4 Quantifying the untapped economic potential of the Single Market

Quantifying the magnitude of trade barriers is key to assessing their economic impact and identifying policies to address them. However, measuring the scale of trade barriers is challenging. As section two discussed, obstacles to trade vary across Member States and sectors and evolve as legislation and national practices change. Comprehensive and comparable indicators are limited, since many barriers – such as gold-plating, licensing complexity or differences in enforcement – are difficult to observe directly or quantify systematically.

To address the lack of data on trade barriers, the literature has adopted an indirect, model-based approach to infer their magnitude. The few existing analyses rely on the estimation of gravity models – the workhorse framework of international trade analysis.^[8] These models consider the determinants of trade flows between two countries, such as economic size, distance, shared language and borders. By incorporating these determinants, the gravity model allows for the quantification of other, additional costs associated with cross-border trade between EU Member States, relative to domestic trade, including possible observable and unobservable frictions that have an impact on trade. These reflect a wide range of influences, including trade-related costs and barriers that can be amended through policy actions, such as regulatory differences and restrictions to competition, but also factors such as cultural mismatches and national preferences.

Estimates of trade costs are typically expressed relative to domestic trade and as ad valorem tariff equivalents, as if they were a percentage tariff on the value of traded products. Estimating the costs influencing cross-border trade in relation to domestic trade means in practice that the estimate captures how much more – or less – economic exchange occurs across an international border compared with trade within the same country. Estimates are often expressed as tariff equivalents to provide an intuitive metric for comparison. However, this should not be interpreted to mean that they are directly comparable to tariffs applied at customs borders. Instead, the tariff equivalent gives a simple numerical indication of the extent of the frictions that limit trade across national borders – the higher the tariff equivalent, the larger the implied trade frictions relative to domestic trade.

Studies based on these methods suggest that substantial costs to integration persist, although the range of estimates is very large. Using a gravity framework, recent studies reveal that, while intra-EU trade costs have declined over time, considerable obstacles remain, especially for services. They also vary widely. The estimated tariff equivalent costs for goods trade were 13% for EU15 and 8% for EU28 in 2017 (Head and Mayer, 2021), 44% for EU27 in 2020 (IMF, 2025), and 60% for the euro area in 2020 (Airaudo et al., 2025). Head and Mayer (2025) indicate that this dispersion reflects differences in estimation strategies, data sources, variables used as controls, estimation choices and the time periods considered. For services, trade costs remain significantly higher. Adilbish et. al (2025) estimate a tariff equivalent of 110% for services, underscoring the scale of impediments to full integration.^[9] Fontagné and Yotov (2025) find that only half of the potential benefits from EU membership have been realised to date.^[10]

The analysis we present in this section deploys a similar gravity specification. It uses the methodology proposed by Head and Mayer (2021) to address two major questions: (i) How has the integration of the Single Market evolved over the past 20 years?; and (ii) to what extent does the Single Market remain incomplete? The evolution of trade costs within the Single Market is estimated over time – separately for goods and services – using a gravity model, and barriers are expressed in tariff-equivalent terms.^[11] In addition, the analysis provides an estimate of barriers across sectors.^[12]

The estimates provide an upper bound for the level of trade costs within the Single Market. The wide range of estimates highlights the significant complexity involved in measuring trade costs. A key challenge is disentangling frictions that are amendable through policy actions (for example through regulatory change) from other structural or behavioural costs that also influence trade flows. Within the gravity framework, trade costs are estimated as a “catch-all” measure for the costs of trading, once the standard determinants have been accounted for. However, these estimates also capture non-policy-related factors that reduce trade, such as taste differences, domestic bias, limited substitutability between products, or the intrinsic limited tradability of some goods and services. As a result, gravity-based estimates overstate the true magnitude of policy-induced trade barriers, and consequently the extent to which barriers within the Single Market can be reduced through policy reforms.^[13] Therefore, these estimates are best viewed as an upper bound on the costs associated specifically with trade barriers.

Given concerns about correctly judging the degree to which trade barriers can be lowered through policy actions, this article also adopts a comparative approach by evaluating intra-EU trade costs against a “friction-light” benchmark country. Several existing studies in the literature analyse the estimated scale of trade costs in isolation, which, as stated above, carries the risk of overstating the extent to which policy interventions can reduce them. In contrast, this analysis aims to compare estimated trade barriers to those of a benchmark country – defined as an EU Member State exhibiting low estimated trade costs and a high degree of trade integration. This provides a more realistic counterfactual that can demonstrate the potential for deepening EU integration if all Member States were to reduce barriers to the levels of the benchmark country.^[14] The use of a benchmark in the estimation helps to mitigate some limitations related to estimating the levels of barriers as described above.^[15] Indeed, for policy purposes, it may be more appropriate to focus on the integration already achieved in the chosen benchmark country rather than on the absolute level of intra-EU barriers – which partly reflect structural factors beyond the reach of policymakers.

5 Measuring trade barriers in goods markets

The integration of EU goods markets has progressed steadily over recent decades. Chart 5, panel a), illustrates the evolution of estimated trade costs – expressed as ad valorem tariff equivalents – within EU Member States, between EU and non-EU partners, and across countries in the rest of the world over time. In 1995, intra-EU trade costs were already almost 19% lower than those for trade between non-EU countries, reflecting the early benefits of Single Market integration (Chart 5, panel a). By 2022, this gap between intra-EU trade costs and non-EU trade costs had narrowed somewhat, while intra-EU trade costs had decreased, in absolute terms, by an additional 7 percentage points. The most substantial decreases in trade costs occurred in energy and agriculture and food products – industries that have benefited from continued policy reforms and harmonisation efforts within the Single Market. For instance, the liberalisation of the energy market, including electricity and gas, and the common agricultural policy reforms have helped to reduce trade costs for these sectors.

Chart 5

Estimated trade costs for the Single Market in goods

a) Changes in trade costs

(percentage points)

b) Estimated level of EU trade costs by sector in 2022

(percentages, percentage points)

Nonetheless, the empirical estimates suggest that trade costs of intra-EU trade in goods remain high. Regression results (Chart 5, panel b) indicate that in 2022 intra-EU trade frictions for goods – i.e. the costs of trading with other EU countries relative to trading domestically – remain significant, at 67% on aggregate for goods and 54% when considering only the manufacturing sector.^[16] Within manufacturing, intra-EU costs for food products are the highest, with an ad valorem tariff equivalent of 150%, which may reflect the complexity of food trade within the EU and the limited scope of the common agricultural policy. In contrast, intra-EU trade costs in the chemical and pharmaceutical sectors are lower, which may reflect the significant efforts towards harmonisation and mutual recognition tools in these sectors.

Comparisons to the friction-light benchmark country – in this case the Netherlands – suggest there is scope to bolster goods trade integration. As stated above, taken in isolation estimates of the level of trade costs can overstate the extent of barriers within the Single Market that can be reduced through policy reforms. Instead, comparison to a benchmark country that has already achieved high integration may be more insightful. Looking across countries, the Netherlands is the Member State with the lowest estimated costs for trade in goods with other EU countries. To quantify the potential for reducing barriers, the gravity regression analysis compares the level of trade costs between the Netherlands and other EU Member States with that of other Member States. This approach calculates the gap between the benchmark and the average trade integration levels across the EU. The regression analysis suggests that, if other countries were to achieve similar levels of integration as this benchmark, intra-EU frictions for trade in goods could be lowered by an average of around 8 percentage points (Chart 5, panel b). That suggests there is scope for relatively substantial gains in integration from countries reaching this benchmark – an aggregate reduction of barriers to trade of 8 percentage points would be broadly similar to the progress made in deepening integration over the past two decades (Chart 5, panel a).

6 Measuring trade barriers in services markets

The integration of EU services markets has also advanced gradually over the past decades. In 2005 intra-EU service trade costs were slightly higher than those affecting countries in the rest of the world. By 2023, intra-EU service trade costs were estimated to have fallen by approximately 7 percentage points (Chart 6a). The most rapid integration has taken place in financial services and in information and communication, where frictions fell by 10 and 9 percentage points respectively between 2005 and 2023. In contrast, progress has been slower in the wholesale and retail sectors, professional services and transport and construction-related services.

Chart 6

Estimated trade costs for the Single Market in services

a) Changes in barriers – tariff equivalent

(percentage points)

b) Estimated level of EU trade costs by sector – tariff equivalent in 2023

(percentages, percentage points)

Despite this progress, substantial frictions continue to impede cross-border trade in services. Chart 6, panel b) presents estimates of the level of trade costs in 2023, expressed as ad valorem tariff equivalents. Although gradual liberalisation has taken place over recent decades, significant obstacles remain – particularly in the construction sector, where trade costs are estimated to amount to a tariff exceeding 120%. On average, intra-EU trade costs approximate an ad valorem tariff of around 95% when compared to domestic trade. This implies that trading services across EU borders is almost twice as costly as trading within national borders.^[18]

The analysis also highlights untapped potential for further integration (Chart 6, panel b). Just as for goods, if taken in isolation, the estimates presented in the previous paragraph overstate the extent of barriers within the Single Market that can be reduced through policy reforms. A more realistic assessment of the untapped potential of the Single Market is provided by the benchmarking exercise. The empirical estimates again suggest that the Netherlands is the benchmark to assess the scope for deeper EU integration in services markets. This is broadly consistent with the indications provided by the OECD Service Trade Restrictiveness Index, which suggests that the Netherlands has a relatively low level of regulatory restrictiveness (Chart 4). The trade costs estimated for the benchmark remain well below the EU average. If other countries were to achieve similar levels of integration, the estimates suggest a reduction in trade costs of around 9 percentage points. As with the goods market, these estimates suggest there is scope for relatively substantial gains in integration if countries can reach this benchmark: a 9 percentage point reduction is similar to the decrease in barriers achieved in the past two decades.

7 Removing barriers to the Single Market: what is the economic impact?

To assess the potential economic gains from reducing barriers within the Single Market, we carry out model-based counterfactual simulations. The simulations are based on a computable general-equilibrium model of trade (Antràs and Chor, 2018), which captures how changes in trade costs affect the economy. The model considers several economic channels through which lower barriers influence trade and welfare. The substitution effect captures that, as cross-border trade becomes easier and cheaper across Europe, firms and consumers substitute more expensive domestically produced goods and services with cheaper imports from other EU countries. In addition, lower barriers lead to lower prices for intermediate and final goods, reducing production costs for firms and increasing real purchasing power for consumers. Together, these mechanisms raise overall efficiency, stimulate competition and expand market opportunities across Member States.

Reducing trade barriers within the Single Market, as identified in the benchmark exercises of the previous sections, could result in substantial long-term welfare gains, particularly in services. The analysis in Chart 7 evaluates the potential gains from closing the gap with the benchmark country in the goods and services markets. In practice, a counterfactual exercise evaluates the gains in terms of increased trade and welfare resulting from the reduction of trade barriers quantified in the benchmark exercise – 8 percentage points in goods and 9 percentage points in services within the EU. A reduction of barriers for goods would lead to an increase in intra-EU trade of 4.4% and estimated welfare gains of 1.3%. However, lower trade barriers for services would achieve a larger increase in trade (14.5%) and a larger welfare increase (1.8%). The higher gains from services reflect their significant potential for further integration (as services sectors face higher initial trade barriers). It also reflects the importance of services in the overall economy, as they represent a larger share of domestic expenditure and have downstream linkages. Therefore, a comparable cost reduction generates greater effective integration and broader general-equilibrium gains.

A modest reduction in Single Market barriers could compensate the likely trade losses from higher US tariffs. In the current geopolitical context, enhancing EU integration is especially important to mitigate the adverse effects of external trade tensions, such as those caused by recent US tariffs.^[19] The ECB staff projections estimated that higher tariffs and uncertainty would cumulatively lower GDP by around 0.7 percentage points over the period 2025 to 2027.^[20] Our simulation shows that achieving a reduction of just 2% in goods and services barriers within the Single Market could, in the long run, fully compensate for the projected impact on GDP of higher US tariffs. That would lead to an increase in intra-EU trade of around 3%. Of course, this would be unlikely to substitute for lost US trade immediately, as any structural adjustments within the Single Market would take time to materialise. Sustained regulatory, administrative and enforcement efforts would be required. Nonetheless, the estimates highlight the potential to take advantage of the vast size of the EU internal market. Trade within the EU accounts for more than half of total intra- and extra-euro area exports. Even a small increase in intra-EU trade could significantly offset external trade disruptions, demonstrating the economic potential of the Single Market.

Chart 7

Welfare effects of decreasing Single Market trade barriers

(percentage change effect of decreasing trade costs)

8 Conclusion

The Single Market is a vital asset for the European Union and its Member States, underpinning prosperity both within the EU and in its relations with the wider world. In the current context of elevated global uncertainty, the completion of the Single Market is more crucial than ever for advancing the EU’s principal agendas: improving living standards, enhancing resilience and competitiveness, building defence capabilities and achieving economic security.

This article helps to show the untapped potential of the Single Market. In line with earlier analyses, it estimates the evolution of trade costs within the Single Market using a gravity model framework, with frictions expressed in terms of their tariff-equivalent value. Those empirical estimates suggest that frictions to intra-EU trade remain elevated, with estimates suggesting a tariff equivalent (i.e. the higher costs of trading with other EU countries compared with trading domestically) of 67% for goods and 95% for services. However, as discussed, these figures capture a broad set of factors. Those include costs that could be addressed by policies (e.g. regulatory or administrative changes) but also factors for which it may not be feasible – or even desirable – to eliminate them by policy actions – for example, preferences, home bias and limited tradability. As a result, these estimates likely overstate the true magnitude of policy-induced barriers. As with similar studies in the literature, they are best interpreted as upper bounds for the trade frictions that can be reduced through policy action.

These findings underscore the considerable benefits for Member States in achieving greater integration. Benchmarking against an EU country that has already achieved relatively high integration – in these estimates the Netherlands – can provide a more realistic counterfactual that can demonstrate the potential for deepening EU integration. The analysis indicates that frictions could be further reduced by some 8 percentage points for goods and 9 percentage points for services if other countries were to achieve a similar degree of integration. That would represent substantial gains in integration, broadly similar to the progress made in deepening integration in goods and services markets over the past two decades. Model estimates suggest this could unlock significant economic potential, with estimated welfare gains of up to 1.3% for convergence in the goods sector and up to 1.8% in the service sector.

Moreover, the EU could derive even greater benefits from completing the Single Market and complementing it with growth-enhancing policies. The estimates of the untapped potential presented in this article are conservative, as they capture only the gains from all Member States reaching the degree of intra-EU trade achieved by the most integrated country. This falls short of the deeper integration that could be unlocked from the full potential of the Single Market and the implementation of Europe’s broader competitiveness agenda. As highlighted by Draghi (2024) and Letta (2024), achieving a truly unified market for services requires a very ambitious reduction of remaining regulatory and administrative barriers across Member States. The European Commission’s Single Market Strategy (2025b), which focuses on eliminating the ten most significant obstacles to the Single Market while revitalising the services sector and enhancing support for small and medium-sized enterprises, is a step in the right direction and deserves strong support.

Finally, further data collection on the precise nature and intensity of remaining barriers would be valuable. Based on more granular data, a deeper analysis of the existing barriers and their relative magnitude could be pursued. This would help to further inform the debate on specific measures.

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