Infant Industry Protection

Definition

Infant industry protection refers to the policy of temporarily shielding a newly established domestic industry from foreign competition through the use of trade barriers, such as tariffs or quotas. The goal is to allow the domestic industry time to grow and become more competitive before facing the full force of international competition.

5 Must Know Facts For Your Next Test

1. Infant industry protection is often justified as a way to help domestic industries overcome initial disadvantages and become more competitive in the long run.
2. The theory behind infant industry protection is that new industries may require temporary shielding from foreign competition to allow them to develop economies of scale and learn production techniques.
3. Proponents argue that once the domestic industry has matured, the trade barriers can be removed, and the industry will be able to compete effectively in the global market.
4. Critics of infant industry protection argue that it can lead to inefficiencies, higher consumer prices, and the potential for rent-seeking behavior by protected industries.
5. The effectiveness of infant industry protection has been debated, with some historical examples of successful implementation (e.g., the development of the U.S. steel industry) and others of failure (e.g., the Indian automotive industry).

Review Questions

• Explain the rationale behind the infant industry protection policy and how it is intended to benefit domestic industries.
  • The rationale behind infant industry protection is that newly established domestic industries often face significant disadvantages compared to their more established foreign competitors. These disadvantages can include lack of economies of scale, less developed production techniques, and limited access to capital and technology. Infant industry protection aims to temporarily shield these domestic industries from foreign competition through the use of trade barriers like tariffs or quotas. The goal is to allow the domestic industry time to grow, develop economies of scale, and become more competitive before facing the full force of international competition. Proponents argue that once the industry has matured, the trade barriers can be removed, and the industry will be able to compete effectively in the global market.
• Discuss the potential drawbacks and criticisms of the infant industry protection policy.
  • Critics of infant industry protection argue that it can lead to several potential drawbacks. First, the policy can result in inefficiencies, as protected industries may lack the incentive to innovate and improve productivity. Second, the higher consumer prices resulting from trade barriers can harm domestic consumers and reduce their overall welfare. Third, there is the potential for rent-seeking behavior, where protected industries lobby the government to maintain or even increase trade barriers, rather than focusing on improving their competitiveness. Finally, the effectiveness of infant industry protection has been debated, with some historical examples of successful implementation and others of failure, depending on the specific industry and economic conditions.
• Evaluate the potential long-term impact of infant industry protection on a country's economic development and international trade relationships.
  • The long-term impact of infant industry protection on a country's economic development and international trade relationships can be complex and multifaceted. On the one hand, if the policy is successful in helping a domestic industry overcome initial disadvantages and become more competitive, it can contribute to the country's overall economic development by creating jobs, increasing exports, and reducing reliance on imports. This can strengthen the country's position in international trade and potentially lead to the development of new comparative advantages. However, the prolonged use of trade barriers can also lead to retaliatory measures from trading partners, strained diplomatic relationships, and the potential for global trade conflicts. Additionally, if the protected industries fail to become competitive, the policy can result in a misallocation of resources and a drag on the country's economic growth. Ultimately, the long-term impact will depend on the specific circumstances, the duration and effectiveness of the protection, and the country's ability to transition towards more open and competitive markets over time.

Related terms

Tariff: A tax or duty imposed on imported goods, intended to make domestic products more price-competitive.

Quota: A limit on the quantity or value of a good that can be imported over a given period of time.

Comparative Advantage:

The ability of a country to produce a good more efficiently than another country, leading to specialization and trade.