imports from the Americas rose nearly fourfold after the 1778 decree (following no secular trend before 1765), and a commodity price ratio between Spain and Spanish America converged beginning in the second half of the 18th century, consistent with lower transportation costs facilitating arbitrage. Second, lower transportation times raised urban population. In the preferred specification, a one-day reduction in transportation time to Europe increases city population by approximately 2 percent over a 50-year period (baseline coefficient -0.023, significant at conventional levels, with the sign and approximate magnitude stable across specifications adding viceroyalty-by-year or country-by-year fixed effects and controls interacted with year indicators). Third, the effects are concentrated among smaller cities and in the fringe regions of the empire (Argentina, Chile, Venezuela, the Caribbean, etc.): for the fringe region the point estimate is -0.016, while for the colonial core (Mexico, Peru, Bolivia) the effect is statistically indistinguishable from zero. A ten-day reduction in transportation time raises the probability that a grid cell contains a settlement by approximately one percentage point (against a sample mean of 11 percent), suggesting the primary margin was growth of existing cities rather than expansion to new frontier areas. Fourth, the cross-sectional elasticity of contemporary (year 2000) population density to pre-reform (1750) population size is 0.592 overall, but falls to 0.369 for cities that experienced large reductions in transportation times, and rises to 0.866 for cities that experienced little change - consistent with the reform attenuating the persistence of pre-reform settlement patterns specifically where the trade shock was large.

To interpret mechanisms and simulate long-term implications, the author calibrates a dynamic spatial general equilibrium model built on Allen and Donaldson (2022). The model features cities that differ in productivity, land endowments, and trade/migration costs, with agents living two periods, static and dynamic agglomeration economies (parameters a1 = 0.055 and a2 = 0.063 from the data), and Frechet-distributed migration preferences. Counterfactual exercises simulate the model forward 300 years. In the benchmark counterfactual, the average reduction in transportation costs increases urban population by 1.27 percent (25th/75th percentile: -0.06 to 1.34 percent), with a maximum city-level gain of 11.77 percent and a minimum of -0.2 percent. Effects in the fringe region average 1.9 percent population gain versus 0.26 percent in the core. Decomposition exercises show that: differences in location fundamentals (productivity and land endowments, A and H) account for part of the core-fringe differential (the gap falls from 1.64 to 1.11 percentage points when fundamentals are equalized); equalizing the pre-reform population size across cities leaves the gap nearly unchanged (1.64 to 1.65), suggesting dynamic agglomeration from historical size plays little role in driving the core-fringe difference; by contrast, equalizing the spatial incidence of the shock (the amount by which transportation times fell) closes the differential almost entirely (gap falls to 0.16 percentage points), indicating that the fringe was simply more restricted before the reform and thus received a larger shock. Trans-Atlantic migration is also an important channel: when trans-Atlantic migration is made prohibitively costly in the model, the average population effect falls to roughly 14.86 percent of the benchmark, indicating that migration from Europe amplified the effect of lower trade costs on city populations.

The overarching conclusion is that economic geography is not fully path-dependent: where trading opportunities move, economic activity can follow - but this adaptation is conditional. Cities that had already accumulated large populations before the change in trading locations are insulated from reallocation, because their internal market size reduces their reliance on long-distance external trade. In less-developed fringes with smaller internal markets, however, the spatial distribution of activity is more malleable and adjusts substantially to the change in trading opportunities.

Layer 2: Deep Dive

What is the identification strategy and what are the main threats to it?

The identification strategy is a two-way fixed-effects difference-in-differences, exploiting cross-city variation in the change in transportation time to Europe induced by the staggered port-opening reform. City fixed effects absorb all time-invariant unobserved location fundamentals (agroclimatic characteristics, disease environment, natural harbors, etc.). Year fixed effects absorb common time-varying shocks. The key identifying assumption is parallel trends: absent the reform, population growth would have evolved similarly across cities with different exposure to the transportation-time reduction. Three main threats are addressed. First, selective port targeting: if policymakers chose to open ports in anticipation of their commercial potential, the reform would not be exogenous to growth trajectories. The author argues against this: historical accounts indicate reluctance to open the wealthiest colony (New Spain/Mexico) precisely because its prosperity might divert trade from other regions, and the reform was driven by European interstate competition (the Seven Years’ War) rather than by American economic conditions. Second, confounding from contemporaneous administrative reforms: Bourbon-era reorganizations, new viceroyalties (Rio de la Plata and Nueva Granada), and ecclesiastical changes could coincide with the trade reform. The author addresses this by dropping cities in the two new viceroyalties (coefficients remain similar) and by including viceroyalty-by-year fixed effects. Third, the transportation network itself might endogenously reflect urban growth (roads built to connect growing cities). The author notes the transportation times are constructed from predetermined geographic characteristics (wind patterns, slope, elevation, landcover) and pre-existing postal routes, not from contemporaneous road-building. The dynamic pre-trends test (interacting the reform-induced change in transportation time with year indicators) shows no significant difference in population growth across differentially exposed cities before 1750, supporting the parallel trends assumption. An alternative synthetic control design yields qualitatively similar results (treatment effect of approximately 19 percent over one century). The author also estimates the model on the sub-sample of cities far from ports (distance above median) and finds similar coefficients, addressing concerns that the reform directly targeted port cities for reasons correlated with their growth.

What are the main mechanisms and how are they distinguished empirically and in the model?

Two principal mechanisms are proposed. The first is a trade-cost channel: lower transportation times reduce the iceberg cost of exporting to European markets, lowering the price index for traded goods in affected cities and raising real income, which attracts labor migration. This channel operates even if migration costs are unchanged. The second is a migration-facilitation channel: lower transportation times reduce information frictions and direct travel costs for migrants from Europe, lowering migration frictions as well as trade costs. The quantitative model distinguishes these by running counterfactuals with and without changes in migration frictions (keeping migration costs fixed at 1760 levels). In the benchmark, allowing migration frictions to fall alongside trade costs yields an average 1.27 percent population increase; fixing migration frictions yields 0.66 percent. This comparison indicates that lower migration frictions approximately double the population effect relative to the pure trade-cost channel. The model also distinguishes between trans-Atlantic migration (Spain to Americas) and intracolonial migration. When trans-Atlantic migration is shut off (migration costs set prohibitively high for Europe-America pairs), the average population effect falls to approximately 15 percent of the benchmark value, implying that trans-Atlantic migration is the dominant driver of the population response. A third dimension of heterogeneity concerns internal market size: in the partial-equilibrium analytics, the marginal impact of a reduction in the trade cost to Europe is attenuated in larger cities because a larger local market reduces the share of consumption sourced externally, making the price index less sensitive to external trade costs. This mechanism is consistent with the finding that the reform had statistically significant effects only in smaller cities and fringe regions.

What heterogeneity is documented and what explains it?

The paper documents three main dimensions of heterogeneity. First, the colonial core (Mexico, Peru, Bolivia) versus the fringe (Argentina, Chile, Venezuela, Caribbean, Central America): the average effect in the fringe region is -0.016 per day of transportation time in the baseline city regressions (statistically significant), while the core coefficient is indistinguishable from zero. In the counterfactual model, the fringe shows a 1.9 percent average population gain against 0.26 percent in the core. Second, large versus small cities: the effects are larger and more precisely estimated for cities with below-median pre-reform population. Third, within the fringe, there is wide dispersion: the 25th/75th percentile population change in the model is -0.06 to 2.47 percent, with individual city gains up to 11.77 percent (most sizable in Buenos Aires and Caribbean ports) and losses up to -0.2 percent (most negative in cities whose relative economic centrality declined, such as Veracruz and Cartagena). The decomposition of the core-fringe differential shows: (a) location fundamentals (A and H, i.e. productivity and land endowments) explain part of the differential - equalizing fundamentals reduces the gap from 1.64 to 1.11 percentage points; (b) initial population size contributes little - equalizing pre-reform population shares barely moves the gap (from 1.64 to 1.65); (c) the spatial incidence of the shock explains most of the differential - equalizing the size of the transportation-cost reduction across all cities virtually eliminates the gap (to 0.16 percentage points), because the fringe was more trade-restricted before the reform and thus received a larger absolute reduction in transportation times.

What robustness checks are run?

The paper runs extensive robustness exercises. On the reduced-form side: (1) Dynamic event-study specifications show no significant pre-trends before 1750 for the full sample, sub-samples by city size and macro-region, and for settlements. (2) Synthetic control method: treating cities as a group, the synthetic control closely matches pre-reform population trends, with a divergence beginning in 1800 and an implied treatment effect of approximately 19 percent (0.338 log points) over a century, and the true treatment group has the highest post/pre-RMSE ratio relative to all placebo assignments. (3) Dropping outliers (cities outside the 5th-95th percentile of pre-reform population growth rates): coefficients remain around -0.018. (4) Weighting by population size: coefficients similar at around -0.024. (5) Spatial standard errors following Conley (1999): results hold. (6) Robustness value analysis following Cinelli and Hazlett (2020): a confounder would need to explain 16.9 percent of both outcome and treatment variation to fully account for the effect, and 7 percent to render it statistically insignificant - both larger than the combined R2 of observable fundamentals. (7) Interior cities only (distance to port above median): coefficient around -0.016, similar to baseline. (8) Dropping the viceroyalties of Nueva Granada and Rio de la Plata (formed in the 18th century): similar coefficients. (9) Estimating only through 1800 to exclude independence-era effects: point estimates similar for smaller cities. (10) Alternative transportation cost measures including a simple distance measure, showing qualitative robustness. On the model and counterfactual side: (1) Alternative values of the elasticity of substitution (sigma 3-7), Frechet shape parameter (theta 2-4), land expenditure share (1-mu: 0.4-0.6), and agglomeration parameters (a1 in [0.04, 0.07], a2 in [0.02, 0.07]) all yield qualitatively similar results. (2) Alternative trade-cost elasticity from Baum-Snow et al. (2018): similar. (3) Incorporation of national borders after independence (15 percent additional trade cost for cross-border flows): similar, somewhat larger effects. (4) Secular productivity improvements and secular declines in transportation costs (0.88 percent per year starting 1800 per Harley 1988): average effects similar or larger than baseline.

How does this paper relate to and differ from closely related prior work?

The paper connects to four main strands. First, the literature on history dependence in economic geography. Davis and Weinstein (2002) use WWII bombing shocks to show that Japanese cities return to their pre-shock size, highlighting persistence from locational advantages. Bleakley and Lin (2012) find that US portage sites retain elevated population density long after canals made them obsolete, a classic multiple-equilibria story. Redding, Sturm and Wolf (2010) exploit German division and reunification to show airports exhibit path dependence. Michaels and Rauch (2018) compare Roman and non-Roman cities in France, finding Roman legacy persists. This paper contributes by using a large-scale historical policy reform that changed the location of trading opportunities itself - controlling for time-invariant location fundamentals by construction - and showing that adaptation occurs but is contingent on initial urbanization levels. Henderson et al. (2018) use cross-country data to show locational advantages governing trade matter less in early developers (countries that developed under high transportation costs). This paper supports that cross-sectional finding and gives it a causal interpretation within a single institutional setting. Second, the literature on transportation costs and income. Frankel and Romer (1999) and Feyrer (2019) find large reduced-form effects. Pascali (2017) uses steamship diffusion and finds little aggregate effect except in countries with inclusive institutions - this paper focuses within countries (single institutional environment) and finds robust effects on the spatial distribution rather than aggregate national income. Third, the historical institutions literature. Acemoglu, Johnson and Robinson (2002) establish that pre-industrial population density negatively predicts current income (reversal of fortune). This paper reframes that as partly attributable to trade institutions, showing that Bourbon-era reforms interacted with pre-existing geography to shape the reversal. Fourth, the literature on 18th-century Spanish empire reforms. Valencia (2019), Alvarez-Villa and Guardado (2020), Arteaga (2022), and Chiovelli et al. (2024) examine Bourbon administrative and ecclesiastical reforms. This paper is distinct in focusing on commercial policy and in constructing time-varying bilateral transportation time matrices rather than relying on cross-sectional variation.

What are the policy implications and their scope conditions?

The central policy implication is that trade liberalization that reduces access costs to long-distance markets can reshape the spatial distribution of economic activity within a country, particularly benefiting peripheral regions that were previously excluded from international trade networks. However, this finding comes with important scope conditions. First, the magnitude of the effect is larger in locations with small pre-existing internal markets. Regions with larger pre-existing urban agglomerations are relatively insulated from reallocation because their size makes them less dependent on external trading opportunities. Policy interventions that reduce international trade costs may therefore have limited spatial rebalancing effects in already-urbanized contexts. Second, the adaptation is not a rapid reallocation: the estimated 2 percent population gain per day-reduction in transportation time reflects cumulative adjustment over 50-year periods. Third, the historical context involves extractive colonial institutions. The paper notes that lower transportation costs influenced spatial development within countries even under extractive institutions, suggesting the result does not require inclusive institutions - but the magnitude and form of adjustment may differ under different institutional regimes. Fourth, migration plays an important amplifying role: in the model, restricting trans-Atlantic migration halves to nearly eliminates the population effect. In modern contexts where immigration is restricted, the spatial reallocation effect of trade liberalization may be substantially smaller. Fifth, the author cautions that the reform involved abrupt, large changes in trade costs, which may produce different adjustment dynamics than gradual reductions.

How is the transportation network constructed and validated?

Maritime transportation times are estimated by regressing daily sailing speed (in knots) from 188,687 logbook entries (after removing implausibly fast observations above 10 knots, anchored ships, steamships, and coastal entries) on wind speed and the cosine of the angle between direction of travel and wind direction. The model is estimated on a training sample (179,255 entries) and validated on a holdout sample (9,432 entries), yielding a mean squared error of 2.16. Fitted sailing speeds are then extrapolated to a 0.16 x 0.16 degree global grid using modern wind data from NOAA’s Global Forecasting System (2011-2017), assuming wind patterns are sufficiently stable (the correlation between historical logbook wind speed and modern wind speed is 0.24; for wind direction, 0.33). The Dijkstra algorithm finds time-minimizing routes through this grid. Land transportation is modeled using a Tobler-style hiking function adjusted for slope, elevation, and landcover, based on the Weiss et al. (2018) parameterization, applied to a 0.16-degree land grid with postal route locations from Stangl (2019b) treated as roads. Validation compares maritime times to seadistances.org sailing times across 21 ports (strong positive correlation), and land times to the Human Mobility Index and Google Maps driving times (again strongly correlated). The transportation time to Europe from city i in period t is defined as the minimum over the set of ports open to direct trade at time t of the sum of the inland travel time to the nearest open port plus the maritime travel time from that port to Cadiz.

How are the spatial model’s parameters identified and what are the key parameter values?

The model has six parameters (sigma = elasticity of substitution, theta = Frechet shape parameter for migration, mu = expenditure share on traded goods, b = preference shifter for transatlantic goods, a1 = static agglomeration externality, a2 = dynamic/historical agglomeration externality), two vectors of location fundamentals (A and H), and time-varying trade and migration cost matrices (T and M). Sigma is set to 5 following Simonovska and Waugh (2014). Theta is set to 3.18 following Bryan and Morten (2019). Mu = 0.5 is the midrange estimate of the land income share for colonial Mexico and Peru from Arroyo Abad and van Zanden (2016). a1 = 0.055 is taken from the mid-range of estimates in Combes and Gobillon (2015). The trade cost elasticity with respect to transportation time (kappa) is estimated from a port-level gravity model of Spanish imports from Spanish America (1797-1820) using PPML with viceroyalty fixed effects, yielding a transportation time elasticity of trade flows of -2.23, which gives kappa = 0.56. The preference shifter b = 0.45 is chosen to match the observed Spanish import share from the Americas in 1750 (approximately 25 percent per Prados de la Escosura and Casares 1983). The migration cost elasticity lambda is estimated similarly from migration gravity, yielding -lambda*theta = -1.16, so lambda = 0.363. The dynamic agglomeration parameter a2 = 0.063 is identified by estimating the structural version of the reduced-form city-size equation (regressing log population on log price index, log real income, lagged log population, and location controls), where the coefficient on lagged population identifies a2 via the model’s equilibrium conditions. Location fundamentals A and H are recovered by inverting the model to exactly match the observed population distribution and nominal wages in 1750.

What does the paper contribute to understanding of the ‘reversal of fortune’ in the Americas?

Acemoglu, Johnson and Robinson (2002) established that areas with higher pre-industrial (circa 1500) population density tend to have lower income today, interpreting this as evidence that Spanish colonization was most extractive in densely populated areas (which later fell behind) and that sparser-populated frontier areas had better institutions (property rights) that supported later development. This paper complements that institutional story by showing that trade institutions also matter for explaining the reversal. The Bourbon reform - driven by dynastic change from Habsburg to Bourbon rule and by European interstate competition - specifically opened direct trade access to peripheral areas that had been systematically excluded under the Habsburg mercantilist system. The paper’s persistence results (lower elasticity of contemporary to pre-colonial population density in areas more exposed to the reform) suggest that the trade reform contributed to the subsequent relative rise of peripheral regions. The finding thus supports the view that the reversal of fortune is partly rooted in institutional change (trade liberalization) interacting with pre-existing geography, rather than in population-density-determined institutions alone. The scope condition is important: the core-versus-fringe heterogeneity shows the reform’s spatial effects were largest precisely in the sparsely populated periphery - consistent with the Acemoglu et al. mechanism but augmenting it with a trade-access channel.

What are the limitations of the analysis acknowledged by the author?

The author acknowledges four main limitations. First, the reform involved sizeable and abrupt changes in trade costs. More gradual liberalizations might produce different adjustment dynamics, potentially slower convergence or different spatial sorting. Second, the absence of individual-level migration data prevents a more direct examination of whether the city-population effects operate primarily through trans-Atlantic immigration, intracolonial migration, or natural population growth. The model-based inference that trans-Atlantic migration matters substantially is indirect. Third, path dependence likely plays a more important role in industrialized contexts with stronger agglomeration economies (larger a2 than estimated here). The pre-industrial colonial setting, with relatively modest agglomeration forces and thin labor markets, may not generalize to modern industrialized spatial economies. Fourth, the study’s focus on within-country (within-empire) variation means it cannot directly address the effect of trade liberalization on aggregate national income, only on the spatial distribution of activity within the empire.

What is the significance of the finding that the reform primarily affected city size rather than frontier settlement?

The settlement-level analysis uses a balanced panel of 53,581 grid-cell-decade observations for 1710-1810, with an indicator for whether a cell contains any settlement. The baseline result is that a ten-day increase in transportation time to Europe reduces the probability of a cell containing a settlement by one percentage point, against a sample mean of 11 percent, and this effect is small relative to the urban population effects. Event-study plots for settlement formation show no significant pre-trends and only modest post-reform effects. This implies that the reform’s primary spatial impact was to concentrate more people in existing urban centers rather than to push economic activity into entirely new locations. This is consistent with the model, in which cities have pre-existing productivity advantages (embedded in A and H) that make them focal points for agglomeration. It also implies the reform did not create entirely new urban systems in frontier areas but rather amplified existing ones, which is important for interpreting the persistence results: even in the fringe, the settlements that grew were already established before 1765.

Key Concepts

Transportation time to Europe: The time-minimizing route from a given location in Spanish America to Cadiz (the dominant European trading port), computed by combining maritime sailing speed estimates (from logbooks, conditional on wind speed and direction) and land travel speed estimates (based on slope, elevation, landcover, and road location) via the Dijkstra algorithm; time-varying because the set of ports permitted to trade directly with Europe changes as the reform proceeds.

Comercio Libre (free trade reform): The staggered series of Spanish royal decrees between 1765 and the early 19th century that progressively lifted the mercantilist restriction confining direct transatlantic trade to four American ports and a single Spanish port, ultimately opening more than 45 American ports to direct trade with Europe; motivated by European interstate competition rather than by the commercial potential of specific American locations.

Dynamic agglomeration externality (a2): In the Allen-Donaldson (2022) framework as applied here, the component of city-level total factor productivity that depends on the city’s own population in the previous period rather than the current period; it encodes the idea that historically larger cities are persistently more productive through channels such as durable local infrastructure, accumulated local knowledge, or input-sharing networks. Estimated at a2 = 0.063 in this setting, smaller than values found in Allen and Donaldson (2022).

First-nature fundamentals: Time-invariant geographic endowments that determine a location’s intrinsic productivity and land availability independent of the scale of economic activity, captured in the model by the vectors A (productivity) and H (arable land); these are recovered by inverting the spatial model to match observed 1750 population and wages and are correlated with caloric potential, elevation, terrain ruggedness, and proximity to rivers and coasts.

Second-nature fundamentals: The agglomeration forces that arise from the scale of economic activity already present at a location, including static (current population) and dynamic (lagged population) agglomeration economies; in this paper, the term is used to explain why larger pre-reform cities in the core are insulated from the trade reform’s spatial reallocation effects - their scale generates internal-market advantages that reduce reliance on long-distance external trade.

Internal market size (market insulation): The degree to which a city’s price index for traded varieties is determined by local production rather than external trade costs; in the model, cities with larger local productivity (higher Ait) have a less sensitive price index to changes in the trade cost with Europe because local goods compete with imported varieties, dampening the welfare and migration effects of trade liberalization; this is the central mechanism explaining the core-fringe heterogeneity.

Persistence elasticity: The coefficient relating contemporary (year 2000) population density or size to pre-reform (1500 or 1750) population density or size in a cross-sectional regression, interpreted as a measure of how much historical settlement patterns predict current ones; found to be 0.866 for cities with below-median changes in transportation time (little treated) and 0.369 for cities with above-median changes (strongly treated), documenting that the reform attenuated the persistence of pre-reform settlement patterns.

Migration-facilitation channel: The mechanism by which lower transportation times to Europe reduce not only trade costs but also migration frictions - through lowering the direct cost of travel and through improving information flows about opportunities in American cities - thereby amplifying city population growth beyond the pure trade-cost effect; quantified in the model by comparing counterfactuals that allow migration frictions to decline with those that hold them fixed at 1760 levels.