The infant industry argument is a rationale proposed by emerging sectors within an economy, advocating for temporary protective measures against international competition. The underlying premise is that nascent industries require time and support to develop the necessary capabilities to compete effectively on the global stage.
Protectionist Policies
Tariffs
One of the most common forms of protection in response to the infant industry argument is the imposition of a tariff, which is a tax on imported goods. Tariffs are designed to make foreign products more expensive and less attractive compared to domestic offerings.
The formula for calculating the tariff on an imported good can be represented as:
Import Duties
Similar to tariffs, import duties are another form of tax on imported goods, designed to protect local industries by increasing the cost of foreign products.
Historical Context
The infant industry argument has its roots in 18th and 19th century economic theory, prominently advocated by Alexander Hamilton in the United States and Friedrich List in Germany. Both economists emphasized the necessity of nurturing young industries until they could compete on a level playing field with established foreign competitors.
Applicability
Examples
United States: One of the earliest formal applications of the infant industry argument. In the late 1700s and early 1800s, the U.S. imposed tariffs to support emerging textile and manufacturing sectors.
South Korea: In the post-war period, South Korea applied protective measures to develop its automobile and electronics industries, leading to globally competitive companies like Hyundai and Samsung.
Special Considerations
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Time-Bound Protection: Protective measures should be temporary and gradually phased out to incentivize industries to become efficient without perpetual reliance on government support.
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Cost-Benefit Analysis: Governments must carefully weigh the benefits of protecting nascent industries against the potential costs, such as higher prices for consumers and retaliatory trade measures from other countries.
Comparisons
Infant Industry Argument vs. Free Trade
- Infant Industry Argument: Advocates temporary protection to allow industries to grow and achieve economies of scale.
- Free Trade: Promotes the unrestricted exchange of goods and services across borders, arguing that competition drives efficiency and innovation.
Related Terms
- Protectionism: Economic policies implemented to restrain trade between nations through various restrictions such as tariffs and quotas.
- Comparative Advantage: The ability of a country to produce goods or services at a lower opportunity cost than others.
- Economies of Scale: Cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output decreasing with increasing scale.
FAQs
What is the primary goal of the infant industry argument?
How long should industries be protected under this argument?
References
- Hamilton, Alexander. Report on Manufactures (1791)
- List, Friedrich. The National System of Political Economy (1841)
- Krugman, Paul. International Economics: Theory & Policy
Summary
The infant industry argument provides a compelling case for temporary protectionist measures to support young industries in developing economies. While such measures can help foster growth and competitiveness, they must be carefully managed to ensure they achieve their intended goals without leading to long-term economic inefficiencies. Understanding the historical context and potential pitfalls is crucial for policymakers aiming to implement tailored, effective industrial policies.
