Free-riding Yankees: Canada and the Panama Canal

We study the impact of the Panama Canal on the development of Canada’s manufacturing sector from 1900 to 1939. Using newly digitized county-level data from the Census of Manufactures and a market-access approach, we exploit the plausibly exogenous nature of this historical episode to study how changes in transportation costs influence the process of structural transformation and manufacturing productivity. Our reduced-form estimates show that lowered shipping costs increased manufacturing employment as a share of the population by increasing the number of manufacturing establishments, though not their average size, capital intensity, or skilled labor share. Manufacturing revenues grew 9% more in counties with market access gains at the 75th percentile, compared to counties with 25th percentile gains. Productivity grew by 13% more. These effects persist when we consider general equilibrium effects: the closure of the Canal in 1939 would result in economic losses equivalent to 1.86% of GDP, chiefly as a by-product of the restriction of the country’s access to international markets. Altogether, these results suggest that the Canal substantially altered the economic geography of the Western Hemisphere in the first half of the twentieth century.