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

65 Pages Posted: 3 Jan 2017  

Eva Van Leemput

Board of Governors of the Federal Reserve System

Date Written: 2016-12

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

Suggested Citation

Van Leemput, Eva, A Passage to India: Quantifying Internal and External Barriers to Trade (2016-12). FRB International Finance Discussion Paper No. 1185. Available at SSRN: https://ssrn.com/abstract=2882438 or http://dx.doi.org/10.17016/IFDP.2016.1185

Eva Van Leemput (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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