Working Paper

A Passage to India : Quantifying Internal and External Barriers to Trade

Abstract: This paper quantifies the size of internal versus external trade barriers and assesses the impact on trade and welfare. I develop a quantitative multi-sector international trade model featuring nonhomothetic preferences in which states trade both domestically and internationally. I discipline the model using rich micro data on price dispersion as well as foreign and domestic trade flows at the Indian state level. I find that (1) state-based price data predict internal trade flows well; (2) internal trade barriers make up 40% of the total trade cost on average, but vary substantially by state depending on the distance to the closest port; and (3) the welfare impacts of domestic integration are substantial: reducing trade barriers across states to the U.S. level increases welfare by more (13%) than fully eliminating international import barriers (7%).

Keywords: Internal Trade Barriers; External Trade Barriers; Welfare; India;

JEL Classification: F13; F14; O18; O24;

https://doi.org/10.17016/IFDP.2016.1185

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: International Finance Discussion Papers

Publication Date: 2016-12

Number: 1185

Pages: 65 pages