Claims about the EU’s internal trade barriers are overblown

No, the EU’s internal trade barriers are not equivalent to 44% tariffs on goods and 110% on services. Still, the EU is far from having a true single market.

In Brussels, European economic competitiveness has been the talk of the town this year. I’ve had endless conversations about how “cooked” Europe is.

Internal barriers of the supposed Single Market are often cited as significant obstacles to achieving the goals of European economic growth.

In the 2025 State of the Union Address, President von der Leyen stated:

Our greatest asset is the Single Market – but it remains unfinished.

The IMF estimates that the internal barriers within the Single Market are equivalent to a 45% tariff on goods.

And a 110% tariff on services.

Just think of what we are missing out on.

The equivalent tariff claim has also been spread by Mario Draghi and others, including on the excellent blog Silicon Continent and in the Constitution of Innovation manifesto.

However, digging into the analysis of the International Monetary Fund (IMF) working paper—which is cited as the source of these figures—shows that taking this claim at face value is at best misleading¹.

How the IMF arrives at these numbers

The IMF uses a gravity trade model - a standard tool that predicts trade flows based on economic size and frictions between countries. Larger economies trade more; barriers reduce trade.

To estimate intra-EU trade barriers, the researchers compare cross-border trade flows to domestic trade flows. The assumption is that trade within a country faces no policy barriers, so any shortfall in cross-border trade must reflect some kind of obstacle. The model controls for physical distance, shared borders, common language, and similar legal origins. Whatever gap remains after accounting for these factors gets interpreted as a bundle of cross-border frictions. The model then expresses that bundle as an an “equivalent tariff”.

The home bias problem

Here’s where I think it falls apart. The model assumes that after controlling for geography, language, etc., any remaining preference for domestic goods must be due to trade barriers. But this ignores home bias - the tendency for consumers to prefer local products for reasons that have nothing to do with regulation².

The IMF authors acknowledge this (emphasis mine):

“[T]his is a strong assumption given that other potentially influent [sic] time-invariant determinants of bilateral trade flows, such as home bias in consumer preferences, cannot be controlled for. Therefore, the levels of trade costs inferred from this approach should be seen as upper bounds.”

In other words: the numbers are best read as an upper bound on policy-fixable barriers, because they also capture stable non-policy factors like the personal preferences of consumers.

A French person buys French cheese not because Estonian cheese faces regulatory hurdles, but because they prefer it. A German chooses a German car out of brand loyalty, not because imports are blocked. The model can’t distinguish “It’s difficult to buy this foreign product” from “I don’t want to.”

The estimates for services seem absurd

Not accounting for home bias becomes almost comical for services. The 110% average includes estimated barriers of roughly 320% for accommodation and 190% for real estate.

I’ll admit I’m not entirely certain I’m interpreting this correctly, but if I understand the model’s logic: real estate shows up as a massive “barrier” because people tend to buy and rent homes where they already live, near family, friends, and jobs. Obviously, most people don’t compare real estate all over the EU and then decide to move where it’s cheapest. Housing is consumed locally almost by definition. The model sees limited cross-border property purchases and interprets this as a trade barrier, when largely it might simply reflect that people want to live where their lives are.

Accommodation (hotels and tourism) is slightly different but seems similarly misleading. Probably people tend to holiday domestically more often, whether due to convenience, cost, or weather preferences. Again, this is about personal preferences, not trade barriers.

71% of trips taken by EU residents are domestic, while 21% are to other EU countries and the remaining 8% to countries outside of the EU³. To be fair, total expenditure was higher for foreign trips.

Lagarde

In a recent speech, European Central Bank president Christine Lagarde said⁴:

“ECB analysis finds that internal barriers in services and goods markets are equivalent to tariffs of around 100% and 65%, respectively.”

The source of this analysis is forthcoming in January. I am very curious how the ECB model differs from that of the IMF. A footnote explains that,

“These “tariff equivalents” should be understood as measures of estimated trade frictions rather than actual policy-imposed tariffs. They reflect a combination of policy-related barriers and structural or cultural factors – such as consumer preferences and taste differences – that cannot be directly addressed through policy alone.”

Based on that, I expect their model makes the same strong assumptions that don’t account for consumer preferences. Let’s see!

Getting the numbers right matters

I want to be clear: I’m not arguing the Single Market is complete. It isn’t. The EU still lacks true integration in capital markets, energy, telecoms, and other sectors. Services liberalisation has lagged. The regulatory patchwork that companies face when operating across borders is real and costly.

But getting the numbers right matters for how we think about the problem.

If you took the 44% (let alone 65%) number literally as a policy tariff, Trump’s actual 15% tariffs on EU goods would be minor compared to what we’re doing to ourselves. That seems fishy.

The numbers also matter for prioritisation. If internal barriers really were equivalent to 44% tariffs on goods and 110% on services, that would almost be good news. It would mean enormous gains are available through relatively straightforward regulatory harmonisation. Completing the Single Market would dwarf almost any other policy intervention for improving the economy.

If the true barriers are significantly lower, the picture is more complex. We would need to focus more on competing globally, especially with China and the US.

Of course, we should do both - in any case, trade barriers are way too high. I’m all for a single market in capital, services, energy, and telecoms. A standardised EU-wide legal entity for startups (the 28th regime) would be fantastic if implemented well.

Market integration is one of the EU’s greatest assets. Von der Leyen is right that we are missing out on unrealised potential. But let’s base that conversation on an honest assessment of the status quo.

1. Epistemic status: I’m not an economist and I could be misunderstanding various things. I merely read the relevant parts of the IMF report and asked GPT-5.2T and Opus 4.5 some questions about it. Maybe more people should do that.

2. By the way, I’m not the first person to complain about people spreading the 44% (110%) internal trade barriers meme. Lorenzo Bini Smaghi from the Institute for European Policymaking @ Bocconi University already pointed out the same issues.

3. https://ec.europa.eu/eurostat/web/products-eurostat-news/w/ddn-20251010-3

4. They give this citation and caveat: “Bernasconi, R., Cordemans, N., Gunnella, V., Pongetti, G. and Quaglietti, L. (2025), “What is the untapped potential of the EU Single Market?”, Economic Bulletin, Issue 8, ECB (forthcoming). These “tariff equivalents” should be understood as measures of estimated trade frictions rather than actual policy-imposed tariffs. They reflect a combination of policy-related barriers and structural or cultural factors – such as consumer preferences and taste differences – that cannot be directly addressed through policy alone.”