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.
- short term shocks
- trade liberalization