Infant Industry Argument
What is Infant Industry Argument?
The infant industry argument holds that new domestic industries deserve temporary tariff or quota protection until they grow large enough to compete with established foreign rivals.
Young industries often lack the economies of scale, learning-by-doing, and accumulated know-how of mature foreign competitors, so unrestricted trade could kill them before they become viable. Temporary protection is meant to let them develop, after which barriers should be removed. Critics note governments rarely pick winners well, protected firms may stay inefficient ('grow up' never happens), and trading partners may retaliate.
Infant Industry Argument: a worked example
A developing country's first solar panel factory turns out 50,000 panels a year at an average cost of $180 each. Established foreign plants, running millions of panels annually, land theirs at $120, so open trade would shut the new factory within a season. The government sets a tariff of $70 per panel, lifting the imported price to $190 and letting the domestic panel at $180 undercut it. Output climbs to 400,000 panels, and learning by doing plus scale pull average cost to $110, under the foreign price, at which point the tariff can be withdrawn. Now count the bill. While protection lasts, domestic buyers pay $180 rather than $120, an extra $60 a panel, or 400,000 × $60 = $24 million a year. The case holds only if the permanent $10 per panel cost advantage eventually repays that charge.
The mistake students make with infant industry argument
The infant industry case gets blurred with the cheap foreign labor argument, and the two make different claims. Cheap foreign labor is a static complaint about a cost gap that never closes, so protecting against it taxes domestic buyers forever. The infant industry claim is dynamic: costs are high only because output is small and experience is thin, and both conditions cure themselves as the industry grows. Lose that distinction and an evaluation answer drops the two requirements that make the argument coherent, that protection is temporary and that costs genuinely fall.
Infant Industry Argument questions
Why do economists criticize the infant industry argument?
Three objections come up repeatedly. Governments have a poor record of guessing which young industries will eventually compete, so protection often lands on firms that never mature. Sheltered firms also lose the pressure that forces cost cutting, so the promised fall in costs may never arrive. Tariffs are politically sticky besides, because protected firms lobby to keep them long past the stated deadline, and trading partners may retaliate against unrelated exports while the barrier stands.
Is the infant industry argument ever valid?
Economists accept the logic in narrow cases: learning by doing has to be strong, domestic capital markets have to be unable to finance the early loss-making years, and the eventual cost saving has to be large enough to repay consumers for the higher prices they paid during protection. Even then a direct production subsidy is usually the cleaner tool, since it supports the young industry without raising the price consumers pay or inviting retaliation from trading partners.
What counts as an infant industry?
An infant industry is a newly established domestic sector that has not yet reached the output level where economies of scale and accumulated experience bring its costs down to world levels. A first domestic aircraft parts plant in a country with no earlier aerospace production fits the description. Youth alone does not qualify a sector. The claim needs evidence that costs are high because output is small, and that those costs would fall as production expands.
This is the live International Trade sandbox. Drag the curves, or open the full version.
Related terms
Common comparisons
Get AP Econ exam tips in your inbox
Occasional emails with study tips, new interactive graphs, and exam-season reminders. Free, no spam.
No spam. Unsubscribe anytime. Read our privacy policy.
Keep track of what you have studied
A free EconLearn account adds progress tracking, your quiz history, and achievements. Studying here is free either way, and there is nothing to pay for as a student.
Create a free accountAlready have one? Sign in
Last updated