Barriers Within Borders: Internal Trade and Domestic Market Integration
IMF Working Papers, September 18, 2026
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- Barriers Within Borders: Internal Trade and Domestic Market Integration
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Bibliographic details
- Authors: Federico J Diez, Trevor Tombe, Yuanchen Yang
- Published: September 18, 2026
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798229059633.001
Summary and scope
- Domestic markets can be far from fully integrated within a country: Canada's interprovincial trade is half the size of its international trade.
- The paper estimates internal trade costs using bilateral flows across hundreds of products and sectors and decomposes them into geographic and non-geographic components.
- Estimates are embedded in a multi-region, multi-sector general equilibrium model with input–output linkages and interprovincial migration to assess macroeconomic and distributional effects of removing internal barriers.
Methodology
- Empirical estimation of internal trade costs using bilateral flows across hundreds of products and sectors.
- Decomposition of estimated internal trade costs into geographic (distance-related) and non-geographic components.
- Embedding cost estimates in a multi-region, multi-sector general equilibrium model that incorporates:
- input–output linkages
- interprovincial migration
Key quantitative results
- Removing all non-distance barriers raises real GDP by 6.8 percent in the baseline scenario.
- The largest gains accrue to smaller provinces.
Sectoral findings
- Services are identified as the sectors generating the largest liberalization gains.
Dynamics, scenarios, and complementarities
- Sequential provincial liberalization can generate a virtuous cycle: a province's liberalization increases the gains from (and incentives for) subsequent liberalization for most other following provinces.
- The potential gains from domestic market integration can offset the GDP losses from increases in external trade costs.
Policy implications and takeaways
- Targeting non-distance internal barriers can yield substantial aggregate gains (6.8 percent real GDP in the baseline).
- Policies that prioritize services liberalization may capture the largest sectoral returns.
- Coordinated or sequential provincial liberalization can produce positive spillovers, increasing incentives for other provinces to liberalize.
- Domestic market integration can serve as a buffer against adverse shocks from higher external trade costs.
Source: IMF Working Papers — Federico J Diez, Trevor Tombe, and Yuanchen Yang. "Barriers Within Borders: Internal Trade and Domestic Market Integration", Working Paper No. 2026/194, September 18, 2026.
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