The Invisible Walls: how Freight Transport Costs shape European Internal Trade

Abstract

This paper investigates the magnitude and macroeconomic relevance of internal trade frictions—specifically freight transport and logistics costs—within the European Union, framing them as sui generis internal duties or non-tariff barriers that create "invisible walls" across the Single Market. Due to the severe limitations and reliability issues inherent in official statistical databases regarding bilateral transit margins, we propose an alternative empirical strategy. By harmonizing Eurostat’s SITC Rev. 4 trade data with the multi-sectoral structural framework of the Global Trade Analysis Project (GTAP) social accounting matrix, we estimate bilateral origin-destination distribution margins across all 27 EU member states for six transportable commodity sectors. Our empirical findings reveal an average intra-European distribution margin of 6%, driven heavily by a commodity's value-to-weight ratio and country-specific geographic features, such as peripheral isolation or infrastructure bottlenecks. To evaluate the systemic and general equilibrium impacts of these frictions, the estimated margins are integrated into a global Computable General Equilibrium (CGE) simulation model. We simulate a hypothetical 50% reduction in all intra-European logistics costs, uncovering profound macroeconomic implications. The optimization of internal distribution networks generates an aggregate welfare gain of approximately $161 billion annually for the European Union and stimulates intra-EU trade flows by 5.72%, while simultaneously inducing a strategic trade diversion that contracts imports from extra-EU partners like China. Furthermore, the general equilibrium effects manifest asymmetrically across member states. While the continent's largest economies secure the highest absolute welfare benefits (quantifiable at $33 billion for Germany and $19 billion for France), the most transformative expansions in gross production volume are concentrated within highly open, smaller economies, led by Lithuania (+0.54%), Hungary (+0.45%), and Slovakia (+0.43%). Ultimately, the study highlights that sustaining the long-term international competitiveness of the Single Market requires European trade policy to expand beyond legal harmonization and actively invest in dismantling physical network inefficiencies.