A passage to India: Quantifying internal and external barriers to trade

This paper quantifies the size of internal versus external trade barriers and assesses the trade and welfare impact. I develop a quantitative two-sector international trade model featuring nonhomothetic preferences in which Indian states trade both domestically and internationally. I discipline the model using rich data on price dispersion together with state-based foreign and domestic trade flows. I find that (1) internal trade barriers make up 40% of total trade barriers on average, but vary substantially by state depending on the distance to the closest port; and (2) reducing trade barriers across Indian states to the United States level increases welfare more (13%) than removing international import barriers (7%).