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Infant Industries

25 April, 2016 - 09:12

One argument for trade barriers is that they serve as a kind of buffer to protect fledgling domestic industries.Initially, firms in a new industry may be too small to achieve significant economies of scale and could be clobbered by established firms in other countries. A new domestic industry with potential economies of scale is called an infant industry.

Consider the situation in which firms in a country are attempting to enter a new industry in which many large firms already exist in the international arena. The foreign firms have taken advantage of economies of scale and have therefore achieved relatively low levels of production costs. New firms, facing low levels of output and higher average costs, may find it difficult to compete. The infant industry argument suggests that by offering protection during an industry’s formative years, a tariff or quota may allow the new industry to develop and prosper.

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Figure 17.9 U.S. Tariff Rates, 1820–2005

Tariff rates on “dutiable imports” have fallen dramatically over the course of U.S. history.

Sources: Historical Statistics, Colonial Times to 1970; Statistical Abstract of the United States, 1998, Table no. 1325; Statistical Abstract of the United States, 1990; U.S. International Commission http://dataweb.usitc.gov/prepared_reports.asp).

The infant industry argument played a major role in tariff policy in the early years of U.S. development. Figure 17.9 shows average tariff rates on dutiable imports in the United States since 1820. The high tariffs of the early nineteenth century were typically justified as being necessary to allow U.S. firms to gain a competitive foothold in the world economy. As domestic industries became established, tariff rates fell. Subsequent increases in tariffs were a response in part to internal crises: the Civil War and the Great Depression. Tariff rates have fallen dramatically since 1930.

Critics of the infant industry argument say that once protection is in place, it may be very difficult to remove. Inefficient firms, they contend, may be able to survive for long periods under the umbrella of infant industry protection.