Barriers Within Borders: Internal Trade and Domestic Market Integration

Domestic markets can be far from fully integrated within a country: Canada's interprovincial trade is half the size of its international trade. We estimate internal trade costs using bilateral flows across hundreds of products and sectors and decompose them into geographic and non-geographic components. Embedding these estimates in a multi-region, multi-sector general equilibrium model with input–output linkages and interprovincial migration, we find that removing all non-distance barriers raises real GDP by 6.8 percent in our baseline scenario, with the largest gains accruing to smaller provinces. We also identify services as the sectors generating the largest liberalization gains. Further, sequential provincial liberalization can generate a virtuous cycle, where a province's liberalization increases the gains from (and incentives for) subsequent liberalization for most other following provinces. Finally, we show that the potential gains from domestic market integration can offset the GDP losses from increases in external trade costs.