What does the infant-industry theory mean?
The infant industry theory says that new businesses in developing nations must be shielded from competition until they grow up and reach economies of scale that are on par with their rivals. Alexander Hamilton and Friedrich List came up with the idea of the “infant industry,” which was often used as a reason for protectionism.
How to Understand the Infant-Industry Theory
The infant industry theory says that new industries in the United States must be shielded from competition from other countries until they are fully developed and stable. The term “infant industry” comes from economics. The baby industry is a new one that is still growing and not ready to compete with established industries.
Alexander Hamilton and Friedrich List developed the infant-industry theory in the early 1800s. It is often used to support trade policies that protect small businesses. 1 The main idea is that new industries in developing countries must be protected by industries that have been around longer, generally from other countries.
Because of these reasons, governments may use import duties, tariffs, quotas, and exchange rate controls to stop international rivals from matching or beating the prices of a new industry. This gives the new industry time to grow and become stable.
Unique Things to Think About
A paper in the Journal of International Economics called “When and how should infant industries be protected?” says this. John Stuart Mill, an economist and philosopher, built on the infant industry theory by saying that new businesses should only be sheltered until they can grow up and make money on their own. Then, Charles Francis Bastable added a simple condition: the protected industry must have given more net benefits over time than it cost to protect over time.1
Infant-industry theorists say that businesses in developing parts of the economy need to be protected so that foreign competitors don’t hurt or destroy the American infant industry. They say that new industries shouldn’t be hurt because older rivals in other countries may have economies of scale, and these new industries should be kept safe until they have built up an economy of the same size.
The infant industry theory says that protective measures, like tariffs, should be removed once the new industry is stable enough to fight globally. In reality, this doesn’t always happen because it can be hard to eliminate the different defenses that were put in place.
Conclusion
- The infant industry theory says that until they are fully developed, new industries in developing countries must be shielded from the effects of competition.
- Alexander Hamilton and Friedrich List developed this idea in the early 1800s. It is often used to support conservative trade policies. Governments in developing countries may use import taxes, tariffs, quotas, and exchange rate control to give the new industry time to grow and become stable.
