Is Free Trade Optimal for a Small Open Economy with Tourism?

Chi-Chur Chao, Bharat Hazari, Jean-Pierre Laffargue and S. H. Yu Eden ()
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Chi-Chur Chao: Chinese University of Hong Kong, Shatin
Jean-Pierre Laffargue: University of Paris I and CEPREMAP
S. H. Yu Eden: Chinese University of Hong Kong, Shatin

A chapter in International Trade and Economic Dynamics, 2009, pp 49-62 from Springer

Abstract: We explore the welfare effects of tariffs and investment taxes for a small open economy in the presence of tourism. Inbound tourism converts local non-traded goods into tradeable, generating a tourism terms-of-trade effect. Because of this favourable “expenditure-shifting” effect when goods are substitutes, increases in import tariffs and investment taxes can actually improve welfare of domestic residents. We establish that for a small open economy with tourism, free trade is not the first-best policy. The optimal rates of tariffs and investment taxes are then derived and simulated for the economy with tourism.

Keywords: Free Trade; Relative Price; Welfare Effect; Foreign Capital; Small Open Economy (search for similar items in EconPapers)
Date: 2009
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-540-78676-4_7

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DOI: 10.1007/978-3-540-78676-4_7

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