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

Résumé

This paper quantifies the size of intra-country versus inter-country trade barriers and assesses the impact on patterns of trade and welfare. I develop a quantitative multi-sector international trade model featuring non-homothetic preferences in which states trade both within country and internationally. I discipline the model using rich micro data on foreign and domestic trade flows at the Indian state level and price dispersion both within and across states. I find that: (1) state-wise price data predict internal trade flows well; (2) internal trade barriers make up 30% 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 costs across states to the U.S. level increases welfare by 15% compared to a welfare gain of 7% when fully eliminating international import barriers.