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

In: International Trade and Economic Dynamics

Author

Listed:
  • Chi-Chur Chao

    (Chinese University of Hong Kong, Shatin)

  • Bharat R. Hazari

    (City University of Hong Kong, Kowloon)

  • Jean-Pierre Laffargue

    (University of Paris I and CEPREMAP)

  • S. H. Yu Eden

    (Chinese University of Hong Kong, Shatin)

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.

Suggested Citation

  • Chi-Chur Chao & Bharat R. Hazari & Jean-Pierre Laffargue & S. H. Yu Eden, 2009. "Is Free Trade Optimal for a Small Open Economy with Tourism?," Springer Books, in: Takashi Kamihigashi & Laixun Zhao (ed.), International Trade and Economic Dynamics, pages 49-62, Springer.
  • Handle: RePEc:spr:sprchp:978-3-540-78676-4_7
    DOI: 10.1007/978-3-540-78676-4_7
    as

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