Infant-Industry Argument
Infant-Industry Argument
One of the oldest arguments for protection from imports was presented as early as 1792 by Alexander Hamilton. The logic of the infant-industry argument for protection is that although the initial output costs for an industry in a given country may be so high as to make it noncompetitive in world markets, over a period of time the costs will decrease to a level sufficient to achieve efficient production. Two factors account for the lowering of costs over time. The first one is economies of scale. Because of high fixed costs, a company may have to reach a certain level of output and sales to bring about a reduction of total unit costs to the level of the competition, assumed in this case to be foreign competition. The second one is the learning curve. Initial production may be costly because of the inexperience of workers and managers, but as they gain experience, their output will grow and the unit costs of production will decrease. Proponents of the infant-industry argument hold
that the domestic infant industry should be guaranteed a large share of the domestic market so that adulthood is ultimately reached.
While it is reasonable to expect costs to decrease over a period of time, they may not go down sufficiently. There are therefore some problems in using trade protection as a means of obtaining international competitiveness for a domestic industry. The first is the difficulty of identifying those industries that have a high probability of reaching adulthood. Examples of industries that grew to be competitive because of government protection are certainly available—automobile production in Brazil and Korea is a good example. In many other cases, however (e.g., automobile production in Argentina and Australia), the industries remain in an infantile state even after many years of operation. If infant-industry protection is given to an industry that does not reduce costs sufficiently, chances are that the owners, workers, and suppliers will constitute a formidable pressure group that may effectively prevent the import of a cheaper competitive product.
Even if policymakers can ascertain which industries are likely to reach productive adulthood, it does not necessarily follow that governmental assistance should be given to them. There are, of course, many examples of entrepreneurs who endured early losses in order to gain future benefits, and policymakers may argue that assistance should be given only if the entry barriers to new firms are very high. Some segment of the economy must absorb the higher cost of local production during infancy. Most likely the consumer will pay higher prices; however, a government may subsidize the industry so that consumer prices are not increased, in which case the taxpayer absorbs the burden. For the infant-industry argument to be fully viable, future benefits should exceed early costs.
The automobile-import case at the beginning of this chapter raises interesting questions about the infant-industry argument. We have all heard of second childhood, but is the automobile industry in the United States in its second infancy? Can this U.S. industry overcome some of its present disadvantages? Or does the automobile industry, like people, go around only once? In other words, has the absolute or comparative advantage shifted to other countries, thus precluding U.S. ability to compete effectively in the future? If efficiency can be achieved, who should incur the short-term costs: investors, taxpayers, or consumers?
One of the oldest arguments for protection from imports was presented as early as 1792 by Alexander Hamilton. The logic of the infant-industry argument for protection is that although the initial output costs for an industry in a given country may be so high as to make it noncompetitive in world markets, over a period of time the costs will decrease to a level sufficient to achieve efficient production. Two factors account for the lowering of costs over time. The first one is economies of scale. Because of high fixed costs, a company may have to reach a certain level of output and sales to bring about a reduction of total unit costs to the level of the competition, assumed in this case to be foreign competition. The second one is the learning curve. Initial production may be costly because of the inexperience of workers and managers, but as they gain experience, their output will grow and the unit costs of production will decrease. Proponents of the infant-industry argument hold
that the domestic infant industry should be guaranteed a large share of the domestic market so that adulthood is ultimately reached.
While it is reasonable to expect costs to decrease over a period of time, they may not go down sufficiently. There are therefore some problems in using trade protection as a means of obtaining international competitiveness for a domestic industry. The first is the difficulty of identifying those industries that have a high probability of reaching adulthood. Examples of industries that grew to be competitive because of government protection are certainly available—automobile production in Brazil and Korea is a good example. In many other cases, however (e.g., automobile production in Argentina and Australia), the industries remain in an infantile state even after many years of operation. If infant-industry protection is given to an industry that does not reduce costs sufficiently, chances are that the owners, workers, and suppliers will constitute a formidable pressure group that may effectively prevent the import of a cheaper competitive product.
Even if policymakers can ascertain which industries are likely to reach productive adulthood, it does not necessarily follow that governmental assistance should be given to them. There are, of course, many examples of entrepreneurs who endured early losses in order to gain future benefits, and policymakers may argue that assistance should be given only if the entry barriers to new firms are very high. Some segment of the economy must absorb the higher cost of local production during infancy. Most likely the consumer will pay higher prices; however, a government may subsidize the industry so that consumer prices are not increased, in which case the taxpayer absorbs the burden. For the infant-industry argument to be fully viable, future benefits should exceed early costs.
The automobile-import case at the beginning of this chapter raises interesting questions about the infant-industry argument. We have all heard of second childhood, but is the automobile industry in the United States in its second infancy? Can this U.S. industry overcome some of its present disadvantages? Or does the automobile industry, like people, go around only once? In other words, has the absolute or comparative advantage shifted to other countries, thus precluding U.S. ability to compete effectively in the future? If efficiency can be achieved, who should incur the short-term costs: investors, taxpayers, or consumers?
Comments
Post a Comment