The impact of trade on growth in the Great Lakes states

Recently, public debate has re-emerged about whether the U.S. has benefited from global trade and trade agreements. We contribute to the debate about the impact of trade on growth, using a natural experiment particular to the Great Lakes region of the United States. Shipping activity in the Great Lakes is sensitive to cyclical fluctuations in water levels, which in turn is primarily driven by natural phenomena such as rainfall, snowfall, and drought. This connection allows us to use data on Great Lakes water levels to identify the causal impact of trade on economic growth, overcoming methodological challenges due to the endogenous relationship between these two variables. We conduct an instrumental variables analysis and show that a 1% increase in trade is associated with a 5bp to 8.5bp increase in the growth rate of state GDP, on average. Our results confirm that shocks to trade policy which negatively disrupt international commerce can have real adverse consequences for the strength of the domestic economy.