The infant industry argument is an economic rationale for trade protectionism. [1] The core of the argument is that nascent industries often do not have the economies of scale that their older competitors from other countries may have, and thus need to be protected until they can attain similar economies of scale. The logic underpinning the argument is that trade protectionism is costly in the short run but leads to long-term benefits. [1]
The argument was first fully articulated by the first United States Secretary of the Treasury Alexander Hamilton in his 1790 Report on Manufactures. Hamilton professed that developing an industrial base in a country was impossible without protectionism because import duties are necessary to shelter domestic "infant industries" until they could achieve economies of scale. [2] The argument was systematically developed by American political economist Daniel Raymond, [3] and was later picked up by economist Friedrich List in his 1841 work The National System of Political Economy, following his exposure to the idea during his residence in the United States in the 1820s. [3] List criticized Britain for advocating free trade to other countries given that Britain had obtained its economic supremacy through high tariffs and government subsidies. List stated that "it is a very common clever device that when anyone has attained the summit of greatness, he kicks away the ladder by which he climbed up, in order to deprive others of the means of climbing up after him." [4]
Infant industry protection is controversial as a policy recommendation. As with the other economic rationales for protectionism, it is often abused by rent seeking interests. In addition, countries that put up trade barriers to imports often face retaliatory barriers to their exports, potentially hurting the same industries that infant industry protection is intended to help. Even when infant industry protection is well-intentioned, it is difficult for governments to know which industries they should protect; infant industries may never grow up relative to adult foreign competitors. During the 1980s Brazil enforced strict controls on the import of foreign computers in an effort to nurture its own infant computer industry. This industry never matured; the technological gap between Brazil and the rest of the world actually widened, while the protected industries merely copied low-end foreign computers and sold them at inflated prices. [5]
In his 2000 report to the UN Secretary-General, Ernesto Zedillo recommended "legitimising limited, time-bound protection for certain industries by countries in the early stages of industrialisation", arguing that "however misguided the old model of blanket protection intended to nurture import substitute industries, it would be a mistake to go to the other extreme and deny developing countries the opportunity of actively nurturing the development of an industrial sector". [6]
Many countries have successfully industrialized behind tariff barriers, including leading current advocates of neoliberal economics United States and Britain. [7] From 1816 through 1945, tariffs in the United States were among the highest in the world. [3] According to Ha-Joon Chang, "almost all of today's rich countries used tariff protection and subsidies to develop their industries". [8] A study of French cotton producers during the Napoleonic Wars found that regions which were protected from international trade with Britain due to blockades of British shipping, experienced greater growth in mechanized cotton output than regions which continued to have close trade with Britain. Canada developed its infant industries, while facilitating the settlement of the Canadian West through immigration and railway construction under the National Policy (1879–1950s) following an earlier experiment in free trade with the United States. South Korea and Taiwan are more recent examples of rapid industrialization and economic development with major government subsidies, foreign exchange controls, and high tariffs to protect selected industries. [9] [10] In Latin America, many countries have implemented economic policies which establish high tariffs and other barriers to international trade, [11] such as Brazil. [12] Many Latin American economists have contributed to the development of theories related to economic nationalism, which in turn promotes the protection of infant industries. [13]
A tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and policy that taxes foreign products to encourage or safeguard domestic industry. Protective tariffs are among the most widely used instruments of protectionism, along with import quotas and export quotas and other non-tariff barriers to trade.
Free trade is a trade policy that does not restrict imports or exports. In government, free trade is predominantly advocated by political parties that hold economically liberal positions, while economic nationalist and left-wing political parties generally support protectionism, the opposite of free trade.
Import substitution industrialization (ISI) is a trade and economic policy that advocates replacing foreign imports with domestic production. It is based on the premise that a country should attempt to reduce its foreign dependency through the local production of industrialized products. The term primarily refers to 20th-century development economics policies, but it has been advocated since the 18th century by economists such as Friedrich List and Alexander Hamilton.
Protectionism, sometimes referred to as trade protectionism, is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, and a variety of other government regulations. Proponents argue that protectionist policies shield the producers, businesses, and workers of the import-competing sector in the country from foreign competitors. Opponents argue that protectionist policies reduce trade, and adversely affect consumers in general as well as the producers and workers in export sectors, both in the country implementing protectionist policies and in the countries against which the protections are implemented.
An export in international trade is a good produced in one country that is sold into another country or a service provided in one country for a national or resident of another country. The seller of such goods or the service provider is an exporter; the foreign buyers is an importer. Services that figure in international trade include financial, accounting and other professional services, tourism, education as well as intellectual property rights.
The American School, also known as the National System, represents three different yet related constructs in politics, policy and philosophy. The policy existed from the 1790s to the 1970s, waxing and waning in actual degrees and details of implementation. Historian Michael Lind describes it as a coherent applied economic philosophy with logical and conceptual relationships with other economic ideas.
Trade barriers are government-induced restrictions on international trade. According to the theory of comparative advantage, trade barriers are detrimental to the world economy and decrease overall economic efficiency.
Non-tariff barriers to trade are trade barriers that restrict imports or exports of goods or services through mechanisms other than the simple imposition of tariffs. Such barriers are subject to controversy and debate, as they may comply with international rules on trade yet serve protectionist purposes.
Daniel Raymond (1786–1849) was the first important political economist to appear in the United States. He authored Thoughts on Political Economy (1820) and The Elements of Political Economy (1823).
International economics is concerned with the effects upon economic activity from international differences in productive resources and consumer preferences and the international institutions that affect them. It seeks to explain the patterns and consequences of transactions and interactions between the inhabitants of different countries, including trade, investment and transaction.
Export-oriented industrialization (EOI), sometimes called export substitution industrialization (ESI), export-led industrialization (ELI), or export-led growth, is a trade and economic policy aiming to speed up the industrialization process of a country by exporting goods for which the nation has a comparative advantage. Export-led growth implies opening domestic markets to foreign competition in exchange for market access in other countries.
Trade creation is an economic term related to international economics in which trade flows are redirected due to the formation of a free trade area or a customs union. The issue was firstly brought into discussion by Jacob Viner (1950), together with the trade diversion effect.
New trade theory (NTT) is a collection of economic models in international trade theory which focuses on the role of increasing returns to scale and network effects, which were originally developed in the late 1970s and early 1980s. The main motivation for the development of NTT was that, contrary to what traditional trade models would suggest, the majority of the world trade takes place between countries that are similar in terms of development, structure, and factor endowments.
In economics, an infant industry is a new industry, which in its early stages experiences relative difficulty or is absolutely incapable in competing with established competitors abroad.
Tariffs have historically served a key role in the trade policy of the United States. Their purpose was to generate revenue for the federal government and to allow for import substitution industrialization by acting as a protective barrier around infant industries. They also aimed to reduce the trade deficit and the pressure of foreign competition. Tariffs were one of the pillars of the American System that allowed the rapid development and industrialization of the United States. The United States pursued a protectionist policy from the beginning of the 19th century until the middle of the 20th century. Between 1861 and 1933, they had one of the highest average tariff rates on manufactured imports in the world. However American agricultural and industrial goods were cheaper than rival products and the tariff had an impact primarily on wool products. After 1942 the U.S. promoted worldwide free trade.
The American System was an economic plan that played an important role in American policy during the first half of the 19th century, rooted in the "American School" ideas of Alexander Hamilton.
Ha-Joon Chang is a South Korean economist and academic. Chang specialises in institutional economics and development, and has been lecturing in economics at the University of Cambridge from 1990-2021, before becoming professor of economics at the School of Oriental and African Studies (SOAS) in 2022. Chang is the author of several bestselling books on economics and development policy, most notably Kicking Away the Ladder: Development Strategy in Historical Perspective (2002). In 2013, Prospect magazine ranked Chang as one of the top 20 World Thinkers.
A Plan of the English Commerce: Being a Compleat Prospect of the Trade of This Nation, As Well the Home Trade As the Foreign is perhaps chief among Daniel Defoe's tracts dealing with economic issues. In it he argues that the employment of labour on the working up of domestic produce, particularly wool, would be the true path to prosperity.
Protectionism in the United States is protectionist economic policy that erects tariffs and other barriers on imported goods. In the US this policy was most prevalent in the 19th century. At that time it was mainly used to protect Northern industries and was opposed by Southern states that wanted free trade to expand cotton and other agricultural exports. Protectionist measures included tariffs and quotas on imported goods, along with subsidies and other means, to restrain the free movement of imported goods, thus encouraging local industry.
Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism is a book about economics written by Ha-Joon Chang, a South Korean institutional economist specializing in development economics. It criticizes mainstream economics of globalization and neo-liberalism. Chang claims that developed countries want developing countries to change their economic policy and open their markets. Rich and powerful governments and institutions are actually "Bad Samaritans"; their intentions may be worthy but their simplistic, free-market ideology and poor understanding of history leads them into policy errors.
