PROTECTING"INFANT INDUSTRIES'
One of the oldest arguments for protectionism, the infant-industry argument, holds that a government should shield an emerging industry from foreign competition by guaranteeing it a large share of the domestic market until it can compete on its own. Many developing countries use this argument justify their protectionist policies, especially if entry barriers are high and foreign competition is formidable. underlying Assumptions The infant-industry argument presumes that the initial operating costs for an industry in a given country may be so high as to make output noncompeti tive in world markets. Eventual competitiveness is the result of the efficiency gains that take time. Therefore, the industry's government needs to protect it long enough for its fledgling companies to gain economies of scale and their employees to translate experience into higher productivity, enabling efficient production and international competitiveness. The govern ment can then recoup the costs of trade protection through benefits like higher domestic employment, lower social costs, and higher tax revenues. Risks in Designating Industries Although it's reasonable to expect production costs to decrease over time, they may never fall enough to create internationally competitive prod- ucts. This risk poses two problems.
PROTECTING"INFANT INDUSTRIES' One of the oldest arguments for protectionism, the infant-industry argument, holds that a government should shield an emerging industry from foreign competition by guaranteeing it a large share of the domestic market until it can compete on its own. Many developing countries use this argument justify their protectionist policies, especially if entry barriers are high and foreign competition is formidable. underlying Assumptions The infant-industry argument presumes that the initial operating costs for an industry in a given country may be so high as to make output noncompeti tive in world markets. Eventual competitiveness is the result of the efficiency gains that take time. Therefore, the industry's government needs to protect it long enough for its fledgling companies to gain economies of scale and their employees to translate experience into higher productivity, enabling efficient production and international competitiveness. The govern ment can then recoup the costs of trade protection through benefits like higher domestic employment, lower social costs, and higher tax revenues. Risks in Designating Industries Although it's reasonable to expect production costs to decrease over time, they may never fall enough to create internationally competitive prod- ucts. This risk poses two problems.
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