The infant industry argument states that developing countries are justified to put tariffs on imports if they are seeking to develop new industries and diversify their economy.
Many developing economies have a comparative advantage in producing primary products (minerals, agriculture). However, in the long-term producing these goods have certain disadvantages.
- Low-income elasticity of demand. As incomes rise, demand for primary products increases only slowly. Therefore relying on primary products limits economic development.
- Price volatility. Many primary products have a volatile price because supply and demand are inelastic. In this case, it is good to diversify the economy.
To diversify the economy, they could try to develop new, manufacturing industries. However, in the beginning, they may struggle to compete against foreign rivals. Therefore, tariffs help provide a domestic market for the new firms. This gives new industries a chance to get established. Over time, the new industries will become more efficient and benefit from economies of scale. At this time the tariffs can then be reduced.
Many developed economies had a period of tariff protection, e.g. Great Britain, US, Germany and, in recent times, South East Asian economies.
The infant industry argument is an important justification for tariffs at certain stages in economic development.
Economists and the Infant Industry Argument
Friedrich List, The National System of Political Economy (1841) argued that protectionism could be justified for an economy trying to develop new manufacturing industries. He argued countries like Great Britain, who used protectionist policies then later tried to insist on pure free trade – were “kicking away the ladder” for poorer countries.
Ha-Joon Chan, Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (2008) makes similar arguments, updating the arguments on free trade and arguing there has been a similar situation with developed countries keener to promote free trade deals, once they have benefitted from protectionism.
Criticisms of Infant industry argument
Although many developed countries used tariffs in their period of economic development, this does not mean per-se – tariffs were the reason for development. For example, it could be argued the US was successful – despite high tariffs raising prices and discouraging competition. A stronger argument to justify US economic success are factors, such as high levels of literacy, entrepreneurial spirit, access to raw materials, mass immigration and relatively stable political situation.
Other countries, such as India and China have experienced different outcomes. During periods of inward looking protectionist policies, their economic growth was weak. However, with trade liberalisation, their infant industries have been exposed to more competition and this has helped economic growth.
GATT did allow developing countries scope for developing selected industries. Many tried win 1950s and 1960s with varying degrees of success.