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Natural Disasters, Trade, and Local Factor Prices: The Urban Equilibrium Effect of Rerouted Trade

As evidenced by recent events, natural disasters are increasingly potent and cause significant disruptions to international trade. I investigate the impact of Hurricane Katrina and the resulting rerouting of international trade on employment and factor prices in otherwise unaffected Floridian communities. Developing a new identification strategy that exploits the disaster-induced quasi-random variation in trade, my IV results are the first to quantify the urban economic impact of international cargo shipments and suggest that a 10% increase in seaport services raises factor prices and employment by 0.46% to 0.69%. Consistent with the predictions of the urban equilibrium theory, I find that the productivity-enhancing effects in traded goods-producing industries and transportation sectors drive the estimated intensive margin effects of transport infrastructure. As natural disasters are not the only cause of changing shipping patterns, my findings have considerable relevance for trade and other public policies that shape the affected urban equilibria.