Infant industry argument

The infant industry argument is an economic rationale for trade protectionism. 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.

Alexander Hamilton first codified the infant industry argument

Early articulations

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.[1] The argument was systematically developed by American political economist Daniel Raymond,[2] 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.[2]

List criticized Britain for advocating free trade to other countries given that Britain had obtained its economic supremacy through high tariffs and government subsidies: "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."[3]

1980s Brazil

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. 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. For example, 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.[4] In addition, countries that put up barriers to imports will often face retaliatory barriers to their exports, potentially hurting the same industries that infant industry protection is intended to help.

Recommendation to the UN

Ernesto Zedillo, in his 2000 report to the UN Secretary-General, 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".[5]

History of implementation

Many countries have successfully industrialized behind tariff barriers, including leading current advocates of neoliberal economics United States and Britain.[6] For example, from 1816 through 1945, tariffs in the United States were among the highest in the world.[2] According to Ha-Joon Chang, "almost all of today's rich countries used tariff protection and subsidies to develop their industries".[7] 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 failed 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.[8]

References
  1. Paul Bairoch, "Economics and World History: Myths and Paradoxes," (1995: University of Chicago Press, Chicago) p. 33
  2. Chang, Ha-Joon. "Kicking Away the Ladder: How the Economic and Intellectual Histories of Capitalism Have Been Re-Written to Justify Neo-Liberal Capitalism". Post-Autistic Economics Review. 4 September 2002: Issue 15, Article 3. Retrieved on 8 October 2008.
  3. Ha-Joon Chang, "Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism," (New York: Bloomsbury Publishing, 2008), p. 16
  4. Luzio, Eduardo (1996.) The microcomputer industry in Brazil: the case of a protected high-technology industry. Santa Barbara: Greenwood Publishing.
  5. Zedillo, Ernesto (2000.) Technical Report of the High-Level Panel on Financing for Development. New York: United Nations.
  6. Ha-Joon Chang, "Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism," (New York: Bloomsbury Publishing, 2008), p. 15
  7. Chang, Ha-Joon (2002.) Kicking Away the Ladder: Development Strategy in Historical Perspective. London: Anthem Press.
  8. Ha-Joon Chang, "Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism," (New York: Bloomsbury Publishing, 2008), p. 14
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