Abstract: Market segmentation has long been considered an important factor hindering trade development, and some studies even speculate that the transaction costs of domestic trade in China are higher than those of international trade. This article provides a positive answer to this question from the perspective of trade flow by jointly analyzing trade data from various countries around the world, Chinese customs data, and inter-provincial trade data from value-added tax statistics from 2003 to 2009. By using four classic gravity models and the spatial gravity model, it is robustly concluded that China's domestic trade is easier to conduct than international trade after excluding the influence of economic aggregate and geographical distance. Using the spatial gravity model, it is also found that with the development of the Chinese economy, the transaction costs of domestic trade have gradually decreased compared to international trade. The conclusion can be regarded as a direct rejection of the claim that China has excessively high domestic transaction costs. In recent years, China has continuously strengthened the construction of a unified national market. Therefore, there will be greater room for reducing domestic trade costs. However, there is still a long way to go in reducing trade costs and facilitating domestic trade significantly.
