Case Study :
In his famous Report on Manufactures (1791), Alexander Hamilton proposed to
encourage the growth of manufacturing by protecting youthful industries from foreign
competition. According to this doctrine, which received the cautious support of freetrade
economists like John Stuart Mill and Alfred Marshall, there are lines of
production in which a country could have a comparative advantage if only they could
get started. Such “Infant industries” would not be able to weather the initial period of
start-up and experimentation if they had to face unprotected the sales of international
competition. With some temporary shelter, however, they might develop economies
of mass production, a pool of skilled labour, inventions well adapted to the local
economy, and the technological efficiency typical of many mature industries.
Although protection will raise prices to the consumer at first, the industry will be so
efficient once it has grown up that cost and price will actually fall. A tariff is justified if
the benefit to consumers at that later date would be more than enough to make up
for the higher prices during the period of protection. This argument must be weighed
cautiously. Historical studies have turned up some genuine cases of protected infant
industries that grew up to stand on their own feet, And studies of successful newly
industrialized countries (such as Singapore and Korea) show that they have often
protected their manufacturing industries from imports during the early stages of
industrialization. But the history of tariffs reveals even more contrary cases in which
perpetually protected infants have to shed their diapers after so many years.
(a) What exactly do you understand by the term ‘infant industry’?
(b) Analyse the infant industry argument for tariffs. What is its relation to
(c) In this age of liberalization and free trade, does the argument of infant industry
protection have any relevance? Is it possible for the governments to adopt
policy measures to support infant industries?
Thanx in advance...