What is the 'Infant-Industry Theory'

The infant-industry theory is the supposition that emerging domestic industries need protection against international competition until they become mature and stable. In economics, an infant industry is one that is new and in its early stages of development, and not yet capable of competing against established industry competitors.

BREAKING DOWN 'Infant-Industry Theory'

The infant-industry theory, first developed in the early 19th century, by Alexander Hamilton and Friedrich List, is often a justification for protectionist trade policy. The basic idea is that young, emerging industries need protection from more established, substantial industries elsewhere. 

According to a paper in the Journal of International Economics, titled "When and how should infant industries be protected?" the theory was later improved on by the economist and philosopher John Stuart Mill, who said that infant industries should only be protected if they can mature and then become viable without protection. Charles Francis Bastable, added a simple condition, that the cumulative net benefits provided by the protected industry must exceed the cumulative costs of protecting the industry.

Infant-industry theorists argue that industries in developing sectors of the economy need to be protected to keep international competitors from damaging or destroying the domestic infant industry. Infant industries, they argue, don't have the economies of scale that older competitors in other countries may have, and should be protected, just until they have built an economy of similar scale. 

In response to these arguments, governments may enact import duties, tariffs, quotas and exchange rate controls to prevent international competitors from matching or beating the prices of an infant industry, thereby giving the infant industry time to develop and stabilize.

Infant-industry theory holds that once the emerging industry is stable enough to compete internationally, any protective measures introduced, such as tariffs, are intended to be removed. In practice, this is not always the case because the various protections that were imposed may be difficult to remove.

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