Do not buy American

Whenever a major bump on the road to economic prosperity is hit, say a Great Depression or a Great Recession, governments resort to protectionism. During the Great Depression, it happened with import tariff wars, and it took decades with GATT and WTO to undo the damage. In the current recession, resisted tariff hikes, but still called for buying local, especially for any stimulus money expenses. Does this work?

Mario Larch and Wolfgang Lechthaler say no it does not, but government cannot resist to the temptation. They do this by looking at a macro model (which can look at fluctuations, instead of a trade model (which can only look at steady states), in other words a model à la Ghironi and Melitz. Temporary protectionist measures heart both the domestic and foreign economies (in aggregate) because they shifts production from efficient foreign firms to inefficient domestic ones, and the domestic consumer faces thus higher prices. But domestic, non-trading firms gains, and if the economy is sufficiently closed or if those firms have a strong lobby, politicians will still favor such policies. Once again, do not leave politicians in charge of running an economy.