Revenue-neutral tariff reform and growth in a small open economy

Formulating a two-final-good, two-input, small open endogenous growth model, we analyze the growth effect of revenue-neutral tariff reform. We find that the growth effect of tariff reform depends on the pattern of trade and the elasticities of substitution between inputs and between consumption of final goods. When the economy specializes in the capital good, the revenue-neutral substitution of a tariff on the imported final good for a tariff on the foreign intermediate good always raises the growth rate. However, when the economy specializes in the consumption good, the revenue-neutral tariff reform may raise or lower the growth rate.