An argument that carries both intellectual and emotional appeal to voters is the ‘infant-industry’ argument. The argument goes as follows: new ventures and sectors of the economy may require time before that can compete internationally: scale economies may be involved for example, and time may be required for producers to expand their scale of operation, at which time costs will have fallen to international (i.e. competitive) levels. In addition learning by doing may be critical in more high-tech sectors, and once again, with the passage of time costs should decline for this reason also.
There are two problems with this stance: first, is that these infants have insufficient incentive to grow up and become competitive; the second is why the private sector cannot invest sufficiently in promising young sectors. A protection measure that is initially intended to be temporary can become permanent because of the potential job losses associated with a cessation of the protection to an industry that fails to become internationally competitive. Furthermore, employees and managers in protected sectors have insufficient incentive to make their production competitive if they realize that their government will always be there to protect them. As for the need for protection rather than private sector investment: if the industry is such a good idea in the long run, society should begin by asking why private firms cannot borrow the money to see them through the early period when they are losing out to more efficient foreign firms. If private lenders are not prepared to invest or lend, should the government be willing to step in? Does the government know more than the private sector about long-term investment returns?
In contrast to the infant industry argument, economists are more favourable to restrictions that are aimed to prevent ‘dumping’. Dumping is a predatory practice, based on artificial costs aimed at driving out domestic producers.
Dumping is a predatory practice, based on
artificial costs aimed at driving out domestic producers.
Dumping may occur either because foreign suppliers choose to sell at artificially low prices (prices below their marginal cost for example), or because of surpluses in foreign markets resulting from oversupply. For example, if, as a result of price support in its own market, a foreign government induced oversupply in butter and it chose to sell such butter on world markets at a price well below the going (‘competitive’) world supply price, such a sale would be a case of dumping. Alternatively, an established foreign supplier might choose to enter our domestic market by selling its products at artificially low prices, with a view to driving domestic competition out of the domestic market. Having driven out the domestic competition it would then be in a position to raise prices. Such behaviour differs from a permanently lower price on the part of foreign suppliers. This latter may be welcomed as a gain from trade, whereas the former may generate no gains and serve only to displace domestic labour and capital.
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