Why Government Intervention in Infant Industry Protection Is a Requirement for Development - Literature review Example

Introduction

Protection of infant industries is one of the most important steps a government can take in order to grow its economy. The infant industry argument refers to the policies developed by a government to protect its domestic industries from unfavorable external competition (Zambakari, 2012). This demands that a series of policies are designed to nurture these industries until a time when they rich managerial and productive maturity. The infant industry argument is one that attracts debate from scholars, researchers, and economists. Whereas some analysts point to the advantages of such measures, there are those who argue that protecting the infant industry does not provide the intended benefits to the industries and the economy as a whole. In this paper, however, an attempt will be made to show that protecting these industries is critical for the future economic survival of a given country. To achieve these objectives the government has to access all available options such as quotas, tariffs, import bans and subsidies and choose the best the suits the economy. In this paper, the advantages of infant industry protection are offered by using the Chinese infant car industry as an illustration.

Protecting the infant industry: a Literature Review

The infant industry theory is based on the argument that a given industry can be effectively developed when the government offers temporary protection to it. Protecting the infant industries just means helping them to reduce costs of start-up and operation to allow them to stabilize in the market. Some arguments are presented for and against this stance. There are those who argue that offering protecting to infant countries does not produce long-term benefits as theory suggests. On the other hand, supporters of this protection argue that it helps an industry overcome the initial shocks related to start-up costs and thus be in a position to survive in the long term.

In a paper by Ha-Joon Chang (2003), the author attempts to show how infant industry protection helped the developed countries to promote their industries. Historically, he argues, Britain used policies to protect their infant industries, and this helped the country develop. For example during the 1800s, Britain’s first Prime Minister Robert Walpole implemented aggressive industrial, trade and technology (ITT) policies that focused on infant industry protection, substantial tariff rebates, and export subsidies. In the end, Britain ensured that the local industries were protected against foreign products. Chang also gives the example of the United States where he argues that the first U.S. theorists such as Alexander Hamilton and Daniel Raymond promoted infant industry protection. In the 1800s, the United States had one of the highest tariff rates charged on manufacturing imports. By the end of the Second World War, the U.S. industries were among the most protected in the world. Chang, therefore, argues that although such countries might promote a different narrative now, the truth is that protecting the infant industries helped them grow.

In an article by Kaplinsky and Mhlongo (1997), the authors give the main reasons that make it necessary for infant industries to be protected. First, in all sectors, there exist many economies of scale such that new industries, or late-comers, have to be given the opportunity to grow their production in a protected market. This protection is aimed at helping companies travel what they term as the cost curve. Secondly, by nature, all firms learn by doing. This means that as these enterprises continue to operate in a market, they became more efficient and experienced in their production, and this helps them to meet the demands of the market better (Kemal, 1979). Giving firms the chance to operate for a considerable period can be of great benefit in helping them learn from the experience of production. Finally, industries need protection to grow their technological capabilities. For these skills to be fully developed, these firms need time. Based on these reasons, it is evident that protecting infant industries from international competition helps them to stabilize and grow in a country (Reinert, 2007). Once these industries are cultivated and developed, the economy will begin to benefit.

Some economists and researchers have however been quick to point out that protecting infant industries is harmful not only to the industries themselves but the entire economy. In an article written by Robert Baldwin (1969) for instance, the author makes the argument that the infant industry tariff protection is harmful to the economy because it distorts consumption. He argues that when tariff protection is offered to these sectors, the consumption patterns in an economy are likely to be affected by the availability of the concerned products in an economy is influenced by the tariffs. He further argues that the protection offered to infant industries may fail to direct enough resources into these industries to promote their growth. He argues that these tariffs only make productive factors available to other players in the market, and in the end, fail to reach to the infant industries. However, most of the arguments against protection of infant industries fail to consider the broader policies that can be adopted by a government in protecting new industries.

In a paper by Yokota and Tomohara (2008), the authors warn that infant industry protection via export subsidies can be beneficial only when the government can maintain a right balance between imports and exports. However, if the consumers have access to the international markets, then this protection will not be of benefit to the industries. In this case, consumers will be in a position to obtain similar products in the international market, and this will leave no market for infant industry products. Therefore, for infant industry protection to be beneficial, the government has to control its internal and international trade. This will help to improve the social welfare by ensuring that the products from the new industries are not over produced and find a market.

The Case of China

To highlight the need for and the importance of infant industry protection, this section of the paper considers the case of China. Although China is one of the largest and fastest growing economies in the world, certain industries have not yet picked up in the country. Evidence suggests that this inability to develop local industries is as a result of inadequate regulation, and this has led to an overflow of foreign brands in the Chinese markets. The car industry is one that best captures this problem. Although China is a big market for the automotive industry, local Chinese companies have failed to capitalize on this. According to the cover story in the China Economic Review (2012), two primary reasons explain this problem. First, the Chinese automotive market is flooded with cheaper foreign alternatives such as Kia and Hyundai. Unfortunately, buyers in the country are willing to go for these alternatives at the expense of the local brands. Secondly, the Sino-foreign joint ventures between local Chinese automobile companies and foreign-based companies have significantly affected the local industry. For example, joint ventures such as the Mercedes-Beijing and Shanghai-GM are flooding the market with cheaper vehicles. This case of Chinese automobile industry best illustrates why there is a need to protect infant industries.

Protecting the infant industry in China has to be achieved by focusing on the World Trade Organization (WTO) provisions that states can use to protect their industries (Bora, Llyod & Pangestu, 2000). Under these provisions, there are some strategies that the Chinese government may employ to protect the infant industry. First, the use of tariffs and subsidies in protecting local firms from the competition is a common practice. Across many countries, the need to protect local industries is high. One of the strategies used for protecting local firms involves local content protection. In the case of China’s car industry, for instance, the country may choose to challenge the fairness of the competition by adopting anti-dumping measures that would ensure that the number of foreign parts brought into the country is limited. This will help to promote exports not only in the car industry but across all other local industries. Moreover, it is necessary for China to look at the various provisions in the WTO that might help promote or derail such import protection measures and thus device ways of dealing with such (United Nations Economic Commission for Africa, 2015). Secondly, protecting the infant industry may involve the use of subsidies and export promotion. To comply with the WTO requirements, states are usually required to prove that a particular grant is hurting its trade. This will then lead to the subsidy being removed or changed to meet the WTO regulations. Because most foreign firms want to use subsidies to enter new markets, it is necessary that these subsidies are regulated in order to protect the country from being flooded by foreign firms (Chang, 1994). In the case of the automobile industry in China, for example, foreign firms such as GM and Volkswagen need to be regulated. It is worth noting that given that most countries rely on foreign direct investment (FDI) for growth, the removal of such subsidies should be done with caution and care (Azarhoushang et al., 2015). Finally, protecting the infant industry in China will require the government to undertake specific measures to boost exports. Although the WTO rules put many restrictions on government’s efforts to grow exports, there are many alternatives that can be utilized. For example, the use of export credit agencies could help local firms to access export financing (Bora, Llyod & Pangestu, 2000). If such measures are adopted and well implemented, infant industries in China are likely to grow significantly.

The best illustration of how China can protect its infant industries, especially the car industry, is seen through the actions it took against the exports of rare earth elements. Currently, China is one the leading producers of rare earth elements, and these include europium, neodymium, and dysprosium (Mulhearn & Vane, 2015). These elements are highly valuable in the making of electronic devices such as televisions and mobile phones. China developed a policy that limited the exports of these precious elements. The United States and other countries have often accused China of imposing quotas on the volumes of such metals that can be exported, and also imposing tariffs on their exports (Mulhearn & Vane, 2015). The main reason why the Chinese government is limiting these exports is that it wants to protect its infant industries. To have hi-tech manufacturers develop in China, the country needs to ensure that raw materials are available at a lower cost. Therefore, limiting the exports of such materials is one way to ensure that companies involved in the making of electronic devices can easily get these vital materials locally at a cheaper cost. If the same strategies are applied to other sectors of the economy, the infant industries in China will greatly benefit.

One of the biggest problems that require government protection of infant industries is dumping. When a country allows products from other nations to flood the market, then it is killing the infant industry in that country. Even developed nations are in fact working to avoid this problem. Take the case of the EU for instance. The EU has imposed tariffs on the shows imported from China and Vietnam whereby it has imposed tariffs of about 16.5% on shoes from China and 10% on those from Vietnam (Mulhearn & Vane, 2015). The EU argued that the countries were dumping their shows into the EU market at a very low price, thereby killing the local industries in Europe. The imposition of such tariffs is thus one way the EU is using to protect its industries. This problem becomes bigger in smaller economies or developing countries. Most of these countries are flooded by cheaper imports, and this kills the local industries. It is, therefore, the responsibility of the state to ensure that local markets are protected against such forms of damping. Addressing damping will protect infant industries from the unfair competition brought by established companies that can afford to sell at lower prices.

Elements of successful implementation of infant industry protection

As highlighted above, the need to protect infant industries in China and many other parts of the world is great. However, under WTO rules and other provisions, the successful implementation of protection measures requires that the country should have certain elements that can help in the implementation. The first of these is the dedicated leadership from the top (Rodrik, 2004). There is a need to have a high-level political support to ensure that adopted policies are well implemented. Such effective political leadership provides a solid foundation for proper coordination and oversight of all the agencies tasked with the responsibility of implementing such policies. Secondly, it is important to have deliberation councils which incorporate representatives from both the private and public sectors (Rodrik, 2004). These bodies will communicate the interests of all the parties and ensure that the policies adopted meet their needs. Finally, there have to be mechanisms for oversight and accountability. This will ensure that all sectors of the economy are given fair treatment, including the smaller industries. If all these factors are in place, the implementation of infant industry protection measures is likely to bear fruit.

Economic Benefits of Protecting the Infant Industries

The basic argument for infant industry protection is that these small firms are allowed the opportunity to sell their products at a higher price to cover for their high production costs. In the long run, these companies will be in a position to lower their costs as a result of gaining production and management experience. The long-term effect is that the consumers will start to enjoy lower prices from these firms, and this will increase consumption (Suranovic, 2010). Secondly, due to the protection offered, smaller industries in an economy will be given the incentive to develop. This will then lead to an increase in domestic production leading to the growth of the economy. Third, protecting infant industries has a spillover effect on other sectors of the economy. It is argued that workers and managers from protected industries may take up jobs in other industries or open new ones, and therefore use the experience gained to develop these new sectors (Suranovic, 2010). Moreover, as small industries are allowed to grow, other sectors linked to these industries such as agriculture and mining are allowed to flourish as well. Finally, protecting local industries has a direct effect on product standards. When a country limits the volume of products that can get into its market, it helps to maintain the right product standards. As stated above, the major problem affecting infant industries is dumping. In some cases, the dumped products are of poor quality, and this may be a major problem for the economy in the long run. By adhering to the WTO Organization rules, governments can ban the imports of certain products that do not meet the required standards. This is beneficial not only to the infant industries but also to the consumers. One of the major arguments that have been put forward by opponents of protectionism is that a country does deny consumers the chance to access products at lower price. However, when such arguments are made, the issue of quality is not considered. Overall, protecting infant industries produces great benefits to an economy in the future.

Conclusion

In this document, it has been argued that when a government develops measures to protect its infant industries, the economic benefits in the long term are great. Although there are a wide variety of measures that can be utilized by the government in offering this protection, it is necessary that only those that best fit the economy are adopted. Also, given that the WTO offers guidelines and regulations regarding international trade and regulation, policies adopted need to conform to these provisions. As shown throughout the paper, the major advantage of offering this protection is that the infant industries are given the chance to grow their productive and managerial capabilities, and this helps them overcome the initial cost challenges. Using China as a case example, it has been demonstrated that the government has to intervene to help local firms compete with already established companies. The benefits of this protection to the economy are high.