▣ DATA BRIEF · INTERNAL TRADE
☀ Key Stats ☀
◆ Fully eliminating measured non-distance internal trade costs would raise Canada’s real GDP by an estimated 6.8% in the paper’s baseline model.
◆ The long-run gain is equivalent to roughly C$220 billion in additional real income in 2025 terms.
◆ Under alternative assumptions, the estimated gain ranges from 4.2% to 8.8% of GDP, or about C$137 billion to C$286 billion.
◆ Canada’s international exports and imports equal about 65.1% of GDP, compared with 33.9% for interprovincial trade flows.
◆ 7 of Canada’s 10 provinces trade more with international partners than with other provinces.
◆ After stripping out distance-related costs, the paper estimates average internal trade costs of about 9.3%.
◆ Services account for 5.9 percentage points of the modeled 6.8% GDP gain, equivalent to roughly C$191 billion of the C$220 billion total.
◆ Removing measured barriers in banking alone raises GDP by an estimated 0.67%, while telecommunications adds another 0.61% when each sector is modeled separately.
◆ Modeled productivity gains range from 3.6% in Ontario to 76.7% in Nunavut, with the largest percentage gains generally occurring in smaller provinces and territories.
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Removing Canada’s measured non-distance internal trade barriers could raise real GDP by 6.8% over the long run, equivalent to roughly C$220 billion in additional real income in 2025 terms, according to a new IMF working paper.
The estimate comes from a model of trade, production and migration across Canada’s provinces and territories rather than a forecast of what the economy will gain in any particular year.
The researchers estimate that internal trade costs unrelated to distance average about 9.3%, with services responsible for the overwhelming majority of the potential economic gains from deeper integration.
About C$191 billion of the modeled C$220 billion gain comes from removing measured non-distance barriers affecting services.
◎ HEADLINE ESTIMATE
C$220B
Estimated long-run increase in Canadian real income, in 2025 terms, if measured non-distance internal trade costs were fully eliminated in the model.
Canada trades almost twice as much internationally
The paper starts with an unusual feature of the Canadian economy: trade across the country’s international border is much larger than trade across provincial borders.
International exports and imports amount to about 65.1% of GDP, compared with 33.9% for interprovincial trade flows.
That makes international trade about 1.9 times as large by this measure.
The pattern extends across most of the country, with 7 of 10 provinces trading more internationally than with other provinces.
The composition is also different: international Canadian trade is 78% goods, while interprovincial trade is 58% services.
↔ TRADE AS A SHARE OF GDP
International trade · 65.1%
Interprovincial trade · 33.9%
Ratio · 1.9×
↳ INTERNAL FRICTION · ABOUT A 9% TARIFF EQUIVALENT
Non-distance internal trade costs average about 9.3%
The researchers estimate total internal trade costs using detailed flows across nearly 500 product categories.
Total trade costs average about 79%, but much of that reflects Canada’s size, distance and other geographic factors that cannot simply be removed through policy.
After stripping out the estimated effects of distance, the average falls to 9.3%.
The paper treats that non-distance component as the more policy-relevant measure, capturing frictions potentially associated with regulatory differences, administrative requirements and other barriers between jurisdictions.
That does not mean every part of the estimated 9.3% wedge represents a regulation that governments could eliminate.
Services account for nearly 90% of the potential gain
The largest finding beyond the headline GDP estimate is the outsized role of services.
Of the model’s 6.8% total GDP gain, about 5.9 percentage points come from removing measured non-distance trade barriers in service industries.
In dollar terms, that represents about C$191 billion of the C$220 billion total.
Estimated non-distance trade costs reach 60.6% in retail trade, 55.5% in health care and social assistance and 41.8% in educational services.
Information and cultural industries carry an estimated 38.2% trade-cost wedge, while accommodation and food services are at 23.6%.
◎ SERVICES DOMINATE
C$191B of C$220B
Roughly 90% of the modeled national gain comes from removing measured internal trade frictions in service industries.
Banking and telecommunications produce the largest sector gains
The researchers also model what happens when trade costs are eliminated in one industry at a time while remaining barriers stay unchanged.
Removing measured frictions in banking and other deposit-taking institutions produces the largest single-sector gain at 0.67% of GDP.
Telecommunications follows at 0.61%, while real estate produces a 0.24% gain and food services and drinking places contribute 0.22%.
The paper attributes much of the larger service-sector impact to connections across the economy: cheaper or more productive business services can reduce costs for companies in many other industries.
! IMPORTANT DISTINCTION
These are separate model simulations, not estimates that can simply be added together. Each exercise removes the measured trade costs of one sector while holding the other 229 sectors unchanged.
↔ REGIONAL EFFECTS · SMALLER JURISDICTIONS GAIN MORE
The model shows much larger percentage gains in smaller provinces and territories
Estimated long-run productivity gains are relatively modest in Canada’s largest provinces, including 3.6% in Ontario, 4.9% in Alberta, 5.7% in British Columbia and 6.9% in Quebec.
Every other province and territory records a double-digit increase in real GDP per worker in the model.
The estimated gain reaches 26.6% in New Brunswick, 23.7% in Nova Scotia and 39.5% in Prince Edward Island.
The territories record the largest modeled increases, including 37.9% in Yukon, 39.1% in the Northwest Territories and 76.7% in Nunavut.
Those regional estimates assume substantial long-run changes in where people work and live, making them scenario results rather than forecasts for provincial GDP growth.
Canada has already changed federal internal trade rules
The research arrives as governments in Canada are already pursuing internal trade reform.
The federal Free Trade and Labour Mobility in Canada Act and its regulations came into force on January 1, 2026.
The law provides federal recognition of comparable provincial and territorial requirements in areas covered by federal rules, but it does not remove provincial or territorial requirements themselves.
The broader question of how much economic activity can be unlocked through market integration also appears in recent StatsJournalist coverage of ASEAN trade, where IMF calculations similarly pointed to large long-run gains from reducing internal barriers.
✦ Why it matters ✦
The study suggests that Canada’s internal market could represent a large source of long-run economic gains even without changes in international demand.
Its baseline estimate of C$220 billion is large partly because removing trade frictions allows workers, companies and production to shift toward more productive uses over time.
The results also shift attention away from physical goods alone.
Services account for roughly 90% of the modeled gains, suggesting that barriers involving finance, telecommunications, professional services and other service industries may matter as much as more visible restrictions on goods moving between provinces.
The scale of the estimate should not be read as an immediate economic dividend from any single policy change.
The paper describes a long-run scenario in which all measured non-distance trade costs disappear and the economy has time to adjust through investment, production and migration.
ⓘ How to read the findings
The source is IMF Working Paper WP/26/194, Barriers Within Borders: Internal Trade and Domestic Market Integration, by Federico J. Díez, Trevor Tombe and Yuanchen Yang. IMF working papers describe research in progress and the findings do not necessarily represent the views of the IMF, its Executive Board or management.
The researchers combine detailed Statistics Canada interprovincial trade data across nearly 500 product categories with estimates of how sensitive trade is to costs.
The headline 6.8% GDP gain is a counterfactual model result. It estimates what could happen over the long run if all measured internal trade costs unrelated to distance were eliminated.
The authors stress that adjustment would take years and potentially decades as production, wages, firm sizes and migration patterns respond. The estimate is therefore not a prediction of annual GDP growth or an immediate C$220 billion increase.
The model does not identify the precise regulation, administrative rule or other cause behind every measured trade-cost wedge. Some estimated non-distance costs may therefore be harder or impossible to remove through ordinary trade reform.
The results are sensitive to assumptions about how strongly trade responds to costs. Under alternative trade-elasticity assumptions tested by the authors, the estimated national gain ranges from 4.2% to 8.8% of GDP, or approximately C$137 billion to C$286 billion in 2025 terms.
The paper’s estimated trade-cost distribution is based on 2021 internal trade data. The figures should therefore be interpreted as model-based estimates of the economic importance of internal market frictions, not a direct measurement of the cost of any one current law.
