The Infant-Industry Argument

New industries sometimes argue for temporary trade restrictions to help them get started. After a period of protection , the argument goes these industries will mature and be able to compete with foreign firms.

Similarly older industries sometimes argue that they need temporary protection to help them adjust to new conditions. For example in 2002, president Bush imposed temporary tariffs on imported steel. He said, I decided that imports were severely affecting our industry an important industry. The tariff which ended up lasting 20 month, would offer temporary relief so that the industry could restructure itself.

Economics are often skeptical about such claims. The primary reason is that the infant-industry argument is difficult to implement in practice. To apply protection successfully the government would need to decide which industries will eventually be profitable and decide whether the benefits of establishing will eventually be profitable and decide whether the benefits of establishing these industries exceed the costs to consumer of protection. Yet picking winners is extraordinarily difficult. It is made even more difficult by the political powerful. And once a powerful industries is protected from foreign competition the temporary policy is sometimes hard to remove.

In addition many economists are skeptical about the infant-industries argument even in principle. Suppose for instance that the Isolandian steel industry is young and unable to compete profitably against foreign rivals but there is reason to believe that the industry can be profitable in the long run. In this case the owners of the firms should be willing to incur temporary losses to obtain the eventual profits. Protection is not necessary for an industry to grow. Firms in various industries such as many internet firms today incur temporary losses in the hope of growing and becoming profitable in the future. And many of them succeed even without protection from foreign competition.

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