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

Author Info

Listed author(s):
  • 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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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3207.

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Date of creation: 2010
Handle: RePEc:ces:ceswps:_3207
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More information through EDIRC

Keywords: protectionism; trade liberalization; short term shocks;

Other versions of this item:

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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  1. Andrew B. Bernard & Jonathan Eaton & J. Bradford Jensen & Samuel Kortum, 2003. "Plants and Productivity in International Trade," American Economic Review, American Economic Association, vol. 93(4), pages 1268-1290, September.
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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. Lechthaler, Wolfgang, 2016. "Protectionism in a liquidity trap," Economics Letters, Elsevier, vol. 145(C), pages 165-167.
  3. 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.
  4. 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.

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