Is free trade optimal for a small economy with tourism?

Jean-Pierre Laffargue (), Chi-Chur Chao (), Bharat Hazari and Eden Yu
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Jean-Pierre Laffargue: CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement
Chi-Chur Chao: CUHK - The Chinese University of Hong Kong [Hong Kong]

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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 nontraded goods into tradable, 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: Tourism; Optimal tariffs; Optimal investment taxes (search for similar items in EconPapers)
Date: 2008
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Published in Takashi Kamihigashi & Laixun Zhao. International Trade and Economic Dynamics. Essays in Memory of Koji Shimomura, Springer; Heilderberg, pp.49-62, 2008

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Working Paper: Is free trade optimal for a small economy with tourism? (2008)
Working Paper: Is free trade optimal for a small economy with tourism? (2008)
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