Internal Trade, Productivity, and Interconnected Industries: A Quantitative Analysis

Does trade within a country affect welfare and productivity? What are the magnitude and consequences of costs to such trade? To answer these questions, we exploit unique Canadian data to measure internal trade costs in a variety of ways – they are large, and vary across sectors and provinces. To quantify their consequences for welfare and productivity, we use a recent multi-sector trade model featuring rich input-output relationships. We find internal trade raises aggregate welfare by 4.4% relative to a counterfactual of only international trade. As for internal trade costs, lowering them by 10% yields aggregate gains of 0.9%; eliminating our preferred estimates of costs, gains average between 3-7% – equivalent to real GDP gains between $50-$130 billion. Finally, as policy reforms to improve internal trade are often sector-specific, we liberalize sectors one at a time and find gains are largest in highly interconnected industries.