Question

Chapter 8 ARGUMENTS AGAINST FREE TRADE

I. Chapter Overview

Protect infant industry argument

II. Chapter Summary

1. Some traditional arguments against free trade including infant industry argument, terms of trade argument, balance of trade argument, fair competition argument and national security argument are discussed in this chapter.

2. Infant industry argument holds that the home country industry which is getting a "late start" may possess a long run comparative advantage if protection could temporarily be given to the industry.

III. Review Questions

A. Briefly define the concepts

infant industry argument

B. Question and Problems

1. What are the two problems that come up with the infant industry argument for protection?

2. Which are the main ideas of infant industry argument?

3. How to evaluate the infant industry argument?

C. Multiple-choice questions

1. The argument that a tariff can provide temporary protection to an industry so that the industry can expand, realize economies of scale, and eventually become an export industry is known as the ( ).

a. anti-dumping argument.​ b. national defense argument.

c. infant industry argument.​ d. reduce unemployment argument.

2. The existence of ( ) most likely constitutes the strongest argument for the imposition of an anti-dumping duty.

a. predatory dumping b. persistent dumping

c. sporadic dumping d. cyclic dumping

3. Which of the following statements does NOT seem generally valid with respect to the stance of trade policy?

a. Recession periods usually lead to greater protectionism.

b. Policy has tended toward freer trade when export interests are organized.

c. Policy tends toward freer trade in countries whose imports are inputs into important industries.

d. Since consumers outnumber producing firms, elected officials usually adopt free-trade policies to satisfy the consumer majority.

Answer 1

A. The infant industry school argues for trade protectionism. It says that new industries that have just been set up(nascent stages) cannot often employ economies of scale that many of their older and foreign competitors can, and thus need to be protected until they can mature,stabilize and can compete on equal footing.

B. 1. It might encourage industries to become inefficient since they are protected from competition and do not have incentive to employ more efficient technologies that can heighten their competitive advantage.

b)It is very difficult to remove protective measures later, once the industry has reached stage of maturity due to political pressures and vested interests.

2. The infant industry argument underlines the following ideas- Firstly it encourages and stimulates domestic production by protecting industries against foreign competition.

It tries to keep major industries like defense,oil under government/domestic control to promote national security and reduce reliance on production from abroad.

It can be used to develop domestic markets and also for job creation in the domestic economy.

C. infant industry argument - protecting domestic industries by increasing tariffs to act as a barrier to entry

2. predatory pricing

3. Since consumers outnumber producing firms, elected officials usually adopt free-trade policies to satisfy the consumer majority - this is not true in general. Producer groups are more organized and efficient in lobbying their interests.