The Gains from International and Intranational Trade

I study the implications of both international and intranational trade for welfare and the distribution of economic activity across sectors and regions within a country, as well as the relative importance of the underlying economic mechanisms, using a quantitative spatial general equilibrium model calibrated to the Brazilian economy. I find that the welfare gains from intranational trade (15.6%) are 4 times as large as those from international trade (3.9%). In the absence of labor migration within the country, the regional welfare gains from intranational trade (7.9%–33.9%) are 2.1 to 29.7 times as large as those from international trade (1%–6.5%). International trade reallocates economic activity from remote and less developed regions toward resource-rich areas, more developed coastal regions, and the free trade zone, without significantly affecting the spatial concentration of economic activity. In contrast, intranational trade induces a considerably larger reallocation, away from the more developed coastal regions, making economic activity more geographically dispersed. The sectoral reallocation associated with intranational trade is substantially smaller than that associated with international trade, and the implications of the two types of trade for the sectoral composition of the economy are markedly different. The extent to which labor can move across regions within the country has dramatic implications for the spatial distribution of the welfare gains from trade, but a small impact on the aggregate welfare effects. Sectoral linkages explain approximately half of the welfare gains and up to half of the spatial reallocation of economic activity associated with trade. The impact of trade on the sectoral composition of the economy depends crucially on how sectors relate to each other.