Explain the infant industry argument for the trade restrictions. (TYPE IT!!) Why do the economists doubt...

Explain the infant industry argument for the trade restrictions. (TYPE IT!!)

Why do the economists doubt that the infant industry argument is a good argument for the trade restrictions? Explain in your own words. (TYPE IT!!)

Under what conditions the infant industry argument for the trade restrictions may be a good argument? Explain. (TYPE IT!)

Expert Solution

Explain the infant industry argument for the trade restrictions. Infant industry argument is the protection given to newly established industries to protect them from foreign competition. These newly established industries do not enjoy economies of scale and is unable to compete with foreign goods. Tariffs on imports are implemented to protect these industries. The protection will be provided till the industry becomes stable, mature and able to compete with foreign competitors. For example, a home country may stop importing cars and start to manufacture cars domestically. The industry may need protection till it is able to compete internationally and able to reap economies of scale.

Why do the economists doubt that the infant industry argument is a good argument for the trade restrictions? Explain in your own words

1. Protection may make the industry inefficient.
2. Once protection is provided, it could be difficult to remove it.
3. How to choose which industry to protect? This choice may be difficult for the government.
4. Loss of consumer welfare. Resources may be shifted from different sectors to protect the infant industry which will lead to loss in consumer welfare.
5. Danger of retaliation by the other countries on whose goods the tariff is imposed.
Under what conditions the infant industry argument for the trade restrictions may be a good argument? Explain.
1. When the industry to be protected is of national importance like defence goods, food items.
2. Industries will be protected to encourage domestic demand. A country may want to start manufacturing cars domestically which will help in the country’s development. Protection is necessary in this case.
3. Employment in domestic industry increases.
4. Foreign investment can be source
5. Domestic industries also bring revenue to the government.

Rahul Sunny answered 1 year ago

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