Internal Trade and Aggregate Productivity

International trade increases productivity; internal trade should too. The size and consequences of internal trade barriers are unfortunately not well known. Using unique Canadian data and multiple approaches to measure trade costs, we find internal trade barriers are large, especially for poor regions, which disproportionately rely on internal trade. Through various counterfactuals using a modified Eaton-Kortum model, we find these barriers reduce productivity and increase regional inequality. Eliminating internal trade barriers increases aggregate productivity by over 8% and lowers cross-region productivity differences by over 40%. We confirm these findings for the United States and China, though with lower quality data.