Question

Discuss the infant industry argument for a tariff on imports.

Short answer

The infant industry argument supports using tariffs to protect new industries temporarily so they can grow and compete globally. However, there are potential downsides, including inefficiencies and dependency on protection.

Step-by-step solution

Understanding the Infant Industry Argument

The infant industry argument is an economic rationale for protecting young or emerging domestic industries from foreign competition. The idea is that these industries need temporary protection to develop and become competitive in the global market.

Explaining Tariffs as Protective Measures

A tariff is a tax imposed on imported goods and services. It can serve as a protective measure by making foreign products more expensive and less competitive compared to domestic products. In the context of the infant industry argument, tariffs can help nascent industries grow without being overwhelmed by established foreign competitors.

Analyzing Benefits of Protection

Supporters claim that tariffs can benefit infant industries by allowing them to achieve economies of scale, invest in innovation, and improve the skills of the domestic workforce. This temporary advantage is expected to lead to long-term competitiveness.

Considering Potential Downsides

Critics argue that tariffs may lead to inefficiencies, increased costs for consumers, and possible retaliation from trade partners. Without a clear timeline or criteria for removing these protections, industries may become dependent on them and fail to become truly competitive.

Evaluating Conditions for Effective Implementation

To be effective, the protection should be time-bound with clear criteria or benchmarks for phasing out. The government should aim for industries with potential for international competitiveness and closely monitor progress to avoid prolonged protectionism.

Key concepts

Tariff on Imports

A tariff is essentially a tax levied on imported goods as they enter a country. This tax makes imported products more expensive than their domestic counterparts. The goal of tariffs, in the context of the infant industry argument, is to create a buffer for developing industries that may not yet be able to compete with established foreign companies.

By increasing the cost of imports, tariffs can make domestic products more appealing to consumers. This allows emerging local businesses the chance to grow and stabilize without being overwhelmed by international competition. While tariffs provide a protective measure, it's important for economies to use them wisely to avoid long-term dependence on such measures.

Economic Protectionism

Economic protectionism refers to the measures taken by governments to shield their domestic industries from the pressures of international competition. The infant industry argument is a form of economic protectionism, oriented towards providing temporary support to young industries.

Forms of protectionism include:

• Tariffs
• Quotas
• Subsidies
• Regulations

Protectionism aims to nurture domestic industries until they are mature enough to withstand global competition. However, there is always a delicate balance to maintain. Overprotecting industries can lead to inefficiencies and higher prices for consumers. Hence, such strategies should be implemented with a clear plan for phasing out once industries reach a competitive level.

Economies of Scale

Economies of scale refer to the cost advantages that industries obtain due to their scale of operations. As production increases, the cost per unit decreases. For infant industries, achieving economies of scale is a crucial step towards becoming competitive.

When tariffs protect these developing industries from larger, more established competitors, they can increase production. This helps them reduce costs through:

• Improved production techniques
• Bulk purchasing of materials
• More efficient use of resources

Realizing these efficiencies allows industries to lower their prices, making them more competitive both domestically and internationally. The end goal is for them to eventually compete globally without needing protection.

Domestic Industry Development

Domestic industry development is the process through which local industries grow and mature to the point where they can self-sustain and compete internationally. The goal of tariffs in this context is to establish a nurturing environment for young industries.

For instance, governments may invest in:

• Workforce training and development
• Research and innovation
• Infrastructure improvements

Such initiatives help industries reach the level of development needed to thrive. However, it is vital to set benchmarks and timelines for progress to ensure industries do not remain reliant on protectionist measures permanently.