Transport costs and the geography of Arbitrage in eighteenth century China

Trade has been considered a condition for growth and development, a view that might have merits in explaining the rise of the Western world. I use a new data set from archival sources of eighteenth-century China to revisit this question. This analysis suggests previous studies of market integration, which attribute much growth to a reduction in transport costs, have overestimated these effects. I nd the overall level of market integration in China was higher than previously thought, and, intertemporal effects are important substitutes for trade. Both factors reduce the importance of trade as a unique explanation for subsequent growth. (JEL O13, O18, R11, N25) It is generally agreed that the progressive reduction in transport costs was a major factor in the growth of the United States and Europe. According to Douglas North (1958, p. 537). Revolutionary developments in transport have been an essential feature of the rapid growth of the Western world of the past two centuries. Reduction in the cost of carriage has enabled specialization and division of labor on a national and inter-national basis to replace the relatively self-suf cient economies that predomi-nated in the Western world two centuries ago. Lower shipping costs promoted greater pro-duction in the newly integrated markets with ex ante lower prices, leading to more trade and overall economic growth. In the United States, railroads, steamboats, and canals each helped transform inland backwoods into agricultural centers (George Rogers Taylor, 1951), and im-provements in transport also contributed to the formation of a national labor market (Robert A. Margo, 2000). In Europe, the beginning of mod-ern economic growth concurred with the ability of trade to spread shocks over a wide area, thereby reducing their detrimental effect on an