What this lesson teaches
I can weigh the benefits and costs of protectionism.
Syllabus 9570, 3.3.1(d). Globalisation, International Trade and Economic Co-operation: Benefits and costs of protectionism
Make a guess
A new local industry asks for protection "until it can compete". When is this argument strongest?
- Always, because every new industry needs help.
- Whenever the new industry employs many local workers.
- When it can become competitive by a set date.
Show the answer
When it can become competitive by a set date.
Infant-industry protection works only if the industry can become competitive and the protection is removed on schedule.
Protection is sometimes argued for infant industries, jobs or strategic reasons, but the arguments are often weaker than they seem.
Infant industry: a new industry may need temporary protection until it grows big enough to compete. This only works if it has a real path to becoming competitive, and the protection is removed on schedule.
Protecting jobs: tariffs may save jobs in import-competing industries in the short run, but they raise costs for consumers and for firms using imported inputs, and invite retaliation.
Strategic and security reasons: countries may protect food, energy or defence supplies. Singapore instead builds resilience through diversified suppliers and stockpiles.
For a small, open economy like Singapore, protection is especially costly: it raises the cost of imported inputs that exporters depend on, and invites retaliation against Singapore's exports.
- Arguments
- Infant industry, jobs, strategic supply.
- Costs
- Higher prices, deadweight loss, retaliation.
Worked example: A young battery firm asks for protection
A new battery maker asks for a three-year tariff, claiming it will learn to cut costs. It gives no cost targets. Local vehicle exporters use its batteries as an input.
- An infant-industry case is possible, but there are no targets to check progress.
- Vehicle exporters would pay more for batteries, hurting their exports.
- Without firm targets and an end date, protection may become permanent.
- A time-limited R&D grant with clear targets would support learning without raising costs for other firms.
Watch out for this
Protection always saves jobs.
It may save some jobs in protected industries, but raises costs for other firms and can provoke retaliation, costing jobs elsewhere.
Check your understanding
What must be true for the infant industry argument to justify protection?
- It must be able to become competitive, and protection must be temporary.
- The industry must already produce at lower cost than foreign rivals.
- The industry must employ many workers who would struggle to find other jobs.
Show the answer
It must be able to become competitive, and protection must be temporary.
Right. Otherwise protection just shields an inefficient industry for good.