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Internal Trade and Aggregate Productivity

Author

Listed:
  • Jennifer Winter

    (Labour Program, HRSDC)

  • Trevor Tombe

    (Wilfrid Laurier University)

Abstract

The positive link between international trade and productivity is well established. However, research on magnitude and consequences of internal trade barriers, which inhibit the efficient geographic distribution of production within a country, is limited. Unique data from Canada and China provide an ideal opportunity to measure the magnitude - and effect on productivity - of barriers to internal trade. Using a flexible, micro-founded approach, we find between-province trade costs average 30% in Canada and over 50% in China (net of distance-effects). These costs are even higher under other plausible parameter values. Internal trade costs in both countries are significantly higher in poor regions. We further adapt a new-trade model to estimate the productivity impact of these barriers. Eliminating inter-provincial trade barriers increases productivity by over 15% in the median province and by over 8% for Canada as a whole, accounting for nearly half the productivity gap with the United States. For comparison, we find these benefits are larger than lowering international trade barriers by 20%. Internal trade barriers also account for over 40% of the regional income inequality across provinces. The gains are even larger for China. Further work will investigate the extent to which high internal trade barriers in developing countries contributes to cross-country income and productivity differences.

Suggested Citation

  • Jennifer Winter & Trevor Tombe, 2012. "Internal Trade and Aggregate Productivity," 2012 Meeting Papers 314, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:314
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    Cited by:

    1. Delina E. Agnosteva & James E. Anderson & Yoto V. Yotov, 2014. "Intra-national Trade Costs: Measurement and Aggregation," NBER Working Papers 19872, National Bureau of Economic Research, Inc.
    2. Natalia Ramondo & Andrés Rodríguez-Clare & Milagro Saborío-Rodríguez, 2016. "Trade, Domestic Frictions, and Scale Effects," American Economic Review, American Economic Association, vol. 106(10), pages 3159-3184, October.

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