Infant industry argument is one of the important valid arguments given in favour of protection. The credit of advancing this argument goes to List in Germany, Hamilton in America and J.S. Mill in England.
According to this argument, infant industries (i.e, newly or late starting industries) during the initial stages of their development are not strong enough to compete with the long-established foreign industries.
The operational cost of the infant industries is very high. Such an industry needs to be fully protected by the government from foreign competition. By imposing a tariff on imports, the government raises the domestic price and helps the home producers to cover their high costs and thus grow under protection.
The essential features of infant industry argument are as follows:
(i) The basic idea behind the infant industry argument is to bring a country in the same stage of development as its trading partner. Free trade among unequals is neither possible nor desirable. As List writes, “A child or a boy in wrestling with a strong man can scarcely be victorious or even offer steady resistance.”
(ii) Protection should be given temporarily only in the initial stages. It should be withdrawn once the industry becomes mature enough to compete internationally. According to List, “baby is to be nursed; child is to be protected; and the grown up young one is to be left free.”
Similarly, J.S. Mill writes that “It is essential that the protection should be confined to such cases in which there is good ground of assurance that the industry which it fosters will after a time be able to dispense with it.”
(iii) The infant industry arguments is not against free trade policy. It favours free trade based on potential (or long run), and not present, comparative advantage.
A country might have potential comparative advantage in the development of certain industry, but, at present, it is not able to realise its true comparative advantage under free trade because other countries have already well-established that industry.
Such a country must give protection to this industry in the early stages so as to make it fully competitive under free trade in future.
(iv) The infant industry argument is based on the realistic conditions of unrealised internal and external economies of scale. Protection tends to equalise competitive conditions and make available to the new firm the unrealised internal and external economies.
It helps the firm to grow up to its optimum level (i.e., realisation of internal economies); it helps to reduce costs of all firms by creating a trained labour force or by spreading knowledge of production techniques (i.e., realisation af external economies).
(v) List advocates discriminating protection. Protection should be given only to those selected industries which are potentially capable of becoming economically viable units.
(vi) Infant industry argument can be developed into the generalised form of ‘infant country arguments’. Industrialisation requires the creation of necessary infrastructure, growth of sizable labour force with the requisite attitudes and skills, and increase in the quantity and quality of scarce resources. Protection helps the infant or newly developing country to industrialise itself.
(vii) Infant industry argument, and particularly the more general infant country argument, is frequently used to speed up the process of industrialisation in less developed countries through protection.
The infant industry argument has been criticised on the following grounds:
(i) It is difficult to determine which particular industry has the potential comparative advantage and deserves protection.
(ii) Once protection is given, vested interests are created and it becomes impossible to withdraw it.
(iii) Protection may lead to political corruption. All types of industries, whether economically justified or not, start claiming for protecting.
(iv) Under protection, an infant industry tends to remain infant. Protected industries generally become negligent and develop a tendency to depend more and more on government assistance.
(v) Protection weakens the efficiency of the firm and results in higher price and poor quality of the product.
Despite these defects, infant industry argument for protection has wide scope of application, particularly in the less developed countries. What is needed is to grant discriminating protection and ensure maximum efficiency in the protected industries.