Infant Industry Argument

Have you noticed that some of your local products have quickly thrived in the market while international products have vanished? Is this just a coincidence? Well, sometimes it is, but most of the time it is the government that assists domestic industries in capturing the market without having to compete with other international competitors. Want to discover how the government does this? Let's get directly into the infant industry argument article!

Infant Industry Argument Definition

Let's quickly review trade policies before diving into the infant industry argument definition. We know that trade policies are a collection of guidelines and agreements created by governments to facilitate equitable trade with other nations. The country's economic situation affects how trade policy is formulated. A developing nation may have a different trade policy than a developed nation. Ultimately, the basic objective of a trade policy of any country is to promote economic growth.

Since the beginning of the 20th century, the viewpoint on economic progress has developed. Following World War II, trade policies were developed under the assumption that protecting domestic manufacturers against imports was the fundamental factor to foster economic growth. The government used import quotas and higher import tariffs to shield specific industries from outside competition. As a result, the imported goods became expensive, enabling domestic goods to foster at a cheaper rate into the market. This type of policy formulated by the government is known as an import-substituting policy.

Now, let us directly jump into the infant industry argument definition.

The infant industry argument is an argument based on an import substitution strategy used to defend new domestic industries against international competitors. The government must take an active role in protecting domestic manufacturers from foreign competition by fostering favorable conditions for new sectors to grow. Some nations employ high import tariffs and import quotas as the first step in the industrialization process.

Infant Industry Theory

Now, let's get straight into the infant industry theory.

The infant industry theory is one of the most important theories of import-substituting industrialization. It argues that the infant industries of developing countries have a comparative advantage in manufacturing but are unable to compete with the well-established manufacturing industries of developed countries.

For the protection of manufacturing industries, the government formulates policies that help the infant industries foster without having much competition. The government will try to impose import quotas, put high tariffs on imports, and provide subsidies.

Fig. 1 - Infant Industry Theory

Figure 1 depicts the economy where import quotas have been employed. Initially, when there is no import quota, the supply is at S₁ and the import ranged from Q₁ to Q₄ (covering portions X, Y, and Z) at price level P. This gives less room for domestic manufacturers as the demand is being covered by imported goods.

Now, after the quota has been imposed, import is restricted down to the range of Q₂ to Q₃ covering portion Y) and increases the price to P₁, which gives domestic manufacturers more space to capture the market and earn a substantial profit. This is how government can impose import quotas and help infant industries grow.

Infant Industry Argument Example

Now, let us look at the infant industry argument example.

Infant Industry Argument for Protectionism

Now, let's dive deep into the infant industry argument for protectionism.

Going beyond government protection, sometimes other measures must also be taken to protect the infant industries. Two other arguments to protect the infant industries are:

1. Building strong capital markets
2. Appropriability argument

Infant Industry Argument for Protectionism: Building Strong Capital Markets

Building strong capital markets is one of the methods to protect the infant industry. A lack of proper financial institutions can limit the ability of the industry to grow and restrict its profits. For example, if there is no proper financial institution (bank), then it will be hard to facilitate the investment for the new industries (infant manufacturing industries) to operate and sustain seamlessly. Hence, to make sure the infant industries are not only protected but are supported at the same time, building strong capital markets is necessary.

Infant Industry Argument for Protectionism: Appropriability Argument

Infant Industry Argument Pros and Cons

Now, let us learn about the infant industry argument pros and cons to comprehensively understand the concept.

There are several advantages of the infant industry argument in a particular industry. If a government tries to adopt the infant industry argument concept then it will be able to protect its domestic industries from foreign competition by imposing high tariffs and import quotas. It further helps the economy to be independent and creates various job opportunities in the market. Ultimately, the nation can expect economic development by employing the infant industry argument.

Along with the advantages, there are several disadvantages of the infant industry argument. As the trade restrictions such as import quotas and high tariffs are imposed, it might affect the exports of other countries from which they were importing, hindering trade relations with the possibility of eventually leading to a trade war. Likewise, due to the lack of competition, the infant industries might become inefficient which can harm the economy. Lastly, sometimes the cost of manufacturing can be greater than the cost of importing. This can harm the economy, so proper assessment must be done before employing such economic decisions.