A Passage to India: Quantifying Internal and External Barriers to Trade
How large are internal versus external trade barriers in India and how large are the welfare impacts of internal compared to external integration?
Eva Van Leemput
The author is a staff economist in the Division of International Finance, Board of Governors of
the Federal Reserve System, Washington, D.C. 20551 U.S.A.
Keywords: Internal Trade Barriers, External Trade Barriers, Welfare, India
DOI: https://doi.org/10.17016/IFDP.2016.1185
International barriers to trade
International barriers to trade, and the benefits from reducing them, have been both a policy and
research focus for decades. But recently, policy has focused more on domestic trade barriers
and their role in improving the economy. For example, in 2014, the World Bank increased their
financing commitments to roads, bridges, energy, and other infrastructure projects by 45%, to $24
billion, compared to 2013. However, the question remains whether domestic integration has a
larger effect on trade and welfare than reducing international trade barriers.
This paper quantitatively addresses two main questions: (1) how large are internal versus external trade barriers in India? and (2) how large are the welfare impacts of internal compared to
external integration? I contribute to the literature in two ways. First, whereas the literature has
mostly focused on estimating the impact of decreasing either internal or external trade barriers,
this paper quantifies both barriers in a unified framework and compares the welfare impacts of
relaxing them. Second, this framework allows for a richer deconstruction of different types of
internal trade barriers. With respect to foreign market access, I model an additional barrier–an
internal barrier of reaching an international port. With respect to domestic trade, the model deconstructs two types of trade barriers in India: across–state and rural–urban within state. Therefore,
as a secondary question I ask: does India have more to gain from better integrating regions across
or within states?
To map the model to the Indian economy, I combine two rich micro-level datasets: (1) the
State Movement/Flows of Goods and (2) the Foreign Trade Statistics for India. Together, they
detail good-specific trade flows bilaterally between Indian states and internationally between each
Indian state and the world. On the export side, it includes the state of origin, the destination for
cross–state trade, and the port of exit for international trade. For imports, it includes the state
of origin in the case of cross–state trade and the port of entry for international trade. These data
overcome two major common issues, namely, distinguishing domestic from international trade
flows and identifying the specific port of international trade.
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