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Why "Buy American" is a Bad Idea but Politicians still Like it

Author Info

  • Mario Larch
  • Wolfgang Lechthaler

Abstract

When the world economy was recently hit by a severe recession, governments all over the world reacted by initiating stimulus packages. Some countries (among them, most notably, China and the US) tried to put special emphasis on their home industries by including “Buy local” clauses into the stimulus package. By analyzing the dynamics of transitory changes of trade barriers as a short-run response to an economic downturn, we show that beggar-thy-neighbor policies do not work. We then come up with two rationales that help to understand why countries nevertheless consider protectionism to be a good response to a recession: (i) the lobbying of domestic, non-exporting firms, and (ii) the relationship between vulnerability, the degree of openness and loss aversion of consumers.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2010/wp-cesifo-2010-10/cesifo1_wp3207.pdf
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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3207.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3207
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Keywords: protectionism; trade liberalization; short term shocks;

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Find related papers by JEL classification:
  • F11 - International Economics - - Trade - - - Neoclassical Models of Trade
  • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
  • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions

References listed on IDEAS
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Do not buy American
    by Economic Logician in Economic Logic on 2010-01-13 21:23:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
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Cited by:

  1. Larch, Mario & Lechthaler, Wolfgang, 2011. "Is there a short-run case for protectionism? Trade policy and the business cycle," Kiel Working Papers 1717, Kiel Institute for the World Economy (IfW).
  2. David R. DeRemer, 2015. "Opportunities for Cooperation in Removing Prohibitive Trade Barriers," IEHAS Discussion Papers 1533, Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences.
  3. Larch, Mario & Lechthaler, Wolfgang, 2013. "Buy National or Buy International? The optimal design of government spending in an open economy," International Review of Economics & Finance, Elsevier, vol. 26(C), pages 87-108.

This item is featured on the following reading lists or Wikipedia pages:

  1. Economic Logic blog

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