Infant Industry Argument Essay ⋆ Business Essay Examples ⋆ EssayEmpire

The infant industry argument is used by countries as an economic protectionist measure so that industries (primarily manufacturing) can be protected from other countries’ industries that can produce goods or services cheaper than the country enacting the measure. The measure was first argued in the United States by Alexander Hamilton, the country’s first Treasury secretary. Prior to the American Revolution, Britain had discouraged its colonies from developing their own industry so that Britain could benefit from its own mercantilism. Additionally, strong tariffs would raise capital for the new republic. Friedrich List (1856) used a similar argument in Germany to protect Germany against British industries. John Stuart Mill eventually went on to formalize the argument in economic terms.

The infant industry argument promotes protectionist measures using tariffs (for a predetermined time) on imported goods of the same type as a particular industry in the host country that has just begun producing those goods (hence the term infant). Since the industry is in its infancy, it has not had the opportunity to gain a learning curve in its mass production. Therefore, the argument assumes two things. First, the argument assumes that the industry’s leaders will gain a learning curve so that it will be able to match the price of incoming goods after a predetermined period of time. Second, inputs of the country using the infant industry argument (labor, materials, etc.) are the same or near the same as the other countries.

Several flaws in modern-day nation-state economic activity make the infant industry argument implausible, or at least unfair. First, the World Trade Organization (WTO) and regional trade agreements have sought to lower tariffs to increase free trade. Therefore, a country that seeks to use an infant industry argument and is a participant in these organizations could face retaliation by several countries and not just the country against which the first country enacted protectionist tariffs.

Next, the principles of comparative advantage are violated. All things being equal, it is not in a nation-state’s best interest to divert resources to an industry in which they have less efficiency or opportunity costs. If a nation-state follows comparative advantage principles, the resources that are being used inefficiently in the protected industry would be distributed to efficient industries (what the nation-state does better than other nation-states).

Also, in today’s global economic atmosphere, the cost of labor as an input (dollars/hour wages) in western Europe and the United States is not the same as developing nations such as China or India. In the mid to late 19th century, labor costs were comparable. Therefore, presently only less developed countries could ethically use this argument. Besides labor cost disparities, a country may have other resource inputs that are naturally higher than the country that currently produces the good at a lower cost. Once the tariffs are lifted, these inputs have a normal effect of making the product that is protected under the infant industry argument cost prohibitive in terms of opportunity costs.

Next, determining when the initial tariffs should be lifted becomes less an economic issue and more a political one for the country enacting the tariffs. The infant industry argument presupposes that the protective tariffs will be lifted when the industry is on an even footing with other nation-states’ industries and can meet domestic demand, as well as export these goods to other countries. When this “even footing” occurs remains open to debate. Also, the infant industry argument presupposes that the protected industry will continue to invest in the industry to keep up with other nation-states in the same industry. If the industry continually changes due to new investment, the protected industry may need tariff protection for many years. Furthermore, the argument is less clear when other entrants want to get into the industry after a few firms have been protected.

Finally, it is ethically unfair when trade does not occur naturally (“the invisible hand”) per Adam Smith. Related to comparative advantage and opportunity costs, resources and manufacturing should naturally flow to nation-states that can produce products most cheaply. The consumer should work with normal cycles of supply and demand to obtain a product at its equilibrium price.

Bibliography:

Kruger and B. Tuncer, “An Empirical Test of the Infant Industrial Argument,” American Economic Review (1982);
Phillip Saure, “Revisiting the Infant Industry Argument,” Journal of Development Economics (v.84/1, 2007);
C. Syrett, ed., The Papers of Alexander Hamilton (Columbia University Press, 1977);
Rüdiger Wolfrum, Peter-Tobias Stoll, and Michael Koebele, WTO— Trade Remedies (Martinus Nijhoff Pub, 2008).

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