Infant industry argument

Definition

The infant industry argument is an economic rationale for protecting emerging domestic industries from international competition until they become mature and competitive. This argument suggests that newly established industries may need temporary support through tariffs, subsidies, or other trade barriers to develop their capabilities and grow, ultimately leading to greater economic stability and innovation.

5 Must Know Facts For Your Next Test

1. The infant industry argument supports the idea that new industries often lack the economies of scale that established competitors enjoy, necessitating protection during their development phase.
2. Proponents argue that protecting these industries can lead to job creation and technological advancement within a country.
3. Critics of the infant industry argument point out that prolonged protection can lead to inefficiency and complacency among domestic producers.
4. Countries that have successfully implemented the infant industry argument include South Korea and Japan, particularly in their early stages of industrialization.
5. The effectiveness of this argument depends on proper government policies and the ability of industries to eventually compete globally without protection.

Review Questions

• How does the infant industry argument justify the use of trade barriers for emerging domestic industries?
  • The infant industry argument justifies trade barriers by asserting that new industries require protection from international competition to develop effectively. These barriers allow nascent firms to grow and gain experience without being overwhelmed by established foreign companies. The idea is that once these industries become competitive, they can contribute more significantly to the economy by creating jobs and fostering innovation.
• Evaluate the potential benefits and drawbacks of implementing the infant industry argument in a developing economy.
  • Implementing the infant industry argument in a developing economy can provide several benefits, including job creation, economic diversification, and technological advancement. However, it also carries drawbacks such as the risk of inefficiency among protected firms and a dependency on government support. If not managed properly, prolonged protection could stifle competition and innovation, ultimately harming long-term economic growth.
• Analyze how historical examples of countries applying the infant industry argument illustrate its successes and failures in economic development.
  • Historical examples like South Korea and Japan demonstrate both the successes and challenges associated with the infant industry argument. In these cases, targeted protection allowed these nations to develop strong domestic sectors in technology and manufacturing. However, these examples also highlight potential failures where industries became overly reliant on government support, leading to inefficiencies. Analyzing these outcomes shows that while the infant industry argument can foster growth, it must be coupled with strategic policy measures to ensure sustainable competitiveness in the global market.

Related terms

Protectionism:

An economic policy that restricts imports through tariffs, quotas, or other regulations to protect domestic industries from foreign competition.

Trade Barriers: Government-imposed restrictions on the free exchange of goods and services between countries, often used to protect domestic industries.

Subsidies: Financial assistance provided by the government to support a specific industry, reducing costs and encouraging growth.