Nations often impose trade restrictions in the form of quotas, tariffs, and exchange rate controls. Yet, these measures, when taken, appear to have negative effects on that nation’s economy as well as others that it trades with. This causes one to wonder why an economy would want to employ policies that prove detrimental to its society. One theory is that of the infant industry.
The infant industry theory advocates that new domestic industries should be protected from foreign competitors for a certain period of time. This is done in the hope that it will have time to develop without immediately being squashed out by foreign competitors. This is, in fact, a very valid point for many small businesses never make it big due to such intense competition from larger firms. Let’s face it. Most people are going to buy from a popular well-known store rather than a new, less developed one. So the infant industry argument proposes that such domestic industries should be protected, or given an advantage over already well-known, large foreign companies. The intention is that the new domestic industries be given enough time to mature and be able to stand on their own feet, so to speak, and be able to compete with foreign competitors effectively. This protection is achieved by way of enforcing quotas, tariffs, and exchange rate controls that discourage consumers from purchasing internationally.
Once the domestic industry becomes efficient enough to compete internationally, though, the protection is supposed to be removed. However, that is often not the case. The most difficult problem with this argument is that once granted, the protection of domestic industries is hard to remove. A perfect example is that of the steel industry. In its early stages, tariffs were granted to help it emerge, but when it finally did grow and become powerful, the tariffs still remained. Furthermore, to this day, there is still legislation that protects the steel industry, though it is far from infant industry. So the infant industry theory is oftentimes abused.
On the surface, the infant industry theory seems a very good one. However, it comes with its difficulties as well. Therefore, it may not be the soundest reason after all for imposing trade restrictions. Ideally, it is a good policy, but once enacted it proves difficult to remove and has lasting effects. All economic side effects, both short term and long term should be considered completely before enacting trade restrictions based upon this argument.