Interstate Trade among Midwest Economies

Article excerpt

If Illinois were an independent country whose Congress was in the process of determining which economies should be granted Most Favored Nation status, the countries shown in the top part of figure 1 would be the prime candidates, assuming Illinois adopted a policy of maximizing self-interest. However, if the set of potential candidates were expanded to include states, the entries in the bottom half of figure 1 would offer far superior benefits to Illinois. Each state entry in figure 1 is larger than the sum of the international entries. Up to now, however, little has been known about interstate trade flows. While detailed monthly and annual data are kept on international trade, the last survey-based interstate trade flow data were collected in 1967. In the last 30 years, significant changes have taken place in the structure of state economies-particularly those in the Midwest-and in the relationship between the U.S. and the rest of the world.

Our analysis of the Chicago region's economy brings to light the enormous importance of interstate trade. Using a detailed econometric input-output model, we were able to construct an annual economic photograph of the region's economy for the period 197095.1We noted that, over time, output in most sectors was increasing (in real terms), but the degree of interdependence was decreasing. This process, referred to as hollowing out, implied that the average firm was buying less from other firms within the region and selling less within the region, which raised the following questions: 1 ) Where are the new sources of inputs and markets for Chicago producers?, 2) Why are these changes occurring?, 3) To what extent is the trend beneficial to the region?, and 4) What, if any, related public policies might be considered to enhance the region's economic well being?

Analyzing the reasons for Chicago's changing trade relationships, it was clear that globalization offered only a partial explanation; Chicago's trade with foreign nations accounted for no more than 10% to 15% of total inflows and outflows. Although we now know that Chicago trades primarily with other U.S. states, until the publication of the Commodity Flow Statistics (CFS) in 1993, it was difficult to allocate the flows to specific locations. We have been able to allocate these flows, based on the CFS data and estimates generated from our models for each of the five Midwest states, Wisconsin, Illinois, Indiana, Ohio, and Michigan. In this Chicago Fed Letter, we focus on commodity flows (agriculture, construction, and manufacturing) rather than total flows (which would include a variety of service activities).

Midwest commodity flows Figure 2 shows the origin and destination of all gross commodity flows within the five-state region. Note the magnitude of the interstate flows in the Midwest (calculated to be over $262 billion) and the degree of dependence that each state has on the other four states. The total volume of trade rivals that in the early 1990s for NAFTA participants (U.S., Canada, and Mexico), yet these trading relationships have received almost no attention in regional public policy discussions. Notable exceptions are Testa's (1992)2 call for a regional agenda and Nagel's (1995) promotion of trade corridors and call for considering broadly based regions as a whole.3 Each of these states has a high degree of dependence on its Midwest neighbors; on average, 34% of total outflows (exports) from any state goes to the remaining four states, while almost 39% of inflows (imports) for any state comes from the other midwestern states. Indiana shows the highest level of dependence on the Midwest at 41 % of exports and 47% of imports, while Ohio has the lowest export dependence (29%) and Illinois the lowest import dependence (32%).

Figure 3 summarizes the effects of this dependence through the creation of a net balance of trade indicator. A positive sign indicates that the state in that row exports more to the state at the top of that column than it imports from that state. …