What can we say about the role of infant-industry protection? I have never been fully convinced by either side. To argue otherwise is to suppose that economic performance would have been still more exceptional with less intervention which is simply less plausible than the converse. They have better information and knowledge about the production process, about market characteristics, about their own labor market, etc. As incomes rise, demand for primary products increases only slowly. As a result they are able to offer their product at a lower price in international markets and still remain profitable. Thus trade associations can develop the necessary infrastructure, even when tariffs cannot. I'm not sure where I come down.
During periods of inward-looking protectionist policies, their economic growth was weak. Determining the correct industries, tariff level and time period is not a simple matter. 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. Unlike sales tax, however, tariff rates often vary depending on the good or service and do not apply to domestic goods, only imports coming into the domestic industry. With affordable foreign goods on the market, infant industries may complain they have no way to compete. One common criticism is that protectionism only works if the domestic firms are well-run and if other government laws allow for sustained growth. One counter-argument to this theory is that by protecting infant industries, countries are not allocating resources in the short-run on the basis of comparative advantage.
Using protective tariffs and adds cost for the foreign competitor process, and while it may give the infant industry a chance to get started, it also tends to disrupt the of production and pricing as the industry grows. Producers however face a new supply curve that generates producer surplus of +E at the original free trade price. Many countries have successfully industrialized behind tariff barriers. Note however, that relative to an import tariff that generates the same level of domestic production, the subsidy is less costly in the aggregate. A newscaster from the United States had visited this small village and met a furniture maker. They need to know which industries have strong learning effects associated with production and which industries are most likely to generate learning spillover effects to other industries. The reason for the discrepancy in policy prescriptions can easily be seen by noting the difference between static comparative advantage and dynamic comparative advantage.
Recall that in the initial years, even the Soviet Union was a success story. In nations with growing economies, infant industries develop in response to perceived economic opportunities. 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. The infant industry argument relies on a dynamic view of the world rather than the static description used in classical trade models. Protection allows an infant industry to flourish and develop so that it can catch up with competitors.
It lacks what are called economies of scale, which are financial advantages accruing when an industry is big that help to lower costs. Second, the government has much better prospects for contributing positively to growth when the economy is small and just initiating the process of development. This is most frequently used when foreign maturity is thought to be due to a trade secret and suffers the same deadweight loss as a tariff. An infant industry is a new industry that is in the process of developing. Essentially this strategy is just an application of the infant industry argument.
Mature industries versus infant industries have three types of knowledge that give them a competitive edge. The Ricardian and Heckscher-Ohlin models of trade show that resources will be allocated most efficiently if countries produce those goods in which the before-trade prices are lower than in the rest of the world. At that price consumers would demand D 1 but the domestic supply curve is too high to warrant any production. Several flaws in modern-day nation-state economic activity make the infant industry argument implausible, or at least unfair. These arguments are some of the most compelling for protectionism.
Additionally, other countries may respond by instituting their own. Where the market is willing to pay more for trained workers, the workers themselves will invest in higher education and training to compete for the higher wages. In addition many people argue that the management and organizational skills necessary to produce agricultural goods and natural resources are not the same as the skills and knowledge needed to build an industrial economy. The domestic consumer price would remain at P 1 so demand would remain at D 1. This is the case then where domestic producers simply could not produce the product cheaply enough to compete with firms in the rest of the world. If the payback is not large enough to justify the cost of the loan, although a tariff will certainly help the business owner get his trade secret without any cost to him, the cost of the tariff is diversified across all of society. 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.
A few things must happen, according to this argument, to help Country A successfully develop its own vehicle. We will use the same supply and demand conditions as in the original example. Although protection may be detrimental to national welfare in the short run, it is conceivable that the positive dynamic long run effects will more than outweigh the short-run or static effects. The domestic supply and demand curves are given by D and S respectively. Although some segments of the population benefit, there remains a production efficiency loss.
I grew up amongst my father's work at the alongside , , , and other great research fellows there. It is a net loss for the company willing to take the risk, no matter how much profit is gained from tariffs protecting them from foreigners. This means that in the second period free trade again prevails. After all, the tariff keeps the price high and allows even relatively inefficient production to produce profits for the domestic firms. In other words, over time workers and managers from the protected industries may establish firms or take jobs in other sectors of the economy. If political pressures are brought to bear whenever the tariffs are scheduled to be reduced or removed, industry representatives might convince legislators that more time is needed to guarantee the intended efficiency improvements.