Working Paper

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

Kiel Working Papers, 1570

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 policy does 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 relationship between

vulnerability and the degree of openness to trading partner

countries, and (ii) the lobbying of domestic, non-exporting

firms.

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JEL Classification
F11, F12, F16