Infant Industry Argument

Definition

The Infant Industry Argument contends that fledgling industries in developing economies require protection from international competition until they become mature and competitive. Advocates of this argument suggest that without state intervention, through mechanisms like tariffs or import duties, nascent industries may falter due to their inability to compete with established foreign entities. The concept is rooted in the belief that temporary protection will enable these industries to develop economies of scale, improve productivity, and ultimately thrive in the global market without government support.

Examples

South Korea’s Automotive Industry: During the 1960s and 1970s, South Korea implemented protective measures to support its infant automotive industry. As a result, companies like Hyundai and Kia grew, eventually becoming competitive global players.
United States Textile Industry: In the early 19th century, the U.S. implemented tariffs on imported textiles to protect its burgeoning textile industry from established British manufacturers.
Brazilian Computer Industry: In the 1980s, Brazil restricted imports of foreign computer technology to nourish its local IT sector, leading to the growth of companies like Positivo.

Frequently Asked Questions

Q: How long should protection for an infant industry last?
A: The duration of protection can vary, but it typically depends on the rate of growth and development of the industry. Continuing protection indefinitely is generally discouraged as it may foster inefficiency and complacency.

Q: What are the potential downsides of the Infant Industry Argument?
A: Potential downsides include fostering inefficiency, encouraging corruption, the difficulty of removing protections once established, and the potential for retaliatory measures from trade partners.

Q: How do tariffs help in protecting an infant industry?
A: Tariffs make imported goods more expensive, thus reducing foreign competition and giving domestic industries a price advantage, which can aid in their growth and development.

Tariff: A tax imposed on imported goods and services to restrict trade and raise government revenue.
Import Duty: A specific kind of tariff levied on imported goods to protect domestic industries and generate revenue.
Protectionism: A governmental policy to restrict international trade to help domestic industries by imposing tariffs, import quotas, and other regulatory measures.
Economies of Scale: Cost advantages attained by expanding the scale of production, which leads to a reduction in average costs.

Online References

Suggested Books for Further Studies

“Economics: Principles, Problems, and Policies” by Campbell McConnell, Stanley Brue, and Sean Flynn
“Principles of Economics” by N. Gregory Mankiw
“The Wealth of Nations” by Adam Smith
“Development as Freedom” by Amartya Sen
“Globalization and Its Discontents” by Joseph E. Stiglitz

Fundamentals of Infant Industry Argument: Economics Basics Quiz

### Why is the Infant Industry Argument used to justify trade protection measures? - [ ] To permanently keep out foreign competitors - [x] To allow new industries time to develop and become competitive - [ ] To maintain high national tariffs indefinitely - [ ] To promote international trade agreements > **Explanation:** The Infant Industry Argument proposes trade protection measures to allow new domestic industries sufficient time to grow and become competitive against established foreign firms. ### Which of the following is a common tool used to protect infant industries? - [x] Tariffs - [ ] Export subsidies - [ ] Free trade zones - [ ] Deregulation policies > **Explanation:** Tariffs are a common trade protection tool used to make imported goods more expensive and less competitive compared to domestic products, thus aiding the development of infant industries. ### What potential risk does prolonged protection of an infant industry pose? - [x] Inefficiency and lack of innovation - [ ] Improved international relations - [ ] Reduced government revenue - [ ] Increased foreign investment > **Explanation:** Prolonged protection can lead to inefficiency and lack of innovation as domestic industries may rely on the protection instead of striving to become competitive on their own. ### For an industry's protection under the Infant Industry Argument to be effective, it typically needs to be: - [x] Temporary and targeted - [ ] Permanent and across all sectors - [ ] Combined with currency devaluation - [ ] Exclusively for the export market > **Explanation:** Effective protection under the Infant Industry Argument should be temporary to allow growth without creating long-term dependency and targeted towards specific industries needing support. ### Tariffs used to protect infant industries primarily serve to: - [x] Increase the cost of foreign goods - [ ] Decrease the cost of domestic production - [ ] Lower domestic taxation rates - [ ] Enhance domestic labor mobility > **Explanation:** Tariffs increase the cost of foreign goods, making them less competitive compared to domestic products, thereby helping new domestic industries grow. ### What is a real-world example of a country using the Infant Industry Argument successfully? - [ ] The United Kingdom’s steel industry in the 21st century - [x] South Korea’s automotive industry in the 1960s and 1970s - [ ] Germany’s pharmaceutical industry in the 1990s - [ ] Australia’s mining industry in the early 2000s > **Explanation:** South Korea's use of protectionist measures in the 1960s and 1970s enabled its domestic automotive industry to grow and become globally competitive. ### Why might the removal of protective measures be challenging once they are established? - [ ] Reduced international trade relations - [ ] Legal restrictions in place - [x] Dependence of industries on protection, leading to political resistance - [ ] Lack of international trade agreements > **Explanation:** Once protective measures are established, industries can become dependent on them, and removing these measures might face strong political resistance from those benefiting. ### Which principle promotes scaling up production to reduce average costs? - [x] Economies of Scale - [ ] Comparative Advantage - [ ] Absolute Advantage - [ ] Market Equilibrium > **Explanation:** Economies of Scale refer to the cost advantage reaped by companies when production becomes efficient, as the scale of operation increases, leading to a reduction in average costs. ### A key assumption behind the Infant Industry Argument is that: - [x] New industries will eventually become competitive without protection - [ ] Domestic industries will always need protection from competition - [ ] Established industries need continuous support - [ ] Free trade is always beneficial in the long term > **Explanation:** The assumption is that new industries will eventually become competitive and self-sustaining, but need temporary protection to reach that stage. ### According to proponents of the Infant Industry Argument, what is necessary besides temporary protection for industry success? - [ ] Permanent tariff impositions - [ ] Isolation from global markets - [x] Development of infrastructure and innovation - [ ] Constant government oversight > **Explanation:** Successful temporary protection also requires concurrent development of infrastructure and innovation efforts to ensure industries can thrive independently in competitive markets.

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