Infant industry argument

To diversify the economy, developing economies could try to develop new, manufacturing industries. Heads of the G20 meeting in London on 2 April pledged "We will not repeat the historic mistakes of protectionism of previous eras". This gives new industries a chance to get established.

In some years prices are very high, in other years the prices are very low. A letter reprinted in the May edition of Econ Journal Watch identifies a similar sentiment against protectionism from 16 British economists at the beginning of the 20th century. In this case, it is good to diversify the economy.

Jump to navigation Jump to search Alexander Hamilton first codified the infant industry argument. May encourage firms to be inefficient from the start.

Once the industry has got used to tariff protection it may become politically difficult to remove because of vested interests. Chapter The Infant Industry Argument and Dynamic Comparative Advantage One of the most notable arguments for protection is known as the infant industry argument.

Infant-Industry Theory

Diagram of economies of scale Diagram showing how temporary tariff-protection can enable firm to expand and get lower averages costs where it will no longer need tariff protection Furthermore, it is argued many developed economies had a period of tariff protection, e.

A firm producing a similar product in less a developed country, on the other hand, would not have the same production technology available to it. As a result they are able to offer their product at a lower price in international markets and still remain profitable.

Tariffs may also be imposed on exports, and in an economy with floating exchange ratesexport tariffs have similar effects as import tariffs.

An Analytical Example Consider the market for a manufactured good such as textiles in a small less developed country. Over time, the new industries will become more efficient and benefit from economies of scale. Once the industry has got used to tariff protection it may become politically difficult to remove because of vested interests.

Export subsidies are often used by governments to increase exports. As incomes rise, demand for primary products increases only slowly. Some years will be very good, others very bad.

But correlation is not causation Mainstream economists instead support free trade. Thus, one of the reasons for protecting an infant industry is to stimulate the learning effects that will improve productive efficiency. In some years prices are very high, in other years the prices are very low.

On the other hand the infant industry argument is based on a dynamic theory of comparative advantage. Tariff rates usually vary according to the type of goods imported. It's workers and management would lack the experience and knowledge of its developed country rivals and thus would most likely produce the product less efficiently.

Preferential governmental spending, such as the Buy American Actfederal legislation which called upon the United States government to prefer US-made products in its purchases.

Which industries to choose.

infant industry argument

Many primary products have a volatile price because supply and demand are inelastic. Ernesto Zedilloin his report to the UN Secretary-Generalrecommended "legitimising limited, time-bound protection for certain industries by countries in the early stages of industrialisation", arguing that "however misguided the old model of blanket protection intended to nurture import substitute industries, it would be a mistake to go to the other extreme and deny developing countries the opportunity of actively nurturing the development of an industrial sector".

Infant Industry Theory

By the time that happened, the economy would be recovering, giving the impression that tariff cuts caused the crash and the reverse generated the recovery. Protection of these LDC firms, perhaps in the form of an import tariff, would raise the domestic price of the product and reduce imports from the rest of the world.

Although a wealthier country may be able to smooth income by effectively using insurance programs, a poor country might face severe problems, perhaps as severe as famine, in years when the prices of their comparative advantage goods are depressed.

Even when infant industry protection is well—intentioned, it is difficult for governments to know which industries they should protect; "infant" industries may never "grow up" relative to "adult" foreign competitors.

Which industries to choose.

The Infant Industry Argument and Dynamic Comparative Advantage

They have better information and knowledge about the production process, about market characteristics, about their own labor market, etc. At that time, the well-established British and other European products were familiar and sought by the U.

In some industries, they might have sped up development by a few years. For example, it could be argued the US was successful — despite high tariffs raising prices and discouraging competition. “ The way that certain companies are taking advantage of people is so unfair.

There needs to be strict laws about how industries are taking advantage. There should be many infant industry arguments that inform about these types of circumstances. Protectionism is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government hazemagmaroc.coments claim that protectionist policies shield the producers, businesses, and workers of the import-competing sector in the country from foreign competitors.

The infant industry argument is an economic rationale for trade protectionism. The core 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.

an industry vital to national security should be protected from foreign competition, to prevent dependence on imports that could be disrupted during wartime. The Infant-Industry Argument A new industry argues for temporary protection until it is mature and can compete with foreign firms.

The Infant Industry Argument and Dynamic Comparative Advantage One of the most notable arguments for protection is known as the infant industry argument.

The Infant Industry Argument

The argument claims that protection is warranted for small new firms especially in less developed countries. This paper identifies a flaw in the infant industry argument that previous literature has ignored.

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A simple model first replicates the infant industry logic but subsequently shows that, in the presence of a ‘traditional technology’ with poor growth potential, the infant-industry logic is likely to fail.

Infant industry argument
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