A Passage to India: Quantifying Internal and External Barriers to Trade
65 Pages Posted: 3 Jan 2017
Date Written: 2016-12
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
Suggested Citation: Suggested Citation