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Ethnic handicrafts are an important part of ethnic culture. A key problem faced by makers of these handicrafts is how to innovate in response to the development of cultural tourism. Tourism brings both opportunities and challenges for the innovation of ethnic handicrafts. This article addresses these issues from the perspective of both ethnic entrepreneurs and tourists. Based on a case study of Xinhua, a Bai ethnic village, it explores the impact of cultural tourism on the innovation of ethnic handicrafts. Facing the opportunities of tourist demand, Bai entrepreneurs have adopted an open and optimistic view toward the innovation of silver handicraft products. This innovation mainly involves the improvement of the productivity and development of modern design to meet the demand of mass domestic tourism. While the study has found that Bai ethnic craftspeople have a tradition of innovating their products to meet customers' needs, and that this flexible tradition is part of their heritage, this article still finds that there are concerns about the sustainability of Bai ethnic handicrafts in the face of a strong market force.