Infant industry argument

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The infant industry argument is an economic reason for protectionism. The crux of the argument is that nascent industries often do not have the economies of scale that their older competitors from other countries may have, and thus need to be protected until they can attain similar economies of scale. It was first used by Alexander Hamilton in 1790 and later by Friedrich List, in 1841, to support protection for German manufacturing against British industry.^[1]

Reasons for protectionism

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Protectionism allows an industry to develop until it is able to compete in international trade. History provides numerous examples of the benefits of protecting infant industries. In the 1830s the average tariff of the USA was 40%, the highest in the world, allowing the development of manufacturing industries until World War II when the manufacturing supremacy of the USA was absolute. More recently in 1939 Japan kicked out General Motors to protect Toyota which at the time was uncompetitive in the global market. The economic miracle of Taiwan has occurred with a state sector one and a half times the world average.^[2] Another good example is the agreement signed between EEC and Japan in July 1991. It put a temporary protection for big auto groups (until dec 31st,1999) in order to allow them to modernize and then be able to confront Japanese competition.^[3]

Reasons against protectionism

Infant industries are by definition those that are not strong enough to survive open competition – they are dependent on government subsidies and protectionism in order to survive. At a given point in time, protectionist policy, along with inefficient industries leads to higher prices and lower quality goods for the consumer than if the good or service produced by the industry was produced on the international market.

For these reasons the infant industry argument is often criticized. Firstly it is hard for government to know which industries will ultimately turn out to have growth potential. A lack of domestic capacity or unforeseen emergence of (even more superior) foreign rivals may, in fact, prohibit industries from becoming competitive in the long run. It is often the case that rather than developing or innovating, the protected industry becomes complacent, due to a lack of competition from the international market.

Since countries that put up barriers to imports will often face retaliatory barriers to exports, protectionism could hurt certain infant industries because the size of their potential market would be smaller.

References