Is free trade optimal for a small economy with tourism?

Book section: 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.

Author(s)

Jean-Pierre Laffargue, Chi-Chur Chao, Bharat R. Hazari, Eden S. H. Yu

Publisher(s)
  • Springer; Heilderberg
Scientific editor(s)
  • Takashi Kamihigashi & Laixun Zhao
Title of the work
  • International Trade and Economic Dynamics. Essays in Memory of Koji Shimomura
Date of publication
  • 2008
Keywords
  • Tourism
  • Optimal tariffs
  • Optimal investment taxes
Pages
  • 49-62
Version
  • 1