Infant Industry Argument

12 Key excerpts on "Infant Industry Argument"

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  Industrialization in Malaysia

  Import Substitution and Infant Industry Performance

  • Rokiah Alavi(Author)
  • 2006(Publication Date)
  • Taylor & Francis

    (Publisher)

  The framework of this chapter is set so as to explain each of these propositions in detail. Thus, we begin with a discussion of the theory regarding infant industry protection for a basic understanding of the argument. Then we explain the first, second and third propositions. All analysts agreed that if these three propositions are valid, then some form of assistance to the activity is warranted. Therefore we examine briefly various recommendations by different analysts as to what are the best policy tools in promoting infant industries.

  Infant Industry Argument: THE THEORY

  In theory, the Infant Industry Argument for protection is one of two exceptions allowed in classical economics for intervening in free trade; the other being the optimum tariff argument 1 (Johnson 1970). The gist of the Infant Industry Argument is that the present (static) cost of protection is accepted for the sake of future (dynamic) benefits, where under protection, the infant will experience faster productivity growth and could eventually compete in the domestic and world market (Weiss 1988). In other words, infant industry protection is a dynamic comparative advantage orientated policy (Schydlowsky 1984).

  The initial criterion for justifying protection for a firm or an industry is that there must be a gap between the average cost of production for domestic producers and that of world competitors. This gap is likely to be created by lack of experience, technological know-how and also by differences in the country’s history and stage of development. It has generally been assumed that new industries have little experience in terms of production techniques, management, marketing and other entrepreneurial expertise. These factors lead to inefficiency, and therefore new local producers are not able to compete with established and efficient world producers. Thus they are considered to be infants, relative to the grown-up, efficient and competitive industries in advanced industrial countries. The proponents of protection argue that if the industry were to be established, then it needs time and support to grow up under protection and gain the necessary experience to produce cost-efficiently.

  Hence, government intervention is necessary to allow local industries to compete with efficient and competitive producers from abroad. Protection will enable the local producers to reap the benefits of economies of scale in production resulting from a guaranteed domestic market. As output increases, scale economies would lead to declining costs of production and the industry to become efficient and competitive over time through learning by doing. Thus, the Infant Industry Argument rests on the promise of future productivity growth in the protected industries. This means that the industry must have positive and fast productivity growth over time.

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  International Trade and Economic Growth

  • Hendrik Van den Berg, Joshua J Lewer(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  Like all policies that target specific industries, the Infant Industry Argument also assumes that policy makers can accurately predict future comparative advantage. Krueger and Tuncer (1982) tested the Infant Industry Argument using data on India and Turkey, and they found no evidence that protection was in any way systematically related to firms that ultimately became competitive in international markets. Infant industry protection also raises the potential for foreign retaliation, especially by countries who have industries that currently enjoy the comparative advantage. World Trade Organization (WTO) rules do not permit government subsidies or protection to help domestic industries compete and gain world market share. If countries take a complaint to the WTO, it is likely to authorize countries to retaliate by restricting the import of products from the offending country.

  Despite all of the qualifications, however, it is nevertheless possible that there are individual firms or even whole sectors of an economy that qualify as infant industries . In developing economies the financial sector is often not well developed and unable to provide financing for long-term or large projects. Or, there may be external benefits from new industries that cannot be captured by the individual owners or the financial sector. Finally, governments may not have well-run tax systems that can cover the costs of direct subsidies to an infant industry; the indirect method of having consumers of imports effectively pay for the temporary cost of protection may be the most efficient way to bring a potentially profitable infant industry into existence. It should be clear, however, that the assumptions underlying the logic of the Infant Industry Argument are not general. The Infant Industry Argument applies to very special circumstances.

  7.5 Import Substitution Policies

  After World War II, many countries in Latin America, Africa, and Asia actively restricted international trade as part of what have come to be called import substitution

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  International Political Economy

  Perspectives on Global Power and Wealth

  • Jeffry A. Frieden, David A. Lake(Authors)
  • 2002(Publication Date)
  • Routledge

    (Publisher)

  promoting a domestic industry. Suppose an industry, already established in other countries, is being established in a specific country. The country might not be able to realize its comparative advantage in this industry because of the existing cost and other advantages of foreign firms. Initially, owners of the fledgling firm must be willing to suffer losses until the firm develops its market and lowers its production costs to the level of its foreign rivals. In order to assist this entrant, tariff protection can be used to shield the firm from some foreign competition.

  After this temporary period of protection, free trade should be restored; however, the removal of tariff protection frequently is resisted. As the industry develops, its political power to thwart opposing legislation also increases.

  Another problem with the Infant Industry Argument is that a tariff is not the best way to intervene. A production subsidy is superior to a tariff if the goal is to expand production. A subsidy will do this directly, while a tariff has the undesirable side effect of reducing consumption.

  In many cases, intervention might not be appropriate at all. If the infant industry is a good candidate for being competitive internationally, borrowing from the private capital markets can finance the expansion. Investors are willing to absorb losses temporarily if the prospects for future profits are sufficiently good.

  Spillover Effects

  The justification for protecting an industry, infant or otherwise, frequently entails a suggestion that the industry generates spillover benefits for other industries or individuals for which the industry is not compensated. Despite patent laws, one common suggestion is that certain industries are not fully compensated for their research and development expenditures. This argument is frequently directed toward technologically progressive industries where some firms can capture the results of other firms’ research and development simply by dismantling a product to see how it works.

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  Principles of Macroeconomics 3e

  • David Shapiro, Daniel MacDonald, Steven A. Greenlaw(Authors)
  • 2022(Publication Date)
  • Openstax

    (Publisher)

  Practices like child labor and forced labor are morally objectionable and many countries refuse to import products made using these practices. 21.3 Arguments in Support of Restricting Imports There are a number of arguments that support restricting imports. These arguments are based around 21 • Key Terms 525 industry and competition, environmental concerns, and issues of safety and security. The Infant Industry Argument for protectionism is that small domestic industries need to be temporarily nurtured and protected from foreign competition for a time so that they can grow into strong competitors. In some cases, notably in East Asia, this approach has worked. Often, however, the infant industries never grow up. On the other hand, arguments against dumping (which is setting prices below the cost of production to drive competitors out of the market), often simply seem to be a convenient excuse for imposing protectionism. Low-income countries typically have lower environmental standards than high-income countries because they are more worried about immediate basics such as food, education, and healthcare. However, except for a small number of extreme cases, shutting off trade seems unlikely to be an effective method of pursuing a cleaner environment. Finally, there are arguments involving safety and security. Under the rules of the World Trade Organization, countries are allowed to set whatever standards for product safety they wish, but the standards must be the same for domestic products as for imported products and there must be a scientific basis for the standard. The national interest argument for protectionism holds that it is unwise to import certain key products because if the nation becomes dependent on key imported supplies, it could be vulnerable to a cutoff. However, it is often wiser to stockpile resources and to use foreign supplies when available, rather than preemptively restricting foreign supplies so as not to become dependent on them.

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  A History of Economic Theory

  Essays in honour of Takashi Negishi

  • Aiko Ikeo, Heinz D. Kurz(Authors)
  • 2009(Publication Date)
  • Taylor & Francis

    (Publisher)

  Corden (1965: 62–5) was sympathetic to the argument for infant industry protection because he thought the critics like Kemp did not use models appropriate for underdeveloped countries. Corden kept emphasizing the importance of external economies expected to generate from protected infant industry. Corden (1974: 256–7) paid attention to the argument in Negishi (1968) and extended it by using the concept of the pecuniary external economies (producers’ and consumers’ surplus) which result from indivisibility or ‘lumpy’ investment in learning based on dynamic internal economies. Economists like Max Corden remain sympathetic to protectionist policies, although he admitted that he believed in free (freer) trade (Coleman 2006: 388). 17 In spite of the theoretical argument, we should admit several problems occurring in reality. It is true that Infant Industry Argument has been often abused, and that there is often a problem of implementation and a difficulty in ending the policy. The test for lifting the protection should be that if a protected industry develops to the point where it can compete in the world markets, as many have, it has grown up (Kindleberger 1958: 216–7). Several economists list negative examples. Kindleberger (1958: 216) suggested that the US pharmaceutical industry had operated on an export basis but behind a wall of protection after World War I. Anne O. Krueger and B. Tuncer (1982) made an empirical case study of Turkish protected industries and argued against infant industry protection (Krueger 1984). Yet the US has been the richest country in the world. Turkey is one of the 20 original members of OECD and should fall into the category of a developed country

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  Trade Regime and Economic Growth

  • Charles L Chanthunya, Victor Murinde(Authors)
  • 2019(Publication Date)
  • Taylor & Francis

    (Publisher)

  Consequently, too few industries become established. However, economic theory sees no case for infant industry protection. It argues that if a capital market exists and functions properly and if domestic producers have a correct view of the profitability o f investment, they will invest in the industry even without a tariff. It is, therefore, concluded that the existence of internal economies is not a sufficient reason for protection. Using the theory o f optimal intervention by Södersten (1980), it is argued that the best way o f dealing with the infant industry case is either the use o f a subsidy or a tax or both. But in developing countries capital markets are not well developed and governments rarely have enough financial resources to resort to the use o f subsidies so that protection o f infant industries may still be justified. All these qualifications have long been recognised by economists but the case for free trade has remained almost universally accepted. Economists have regarded these exceptions to free trade as interesting but unimportant and the economic risks o f trying to act on the exceptions have often been seen as out of all proportion to the likely costs, such as trade-policy retaliation by other countries and the danger that protection for infant industries would be captured by vested interests and extended through adolescence, adulthood and premature senility. However, the virtues o f free trade are now being challenged by a new body of economic theory and the case for free trade is now more in doubt than at 48 any time since the 1817 publication of Ricardo’s Principles of Political Economy.

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  Principles of Microeconomics 2e

  • Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
  • 2017(Publication Date)
  • Openstax

    (Publisher)

  For example, low wages and long working hours in poor countries are unpleasant to think about, but for people in low-income parts of the world, it may well be the best option open to them. Practices like child labor and forced labor are morally objectionable and many countries refuse to import products made using these practices. 20.3 Arguments in Support of Restricting Imports There are a number of arguments that support restricting imports. These arguments are based around industry and competition, environmental concerns, and issues of safety and security. The Infant Industry Argument for protectionism is that small domestic industries need to be temporarily nurtured and protected from foreign competition for a time so that they can grow into strong competitors. In some cases, notably in East Asia, this approach has worked. Often, however, the infant industries never grow up. On the other hand, arguments against dumping (which is setting prices below the cost of production to drive competitors out of the market), often simply seem to be a convenient excuse for imposing protectionism. Low-income countries typically have lower environmental standards than high-income countries because they are more worried about immediate basics such as food, education, and healthcare. However, except for a small number of extreme cases, shutting off trade seems unlikely to be an effective method of pursuing a cleaner environment. Finally, there are arguments involving safety and security. Under the rules of the World Trade Organization, countries are allowed to set whatever standards for product safety they wish, but the standards must be the same for domestic products as for imported products and there must be a scientific basis for the standard. The national interest argument for protectionism holds that it is unwise to import certain key products because if the nation becomes dependent on key imported supplies, it could be vulnerable to a cutoff.

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  Routledge Revivals: The Commerce of Nations (1923)

  • C.F. Bastable(Author)
  • 2016(Publication Date)
  • Taylor & Francis

    (Publisher)

  Chapter XIII Economic Arguments for Protection I N arranging the various pleas urged in favour of the protective system, it is desirable to take those that have had serious influence on policy and that possess real importance, before noticing contentions that rest on some exploded fallacy or appeal to vulgar prejudices. A system may fairly claim to be judged by its strongest positions. Taking this rule as our guide, we proceed to examine the more important of the arguments, some of which we have already noticed in considering the general features of protectionism. I. Protection aids Young Industries.—By far the most effective of the arguments used by the protectionists, as distinct from those surviving from the days before Adam Smith, is that which asserts that new industries stand in need of protection from foreign competition. We have seen (pp. 129-30) how it was employed by Hamilton, and in a wider sense by List. For a long period it was the standing plea of American protectionists; it has, moreover, received the qualified approval of J. B. Say and Mill, and is repeated in numerous German text-books of economics. Stated shortly, the argument is—The commencement of an industry is beset with difficulties which reach their maximum when the attempt has to be made in a country hitherto entirely destitute of anything resembling the particular form of production. The co-ordination of the various agents of production into an “establishment” or “factory” is a process requiring time, and not likely at first to be remunerative. Besides, in an occupation not previously known, the supply of labour suited for the industry is at first wanting. The enterprising manufacturer has to contend against this and similar obstacles; on the other hand, there is no assured market for the product. The weight of reputation and the advantages that organization and a ready supply of the requisite forms of labour and capital give are on the side of the older producers

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  The WTO and Infant Industry Promotion in Developing Countries

  Perspectives on the Chinese Large Civil Aircraft

  • Juan He(Author)
  • 2014(Publication Date)
  • Routledge

    (Publisher)

  1 The following sub-sections, however, reveal that this broad-based development strategy is actually at odds with the policy experiences of most of today’s advanced economies. For these early developed countries, the model for stimulating prioritized industries used to rest on a long list of regulatory incentives and institutional arrangements, rather than laissez faire policies. Generous and sustained public support was successful in setting off the growth period of many key infant industries, primarily in targeted manufacturing areas. Moreover, economies at a similar development stage had in place a series of policies which bore partial resemblance to one another. Such stimulating measures applied widely before the WTO came into existence, could be classified into three main groups: (1) import-substitution practices innovated by early industrialized countries while facing little multilateral constraint; (2) import substitution followed by Latin American countries which began to conflict ideologically with the liberalization rules of the GATT 1947; and (3) export promotion policies employed by East Asian emerging economies, as represented by South Korea and Taiwan, to realize the export potential of emerging local businesses.

  2.2 Import-substituting industrialization

  Import substitution is a long-established industrialization strategy which advocates the use of trade restrictions, predominantly tariffs and import quotas, to encourage the replacement of imports by local industries oriented towards a domestic market.2 The Infant Industry Argument constitutes the primary driving force for the rise of import-substitution industries in many early developed countries. In the history of trade policy theory, the concept of import substitution was formalized as late as the 1950s.3 In practice, it derived a rough skeleton from a much earlier time in the United Kingdom (UK). Starting from the fourteenth century, the country began to design and implement import-substitution policies when motivated by the enterprise of building up a local woollen industry. Starting from an agricultural economy, the government of the UK gradually regarded labour-intensive manufacturing as the focus of technologically advanced industry in that era. Its preferred policies included selectively high tariffs, taxing raw wool exports, poaching skilled workers from the more advanced Netherlands and Belgium and so on.4 Before the UK became the world’s dominant economic power in the late eighteenth century, the country had progressively established a group of basic manufacturing, including, inter alia, wool, cotton, iron and other metals, shipbuilding and fisheries, ‘behind high and long-lasting tariff barriers’.5 Its weighted average of industrial tariffs had long been maintained in a range between 45 per cent and 55 per cent until the 1820s, which thus ranked it the foremost protected economy among European nations.6

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  Free Trade In The World Economy

  Towards An Opening Of Markets

  • Herbert Giersch(Author)
  • 2019(Publication Date)
  • Routledge

    (Publisher)

  Unfortunately, other things are never equal. Let me take an example. Which of the many aspects of the Japanese economy can be given credit for Japan's high postwar growth rate? Presumably there has been a combination of factors, many of which have nothing to do with the trade regime. In any case, is Japan to be regarded as a high or a low protectionist country? In the first forty years after the Meiji Restoration, Japan was not permitted to impose (1) A survey of the new strategic literature can be found in Richardson [1986]. (2) The first-best argument for infant industry protection is normally for direct intervention, such as subsidies, and not for trade restrictions. A fuller analysis, with all the qualifications, is in Gorden [ 1974, Ch. 9]. It is shown there that the argument hinges primarily on capital market imperfections. 7 tariffs -but it did practise state initiative in industrial development. As protectionists tell one again and again, Japan's twentieth century history is certainly state-interventionist. Yet much of the intervention has not been conservative but in a direction signalled by the market, and may not have greatly altered the path of events. Furthermore, Japan is a large econ..,my -an area of internal free trade -and has prospered through world trade. In my own view, the historical evidence in Japan and elsewhere is in itself not conclusive, and certainly does not suggest that absolute free trade is essential for economic prosperity, but it is suggestive of the gains from trade and does not give support for the opposite position. Simple theory -in fact, common sense -justifies a qualified argument for free or nearly-free trade from a long-term point of view. The main qualification is still likely to be based on some kind of Infant Industry Argument and to apply mostly to developing countries. It follows that countries should avoid imposing wide-spread restrictions on trade.

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  Reclaiming Development in the World Trading System

  • Yong-Shik Lee(Author)
  • 2016(Publication Date)
  • Cambridge University Press

    (Publisher)

  In advocating state industrial support and trade measures for the development purpose, the general economic efficiency of free trade and the market economy is not refuted. The proposals advocate limited modifications of the open trading system to better facilitate the development of developing countries and do not suggest a change of this system otherwise. The argument highlighting the economic inefficiency of state industrial promotion is sensible from the perspective of a static economic model at a given point in time where state interventions (other than those to correct market failures), such as trade protections, may only cause welfare loss. 374 This initial welfare loss resulting from state industrial facilitation is only justified when govern- ment industrial facilitation leads to economic development that would produce greater economic welfare in the future. 375 There are some well- known objections to infant industry promotion, and a conclusion has already been made that infant industry promotion can facilitate devel- opment but does not necessarily guarantee it. 376 The pro-development provisions in the GATT, such as Article XVIII, are nevertheless based on infant industry promotion arguments. 377 In addition to the DFT proposal, another point should be made with respect to the import concessions under GATT Article II. 378 As paragraph 8 of GATT Article XXXVI indicates, 379 developing countries should be allowed the benefit of membership in the WTO without being required to confer reciprocal trade benefits in return for any concession offered 373 Trade restrictive effects of tariffs are generally considered less than those of quantitative restrictions. For the trade effects of tariffs and quantitative restrictions, see Salvatore (2003), supra note 81, chapters 8 and 9. 374 See ibid. for the general economic effects of trade measures. 375 See the relevant discussions in Section 1.4.2 supra.

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  Microeconomic Principles and Problems

  A Pluralist Introduction

  • Geoffrey Schneider(Author)
  • 2024(Publication Date)
  • Routledge

    (Publisher)

  Supply-side economists focus primarily on business profits, arguing that the government should work to give domestic companies advantages and disadvantage foreign competition, usually via tariffs. This was the approach taken during the Trump administration in the U.S. from 2017–2020. However, without the other types of support noted above, this approach had limited impact in rejuvenating U.S. manufacturing. Recently, these criticisms of unregulated trade and the theory of comparative advantage have gained traction, and in the last decade countries moved increasingly away from free trade. Most developed countries now utilize a significant degree of protectionism. 24.4 PROTECTIONISM: USING TARIFF AND NON-TARIFF BARRIERS TO PROTECT INDUSTRIES The main policies a country can use to protect specific industries are tariffs and quotas. A tariff is a tax on imported goods. An import quota is a limit on the quantity of a good that can be imported. Other policies a country can use to protect industries include subsidies and laws or regulations that prevent or impede trade. There are a number of reasons why a country may want to protect some of its industries: Infant industry protection: As noted above, one of the strongest reasons to protect an industry is to foster economic development. New industries usually need protection until they gain the size and experience necessary to compete at the international level. Strategic industry protection: Certain industries may be deemed so essential to a country’s interests that they cannot be entrusted to production in foreign locations. Typically, industries associated with national defense fall within this category. The United States has protected its steel, electronics, and metalworking industries for national defense reasons. Similarly, certain industries are essential for clusters of economic development. The U.S

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