Infant industry argument

Alexander Hamilton first codified the infant industry argument.

The infant industry argument is an economic rationale for trade protectionism. The core of the argument is that nascent industries often do not have the economies of scale that their older competitors from other countries may have, and thus need to be protected until they can attain similar economies of scale. The argument was first fully articulated by Alexander Hamilton in his 1790 Report on Manufactures, was systematically developed by Daniel Raymond,^[1] and was later picked up by Friedrich List in his 1841 work The National System of Political Economy, following his exposure to the idea during his residence in the United States in the 1820s.^[1]

Many countries have successfully industrialized behind tariff barriers. For example, from 1816 through 1945, tariffs in the USA were among the highest in the world.^[1] According to Ha-Joon Chang, "Almost all of today’s rich countries used tariff protection and subsidies to develop their industries."^[2]

Despite this, infant industry protection is controversial as a policy recommendation. As with the other economic rationales for protectionism, it is often abused by rent seeking interests. Even when infant industry protection is well–intentioned, it is difficult for governments to know which industries they should protect; "infant" industries may never "grow up" relative to "adult" foreign competitors. For example, during the 1980s Brazil enforced strict controls on the import of foreign computers in an effort to nurture its own "infant" computer industry. This industry never matured; the technological gap between Brazil and the rest of the world actually widened, while the protected industries merely copied low-end foreign computers and sold them at inflated prices.^[3] In addition, countries that put up barriers to imports will often face retaliatory barriers to their exports, potentially hurting the same industries that infant industry protection is intended to help.

Ernesto Zedillo, in his 2000 report to the UN Secretary-General, recommended "Legitimising limited, time-bound protection for certain industries by countries in the early stages of industrialisation," arguing that "However misguided the old model of blanket protection intended to nurture import substitute industries, it would be a mistake to go to the other extreme and deny developing countries the opportunity of actively nurturing the development of an industrial sector."^[4]

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