Infant Industry Argument

An economic concept that justifies the imposition of trade barriers and tariffs on imports

The infant industry argument is an economic concept that justifies the imposition of trade barriers and tariffs on imports to protect upcoming industries in the domestic economy. It is trade protectionism, as it protects new industries from foreign competition.

The argument is based on the understanding that new and upcoming (known as infant industries) in the early stages of their development have not yet achieved economies of scale.

Infant industries are newly established industries that lack efficiency and competitiveness and are prone to sudden market changes.

On the other hand, similar industries in other countries may have existed for a long time and are much more developed. They are also more mature, stable, and have higher cash reserves. This gives them a latent comparative advantage over the domestic industry.

These foreign firms can produce lower-cost goods, benefiting from economies of scale. However, if these firms can sell their lower-priced goods in a domestic market, the infant industries may lose due to price competition.

This could force young firms out of the market and hinder further industry development.

To protect these industries from unfair foreign competition by multinational firms, governments choose to impose trade barriers on imports of specific goods in specific industries. 

Importance of restrictions

Fostering infant industries is often necessary when countries seek to develop and diversify their economies. 

Money

It becomes critical for a country to be self-reliant in leading sectors of national defense, technology, and production. Moreover, infant industries create employment in the domestic economy and contribute to higher economic growth.

The objective of trade barriers is to give domestic industries enough time to develop and achieve economies of scale to withstand foreign competition.

However, certain costs are also involved with the imposition of trade barriers. When foreign firms are not allowed to enter the domestic market, the choice of goods in the market is limited, and consumers are forced to buy more expensive domestic alternatives.

Newly formed industries produce them, but these goods may not match the quality of foreign goods. The imposition of protectionist measures adversely affects consumers and reduces their purchasing power. 

It is important to understand that in countries where governments are successful in fostering infant industries until they can compete with foreign firms, the long-term costs outweigh the short-term benefits to the economy. 

The argument was given by Alexander Hamilton in 1791, arguing for the protection of industries in the United States by regulation of imports from Great Britain. The argument was further formally refined and formulated by Friedrich List in 1841.

In his book, National System of Political Economy, List criticized Britain's advocacy of free trade policies with other countries, mentioning that Britain's supremacy in international trade resulted from high tariffs and government subsidies.  

Advantages and disadvantages

There are several advantages and disadvantages to protecting infant industries. A government must consider all factors before enforcing protection, as such measures are difficult and costly to remove.

Government

The advantages of enforcing trade barriers to protect infant industries are:

  • Domestic industries are protected from foreign competition and have a chance to mature and develop. This encourages domestic production.

  • It helps the economy diversify and become independent in the long run. This reduces a nation's reliance on imports and makes them competitive.

  • New industries create more employment opportunities for the domestic economy and contribute to economic growth.

  • By providing employment opportunities, they also increase the standard of living, income level, and domestic consumption of goods.

  • The duties and tariffs are a source of government revenue.

  • Barriers act as anti-dumping measures and prevent the influx of cheap imports into the domestic economy.

The disadvantages of protectionism are as follows: 

  • First, the lack of competition in the industry may lead to inefficiencies in the domestic industry as firms see no incentive to improve quality. 

Consumers with limited choices are forced to buy inferior quality goods at higher prices and may be exploited by producers.

  • Imposing restrictions on imports may result in retaliation from other countries. 

The foreign country may charge import duties on goods from the domestic country. This obstructs free trade and may even lead to a trade war.

  • The products of domestic producers are costlier than their foreign alternatives, but due to limited choice, consumers pay higher than the market price.

  • There is always an argument about which industries to protect. However, economists insist that only industries that can become viable and competitive in the future should be protected.

Even then, these measures are difficult to remove and continue to affect domestic economies.

  • In some cases, these measures prove inadequate to protect industries. For instance, subsidies on the automobile industry in Central Africa do not help in improving innovation due to several other influencing factors like lack of technology. 

Measures of protection

There are several measures a government may choose to protect an infant industry. The most common measures are as follows:

1. Tariffs

A tariff is a tax imposed by the government to increase the price of imports for domestic consumers. It is levied on the consumers and not the exporting country. The customs authority of a nation collects it.

By charging a tax on imports, governments aim to increase the price of foreign goods, bringing prices closer to that of domestic goods. This makes imports less attractive to domestic consumers in terms of price. 

This tax also prevents dumping by foreign countries and protects domestic producers from unfair price competition. 

It can be charged as a per-unit tax (specific tariff), a percentage of the total value of imports (ad valorem tariff), or both (compound tariff).

2. Import Quotas 

Import quotas are quantitative restrictions limiting the number of exports and imports into a nation. Quotas can be placed in specific industries, on specific goods, or for a specific period.

Governments usually do not impose restrictions on trade until the quota has been reached. These measures limit the involvement of countries in trade.

They are primarily used to manage or limit competition when governments do not wish to eliminate foreign competition.

3. Subsidies

Governments may protect infant industries by giving them grants or subsidies. These subsidies reduce production costs and give these industries a chance to compete with foreign players in terms of price.

Subsidies are often termed as a better alternative to tariffs as they are not prone to retaliation by other countries. However, subsidies are a significant part of government expenditure and burden taxpayers.

Similar to taxes, they can be granted per unit basis or as a total percentage of the value of goods produced.

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Researched and authored by Manya Bhardwaj LinkedIn

Reviewed and edited by James Fazeli-SinakiLinkedIn

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