Infant Industry Protection

Definition

Infant industry protection refers to the economic policy of shielding newly established industries from foreign competition through tariffs, subsidies, or other forms of government support. This protection aims to nurture these emerging sectors until they can compete on equal footing with established firms in the global market. The underlying idea is that new industries require time and resources to develop, which can be crucial for a country's economic growth and diversification.

5 Must Know Facts For Your Next Test

1. Infant industry protection is often justified on the grounds that new industries may initially lack the economies of scale needed to compete with established foreign competitors.
2. Critics argue that prolonged protection can lead to inefficiency and dependency on government support, preventing industries from becoming truly competitive.
3. Successful infant industry protection examples include South Korea's automotive industry and Brazil's aircraft manufacturing sector, which grew under protective measures.
4. The effectiveness of this protection often hinges on the government's ability to set a clear timeline for support and implement policies that encourage innovation and efficiency.
5. Global trade organizations often scrutinize infant industry protection measures, as they can conflict with free trade principles and international agreements.

Review Questions

• How does infant industry protection relate to the concept of economies of scale in newly established sectors?
  • Infant industry protection is closely tied to economies of scale because new industries often struggle to produce at a competitive cost due to lower production volumes. By implementing protective measures like tariffs or subsidies, governments can help these industries grow and achieve larger production levels over time. As these industries scale up their operations, they can lower their average costs and eventually compete with established foreign firms in the market.
• Discuss the potential negative impacts of maintaining infant industry protection for extended periods and how this could affect a nation's economy.
  • Maintaining infant industry protection for too long can lead to inefficiencies within protected industries as they may lack motivation to innovate or improve productivity without the pressure of competition. This reliance on government support can create a burden on taxpayers and result in misallocation of resources. Over time, these factors can slow down overall economic growth, as capital could be better utilized in more competitive sectors that drive innovation and efficiency.
• Evaluate the effectiveness of infant industry protection in fostering sustainable economic growth, considering both historical examples and potential future trends.
  • The effectiveness of infant industry protection in promoting sustainable economic growth can vary greatly depending on implementation and context. Historical examples like South Korea show how targeted protection can successfully nurture industries to become global leaders. However, challenges arise when protective measures create complacency or hinder competitiveness. Moving forward, countries must balance the need for temporary support with policies that promote innovation and adaptation to changing global markets, ensuring that protected industries do not remain stagnant but instead evolve towards competitiveness.

Related terms

Tariffs: Tariffs are taxes imposed by a government on imported goods, making foreign products more expensive and less competitive compared to domestic products.

Subsidies: Subsidies are financial assistance provided by the government to support businesses or sectors, making them more competitive in the market.

Comparative Advantage: Comparative advantage is the economic principle that countries should specialize in producing goods where they have a lower opportunity cost, thus maximizing efficiency and trade benefits.