Protection and trade liberalization under incomplete market integration

Using a general equilibrium analytical approach, we derive guidance principles on three shadow price problems related to a lack of market integration. Then, we apply these principles to the partial equilibrium framework of the PAM and discuss the applicability, or lack thereof, using Chinese agricultural and food market examples. The informational requirement for the shadow price of nontraded commodities is daunting, requiring estimates of price responses and actual taxes. We doubt that these can be addressed in a partial equilibrium framework. Hence, an AGE model may be required to estimate these shadow prices correctly. The results on pure intermediate goods and domestic factors are more promising. The domestic factor case in particular does not require more information than what the PAM framework requires. Therefore, in sum, the message of this paper is mixed. Estimation of the shadow price of domestic factors and intermediate goods could be improved at moderate cost, but this is probably not the case for estimating the price of nontraded final goods. Biases in ERP and DRC can be readily addressed by reorganizing the same information in alternative ratios.