In economics, an infant industry is an economy that in its earliest stages experiences relatively low relative competition or is unable to successfully compete with established, more established competitors abroad. In many cases, these industries consist of small businesses located in rural or informal locations that have the resources necessary to compete on a limited basis with larger, more established firms. In the United States, many of these businesses are considered start-ups or emerging firms that are attempting to capitalize on the potential of a new market by developing it as a new business enterprise. The infant industry definition can also be applied to a smaller segment of the overall market: the small and intermediate goods market.
Governmental Support for These Small and Medium-Sized Enterprises
The United States has experienced mixed results with respect to the degree of governmental support for these small and medium-sized enterprises. On the one hand, the scale of the scale and scope of investment required to make subsidies a less than effective means of encouraging new ventures; on the other, subsidies do not make up for the lost foreign investment and other macroeconomic rents that would be generated by a successful new enterprise. For these reasons, the United States government continues to monitor the performance of the infant industry concept and, as trade policy and trade protection policy considerations shift towards encouraging the development of the domestic activity, attempts will continue to be made to promote these enterprises through subsidies. Efforts will continue to be directed towards the avoidance of barriers to trade and promote access to international markets.
Prevent Barriers to Trade by Maintaining or Imposing Various Measures
In addition to subsidies, the United States and other developed countries have sought to prevent barriers to trade by maintaining or imposing various measures that either raise the cost of imported goods, prevent international competitors from establishing in the domestic market, or reduce the amount of international competition by preventing barriers to entry. In some instances, import duties and other measures have been used to prevent imports altogether, for example, when a country objects to a specific import agreement between the United States and a foreign competitor. In some other instances, import duties and other measures have been used to reduce the cost of imported goods to the domestic market, for example by adjusting the rate of duty associated with a specific importable good. On the whole, import duties, and other measures designed to increase the cost of importing goods from other countries have been considered legitimate strategies to protect the domestic producers from the competition and to increase domestic employment.
The second aspect of the second infant industry argument regards the rationale behind the requirement of (and interest in) domestic production. The argument of course is that the government has an interest in protecting domestic production. After all, the domestic producers create jobs, they earn revenues, and they contribute to the overall strength of the American economy. The ability of a domestic producer to secure a market and maintain jobs and remain in business is important from a macroeconomic perspective. Import competition is not helpful in this regard, because importing goods will only result in reduced employment for the domestic producers, and increased employment means more income for the government, and all of this is unfortunate in the view of those that support free trade.
Finally, the last aspect of the infant-industry argument considers the effects of protectionism. Protectionism is often justified as necessary for protecting the interests of American consumers. Certainly, protectionist policies do have an effect, but the effects of protectionism do not usually take into account many of the underlying arguments against protectionism. In short, the infant industry argument makes three general points that are often overlooked when making a comparative analysis of domestic and foreign production. These three points include the damage done to domestic producers by protectionist policies, the importance of domestic production in overall economic strength, and the extent to which international trade deals benefit domestic businesses.