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 Canadian data provides an ideal opportunity to measure the magnitude - and impact on productivity - of barriers to internal trade. Using a flexible, micro-founded approach, we measure internal trade barriers between Canadian provinces. We find between-province trade costs average 30%, rising to nearly 50% in poor regions, net of distance effects. We then 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.
- Internal trade,
- Regional economic development
Available at: http://works.bepress.com/jenniferwinter/2/