Shadow Pricing Market Access: A Trade Benefit Function Approach

Abstract

Appropriate assessment of the social value of market access is at the core of a broad range of inquiries in trade research. A selection include: the appraisal of industry-level production and consumption distortions due to selective trade liberalization and partial tax reform; the construction of national-level quantity indicators of market access consistent with welfare change, and the use of international trade re-balancing as sanctions to discourage trade agreement violations, or as compensation in trade dispute settlement. In order to obtain shadow prices, we propose a new approach integrating the Luenberger bene t function and the directional output distance function. This yields a trade bene t function which represents trade preferences a la Meade in the context of a canonical general equilibrium model of trade. We rst show that our approach is in keeping with well-established and commonly used measurement techniques of trade welfare, for the standard trade expenditure function is in fact dual to the trade bene t function. We then show that this dual relation allows for a direct retrieval of the shadow values of net imports from the trade bene t function. The usefulness and operationality of our approach is then demonstrated in a series of applications and simulations.