Past studies on the economic history of Taiwan have argued that the formation of a modern transportation system during the Japanese colonial era promoted market integration of the cities close to the north-south railway line. In this paper, we will explore further these issues focusing on how the non-station areas were integrated into the Taiwan economy. We find that: (1) local railway systems decreased trade costs and interregional price gaps between non-station areas and station areas, and non-station areas and non-station areas. (2) the formation of a modern transportation system including the north-south railway line and local railway systems increased interregional trade.