What Is Infant Industries?
Infant industries refer to newly established industries in a country that are in their nascent stages of development and thus lack the experience, infrastructure, and economies of scale to compete effectively with mature, established foreign competitors. This concept falls under the broader umbrella of industrial policy and trade policy, often serving as a rationale for government intervention to foster specific sectors. The core idea behind protecting an infant industry is that, given temporary support, it can grow to become competitive in the global domestic market and contribute significantly to national economic growth.
History and Origin
The concept of protecting nascent domestic industries gained prominence in the late 18th and early 19th centuries, notably articulated by American statesman Alexander Hamilton. As the first U.S. Secretary of the Treasury, Hamilton laid out his vision for American economic independence in his seminal "Report on the Subject of Manufactures" in December 1791. He argued that newly forming American manufacturing sectors required protection from the more advanced European industries, particularly those in Britain, to allow them to develop and mature4. Hamilton advocated for government support through measures like tariffs and subsidies to nurture these emerging industries.
Later, the German economist Friedrich List systematically developed the infant industry argument in his 1841 work, "The National System of Political Economy," based on his observations of industrial development in the United States and Germany. List emphasized the importance of a nation's productive capacity over immediate gains from free trade, asserting that temporary protection was crucial for developing national industries to achieve competitive standing against established foreign firms.
Key Takeaways
- Infant industries are new or developing sectors that require temporary protection to grow and become internationally competitive.
- The primary justification for protecting an infant industry is to allow it to achieve economies of scale and efficiency.
- Protection typically involves trade barriers such as tariffs, import quotas, or direct government subsidies.
- The argument suggests that short-term costs (higher consumer prices, reduced choice) are outweighed by long-term benefits (economic growth, employment, national security).
- A key challenge is identifying which infant industries have genuine potential and ensuring that protective measures are temporary.
Interpreting the Infant Industries
The infant industry argument posits that a new industry, despite having long-run potential for competitive advantage, may not be able to survive initial competition from more mature foreign rivals without temporary government support. This is because established foreign industries benefit from existing economies of scale, extensive distribution networks, and accumulated experience, which newer domestic firms lack. By shielding an infant industry, policymakers aim to give it a "breathing room" to develop its production capabilities, reduce costs, and build a customer base.
The success of such policies often hinges on the government's ability to pick the right industries and implement appropriate, time-bound protective measures. The goal is to allow the infant industry to reach a point where it can operate efficiently at market equilibrium without artificial support and contribute to the nation's overall economic growth and welfare.
Hypothetical Example
Consider a hypothetical developing country, "Agraria," which traditionally relies on importing all its consumer electronics. The government of Agraria decides it wants to foster a domestic smartphone manufacturing industry to create jobs and reduce reliance on imports. Initially, Agraria's nascent smartphone manufacturers face significant challenges. They lack the sophisticated supply chain networks, skilled labor, and production efficiency of global giants like "Techlandia" and "Innovatia."
To protect this infant industry, Agraria's government imposes a 25% tariff on all imported smartphones and offers subsidies to domestic producers for research and development. This raises the price of imported phones, making Agraria-made phones more competitive in the local market despite their initially higher production costs and potentially lower quality. The protection allows Agraria's smartphone industry to capture a larger share of the domestic market, invest in new factories, train workers, and gradually improve its production processes. The hope is that after a predefined period, say 10 years, these tariffs can be reduced or eliminated as the Agrarian smartphone manufacturers achieve economies of scale and can compete globally without protection.
Practical Applications
The infant industry argument has been applied in various forms of industrial policy throughout history, especially in developing economies seeking to diversify their industrial base. Governments may use tariffs, quotas, direct subsidies, tax breaks, or preferential government procurement to support these emerging sectors. Historically, countries like the United States, Germany, and Japan used such policies during their early stages of industrialization. More recently, some developing countries have employed similar strategies to build competitive industries in areas like automotive manufacturing, steel production, or renewable energy.
However, the application of such policies is often scrutinized by international trade bodies. For instance, the World Trade Organization (WTO) regulates the use of subsidies through its Agreement on Subsidies and Countervailing Measures (SCM Agreement), distinguishing between prohibited and actionable subsidies to prevent unfair trade advantages3. The OECD also regularly analyzes and discusses the role and impact of industrial policy in its member countries, noting a recent "return of industrial policies" aimed at addressing global challenges like the green transition and supply chain robustness2.
Limitations and Criticisms
Despite its theoretical appeal, the infant industry argument faces significant limitations and criticisms. A primary concern is that protected infant industries may never "grow up" and become competitive, instead becoming perpetually reliant on government support. This can lead to inefficiencies, stifle innovation, and result in higher prices and limited choices for consumers in the domestic market. Economists Anne Krueger and Tuncer Baran, for example, found no consistent empirical evidence that protected industries in Turkey experienced faster productivity growth than unprotected ones.
Another criticism revolves around the practical difficulty for governments to "pick winners" – identifying which new industries genuinely have the potential to succeed and which will simply become drains on public resources. Political influence and lobbying can lead to protection being granted to industries that lack long-term viability or to an extension of protection beyond what is economically justified, creating rent-seeking behavior. 1Furthermore, protectionist measures can invite retaliatory actions from other countries, potentially harming a nation's overall international trade and the very industries they intend to help. Critics argue that relying on comparative advantage and market forces, possibly combined with targeted investments in education and infrastructure, often leads to more sustainable economic growth than direct protection.
Infant Industries vs. Protectionism
While the concept of infant industries often involves protectionism, the two terms are not synonymous. Protectionism is a broad economic policy that seeks to restrain international trade between countries through methods such as tariffs on imported goods, restrictive quotas, and other government regulations. Its aims can vary widely, including protecting domestic jobs, safeguarding national security, or responding to perceived unfair trade practices.
The infant industry argument is a specific rationale or justification for employing protectionist measures. It argues that protectionism, in this particular context, is a temporary tool applied to a young industry to help it overcome initial disadvantages and eventually compete globally. In contrast, general protectionism can be permanent and applied to mature industries for various reasons, sometimes leading to reduced competition and overall economic inefficiency.
FAQs
What is the main goal of protecting an infant industry?
The primary goal is to nurture a newly established domestic industry by shielding it from fierce international competition until it matures, achieves economies of scale, and becomes efficient enough to compete globally without government support.
How do governments typically protect infant industries?
Governments often use tools such as tariffs (taxes on imports), import quotas (limits on the quantity of imports), or direct subsidies to domestic firms. These measures aim to make foreign goods more expensive or less available, thereby giving the infant industry a competitive edge in the domestic market.
Is the infant industry argument always successful?
No. The argument has faced significant criticism because protected industries may not develop the expected efficiency or competitiveness, becoming permanently dependent on protection. There's also the challenge of governments effectively choosing which industries to protect and ensuring that the protection is temporary and not subject to political manipulation.
What are the potential drawbacks of infant industry protection?
Drawbacks include higher prices for consumers, reduced product choice, potential retaliation from trading partners, and the risk that the protected industry becomes inefficient or fails to innovate due to a lack of genuine competition.