key term - Infant Industry

Definition

The infant industry concept refers to a newly established domestic industry that is unable to compete with more established foreign competitors. The idea is that these infant industries should be temporarily protected from foreign competition to allow them to develop and become self-sustaining.

5 Must Know Facts For Your Next Test

1. The infant industry argument is often used to justify temporary protectionist policies to support the development of new domestic industries.
2. Proponents argue that once the infant industry matures and becomes competitive, the protectionist measures can be removed.
3. Protecting infant industries may allow them to achieve economies of scale, learn production techniques, and innovate, leading to long-term benefits.
4. Critics argue that infant industry protection can lead to inefficiencies, lack of competition, and higher consumer prices in the long run.
5. The success of infant industry policies is heavily debated, with some historical examples of success (e.g., South Korea) and many examples of failure.

Review Questions

• Explain how the infant industry concept relates to the tradeoffs of trade policy.
  • The infant industry concept is closely tied to the tradeoffs of trade policy. Proponents argue that temporarily protecting new domestic industries from foreign competition allows them to develop and become self-sustaining, leading to long-term economic benefits. However, critics counter that such protectionist measures can result in inefficiencies, higher consumer prices, and a lack of competition in the long run. Policymakers must weigh the potential benefits of nurturing infant industries against the costs of protectionism to determine the optimal trade policy.
• Describe the relationship between the infant industry concept and the principle of comparative advantage.
  • The infant industry concept challenges the principle of comparative advantage, which states that countries should specialize in producing goods they can make most efficiently and trade for other goods. Proponents of the infant industry argument believe that temporary protectionist measures can help domestic industries overcome their initial disadvantages and eventually become competitive, even if they do not have a comparative advantage in the short term. This suggests that the optimal trade policy may involve a mix of protection and liberalization, rather than pure free trade based on comparative advantage.
• Evaluate the potential long-term consequences of implementing infant industry policies.
  • The long-term consequences of infant industry policies are heavily debated. Potential benefits include the development of new domestic industries, the achievement of economies of scale, and increased innovation. However, critics argue that such protectionist measures can lead to inefficiencies, higher consumer prices, and a lack of competition in the long run. Policymakers must carefully consider the tradeoffs and weigh the potential benefits against the costs to determine whether infant industry policies are justified. Successful implementation requires a clear exit strategy and the ability to remove protections once the infant industry has matured and become self-sustaining.

Related terms

Protectionism:

The economic policy of restricting imports from other countries through methods such as tariffs, quotas, or subsidies in order to protect domestic industries.

Comparative Advantage:

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

Tariff:

A tax or duty imposed on imported goods, designed to make the price of the imported good higher relative to the domestic good.