Long-Distance Trade and Long-Term Persistence

Do changes in the location of trading opportunities lead to changes in the location of economic activity? This paper explores this question using a staggered lifting of restrictions on direct trade with Europe across the Spanish Empire in the 18th century. I combine a difference-in-differences approach with a dynamic spatial equilibrium framework and detailed georeferenced data on maritime travel from historical logbooks to examine this issue. I find that the reform improved market integration and induced urban growth, but had a smaller effect in locations with larger internal markets. The findings suggest that the location of economic activity adapts to changes in the location of trading opportunities, but can persist when these changes are preceded by urban growth.