What's Inside Counts: Migration, Taxes, and the Internal Gains from Trade

Like trade between countries, trade within countries is costly; unlike between countries, gains from trade within countries depend on migration and taxes, as gains through higher wages have tax consequences that gains through lower prices do not. We confirm the first point and flexibly measure large trade costs within Canada, China, and the United States. We further measure trade cost asymmetries to gauge the importance of non-geographic factors and find they are also large. To quantify the second point, we develop a model of trade featuring within-country factor mobility and, new to the literature, central government taxes and transfers. Taxes endogenously generate unbalanced internal trade and allow the model to match trade and income data well. We find (1) substantial gains from lowering internal trade costs and (2) gains to poor regions are particularly large, amplified by internal taxes and transfers.