Infant Industry Argument

Definition

The infant industry argument is an economic concept that justifies the temporary protection or subsidization of a domestic industry that is still in its early stages of development, in order to allow it to become competitive against more established foreign competitors. The goal is to nurture the industry until it can stand on its own without government support.

5 Must Know Facts For Your Next Test

1. The infant industry argument suggests that new, domestic industries need temporary protection from foreign competition in order to develop and become viable.
2. This protection can come in the form of tariffs, quotas, or subsidies, which increase the price or availability of imported goods relative to domestic products.
3. The goal is to allow the domestic industry time to achieve economies of scale, learn production techniques, and become more efficient before facing full international competition.
4. The infant industry argument is often used to justify protectionist trade policies, especially in developing countries seeking to build up their manufacturing capabilities.
5. Supporters argue that once the industry matures, the temporary protection can be removed, and the industry will be able to compete globally without assistance.

Review Questions

• Explain how the infant industry argument relates to the concept of protectionism.
  • The infant industry argument is a key justification for protectionist trade policies. It suggests that new, domestic industries need temporary protection from foreign competition in the form of tariffs, quotas, or subsidies in order to develop the scale, skills, and efficiency to eventually compete globally. Proponents argue that this short-term protection allows the domestic industry to mature and become viable, at which point the protectionist measures can be removed. In this way, the infant industry argument is used to support protectionist policies that shield emerging domestic industries from international competition.
• Describe how the infant industry argument challenges the principle of comparative advantage.
  • The infant industry argument challenges the economic principle of comparative advantage, which states that countries should specialize in producing goods where they have the lowest opportunity cost. The infant industry argument suggests that new, domestic industries may not have a current comparative advantage, but with temporary protection, they can develop the capabilities to eventually compete globally. This temporary protection allows the industry to become more efficient and overcome initial disadvantages, rather than specializing based on current comparative advantage. In this way, the infant industry argument justifies government intervention to build up domestic industries, even if they do not currently have a comparative advantage.
• Evaluate the long-term economic impacts of implementing the infant industry argument through protectionist trade policies.
  • While the infant industry argument provides a rationale for temporary protectionist policies, there are concerns about the long-term economic impacts. Protectionist measures can distort market signals, reduce competition, and lead to inefficient resource allocation. There is also a risk that once granted, the protection becomes entrenched and difficult to remove, even after the industry matures. Additionally, retaliatory trade barriers from other countries can spark trade wars that harm consumers and the broader economy. Ultimately, the success of the infant industry approach depends on the government's ability to correctly identify promising industries, provide the right incentives, and phase out protection at the appropriate time. Careful policy design and evaluation is required to balance the potential benefits of nurturing new industries against the long-term costs of protectionism.

Related terms

Protectionism: Protectionism refers to government policies that restrict or regulate international trade in order to protect domestic industries and jobs.

Comparative Advantage: Comparative advantage is the ability of a country to produce a particular good or service at a lower opportunity cost than another country.

Tariffs: Tariffs are taxes imposed on imported goods, designed to make domestic products more competitive.