The infant industry argument is said to be an economic argument that favors a protectionist approach to trade. The basic argument is that when an industry develops, particularly in non-industrialized areas, it has specific disadvantages. It lacks what are called economies of scale, which are financial advantages accruing when an industry is big that help to lower costs. These advantages could include being able to purchase in bulk, get better loan rates, and allocate personnel resources more efficiently. Given this disadvantage, it’s thought by some economists that the best way to tackle the matter is by limiting importation of similar goods into the country, and this is usually addressed via a government that imposes tariffs (importation taxes) or limits, that make imported goods less attractive or available to consumers in the less industrialized country.
An example of how the infant industry argument might work helps to understand the proposed economic strategy. Country A decides to develop a quality vehicle, but the country is already flooded with imports from Country B that are cheap to buy. A few things must happen, according to this argument, to help Country A successfully develop its own vehicle. It has to find a way to get rid of access to Country B’s cars, or make them so unaffordable that most people won’t buy them.
One way to do this is to raise tariffs. The cars will still be imported but they’ll now be extremely expensive. This could create demand for a locally produced car that is cheaper. Another thing Country B could do is limit the number of cars that can be imported into the country. This means demand will exceed supply.
The implication of the infant industry argument as played out in this example is that Country A reduces trade with Country B. When countries restrict trade in a number of areas they may be protecting industry, but they’re also being anti-global. It’s argued by some economists that problems with the infant industry argument arise at this point.
In order to gain greater profits, eventually the market should expand from country to the globe. With harsh importation laws or tariffs in place, other countries may no longer be interested in trade. While an industry might develop sooner, its capacity to continue developing could be impaired over the long run.
The infant industry argument may impact trade significantly or very little. Usually, if a country is growing a new industry, they don’t want it to compete with well-established industries, and they might want specific trade protections that involve certain new industries. Usually in creating trade laws, countries may build in protections, or only trade in the areas that don’t affect these industries. Sometimes a country uses an infant industry argument to justify nearly complete protectionism, and will refuse to trade with most areas because their lack of economies of scale means never being able to become competitive on a world market.