Question

The infant industry argument for protectionism is based on which of the following views? a. Foreign buyers will absorb all of the output of domestic producers in a new industry. b. The growth of an industry that is new to a nation will be too rapid unless trade restrictions are imposed. c. Firms in a newly developing domestic industry will have difficulty growing if they face strong competition from established foreign firms. d. It is based on none of the above.

Short answer

The infant industry argument for protectionism is based on Option C: Firms in a newly developing domestic industry will have difficulty growing if they face strong competition from established foreign firms.

Step-by-step solution

Analyzing Option A

The infant industry argument for protectionism focuses on protecting new domestic industries from more established foreign competition. Option A, which mentions foreign buyers absorbing all of the output of domestic producers in a new industry, does not relate to the core idea of this argument. So, it is not the right answer.

Analyzing Option B

Option B suggests that the growth of a new industry will be too rapid unless trade restrictions are imposed. This idea is not consistent with the infant industry argument, which aims to protect fledgling industries from intense foreign competition so they can grow and become competitive. Thus, this option is not the correct answer either.

Analyzing Option C

Option C states that firms in a newly developing domestic industry will have difficulty growing if they face strong competition from established foreign firms. This view is in line with the infant industry argument, as it seeks to protect and nurture developing industries until they can compete with foreign rivals. So, this option could be the correct answer.

Analyzing Option D

Option D suggests that the infant industry argument has no basis in any of the given views. As we have found one option (C) that matches the principles of the infant industry argument, this option is not the correct answer.

Conclusion

After analyzing all the given options, we can conclude that the infant industry argument for protectionism is based on the view presented in Option C: Firms in a newly developing domestic industry will have difficulty growing if they face strong competition from established foreign firms.

Key concepts

Protectionism

Protectionism refers to 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. These measures are designed to shield domestic industries from foreign competitors by making imported goods more expensive and less attractive to consumers.

For instance, if the United States implements a tariff on steel imports, the import prices for steel will rise. This increase makes domestically produced steel more appealing price-wise to American buyers, thereby benefiting the US steel industry at the expense of foreign producers.

Supporters argue that protectionism helps to build up domestic industries, especially those that are new or struggling against established foreign rivals. This economic approach can also safeguard jobs within the country and foster national security by reducing dependence on imports.

Trade Restrictions

Trade restrictions are tools used by governments to control the amount and type of goods flowing into and out of a country to protect domestic markets. These restrictions can take many forms, including tariffs, quotas, embargoes, and standards that prohibit certain goods.

Tariffs, for example, are taxes imposed on imported goods. They increase the price of goods, protecting domestic producers who can offer similar products at lower prices. Conversely, quotas limit the quantity of a good that can be imported over a set period, which can help to avoid market saturation from overseas products.

Though these policies can promote domestic industry growth, they can also lead to retaliatory measures from trading partners and possibly initiate trade wars, which could harm the global economy.

Challenges to Domestic Growth

When a market lacks trade restrictions, domestic firms face significant challenges, as they must compete not only with each other but with more established and possibly more efficient foreign companies. This fierce competition can hamper the growth of domestic industries, particularly those just starting out or scaling up, which is why proponents of trade restrictions believe they are necessary.

Foreign Competition

Foreign competition refers to the competition that domestic companies face from foreign entities offering similar goods or services. This can drive innovation and lower prices for consumers but can also exert pressure on domestic companies that may not have the same economies of scale or access to cheap resources as their global competitors.

For newly established industries, commonly known as 'infant industries,' this type of competition can be particularly daunting. Without the economies of scale, brand recognition, or market penetration that established foreign competitors have, infant industries might find it difficult to survive, let alone thrive, with rivals that can produce goods more cheaply and efficiently.

The 'infant industry' argument suggests that temporary trade restrictions can help these burgeoning domestic sectors develop and eventually become competitive on the global stage, without the immediate existential threat posed by larger, established foreign competitors. Ideally, over time, these protections would be lifted as the domestic industry matures and gains the ability to compete in the global marketplace.