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When and how should infant industries be protected?

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  • Melitz, Marc J.

Abstract

This paper develops and analyzes a welfare maximizing model of infant industry protection. The domestic infant industry is competitive and experiences dynamic learning effects that are external to firms. The competitive foreign industry is mature and produces a good that is an imperfect substitute for the domestic good. A government planner can protect the infant industry using domestic production subsidies, tariffs, or quotas in order to maximize domestic welfare over time. As protection is not always optimal (although the domestic industry experiences a learning externality), the paper shows how the decision to protect the industry should depend on the industry's learning potential, the shape of the learning curve, and the degree of substitutability between domestic and foreign goods. Assuming some reasonable restrictions on the flexibility over time of the policy instruments, the paper subsequently compares the effectiveness of the different instruments. Given such restrictions, the paper shows that quotas induce higher welfare levels than tariffs. In some cases, the dominance of the quota is so pronounced that it compensates for any amount of government revenue loss related to the administration of the quota (including the case of a voluntary export restraint, where no revenue is collected). In similar cases, the quota may even be preferred to a domestic production subsidy.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 66 (2005)
Issue (Month): 1 (May)
Pages: 177-196

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Handle: RePEc:eee:inecon:v:66:y:2005:i:1:p:177-196

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Web page: http://www.elsevier.com/locate/inca/505552

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References

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  1. Kyle Bagwell & Robert W. Staiger, 1989. "A Theory of Managed Trade," Discussion Papers 801, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Feenstra, Robert C & Lewis, Tracy R, 1991. "Negotiated Trade Restrictions with Private Political Pressure," The Quarterly Journal of Economics, MIT Press, vol. 106(4), pages 1287-307, November.
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  4. Dinopoulos, Elias & Lewis, Tracy R. & Sappington, David E. M., 1995. "Optimal industrial targeting with unknown learning-by-doing," Journal of International Economics, Elsevier, vol. 38(3-4), pages 275-295, May.
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  7. Alwyn Young, 1991. "Learning by Doing and the Dynamic Effects of International Trade," NBER Working Papers 3577, National Bureau of Economic Research, Inc.
  8. Baldwin, Robert E, 1969. "The Case against Infant-Industry Tariff Protection," Journal of Political Economy, University of Chicago Press, vol. 77(3), pages 295-305, May/June.
  9. Redding, S., 1997. "Dynamic Comparative Advantage and the Welfare Effects of Trade," Economics Papers 140, Economics Group, Nuffield College, University of Oxford.
  10. Young, Alwyn, 1991. "Learning by Doing and the Dynamic Effects of International Trade," The Quarterly Journal of Economics, MIT Press, vol. 106(2), pages 369-405, May.
  11. Deardorff, Alan V., 1987. "Why do governments prefer nontariff barriers?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 26(1), pages 191-216, January.
  12. Krugman, Paul, 1987. "The narrow moving band, the Dutch disease, and the competitive consequences of Mrs. Thatcher : Notes on trade in the presence of dynamic scale economies," Journal of Development Economics, Elsevier, vol. 27(1-2), pages 41-55, October.
  13. Branstetter, Lee G., 2001. "Are knowledge spillovers international or intranational in scope?: Microeconometric evidence from the U.S. and Japan," Journal of International Economics, Elsevier, vol. 53(1), pages 53-79, February.
  14. Mill, John Stuart, 1848. "Principles of Political Economy (II): Distribution," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 2, number mill1848-2.
  15. Dixit, Avinash, 1984. "International Trade Policy for Oligopolistic Industries," Economic Journal, Royal Economic Society, vol. 94(376a), pages 1-16, Supplemen.
  16. Dasgupta, Partha & Stiglitz, Joseph E, 1985. "Learning-by-doing, Market Structure and Industrial and Trade Policies," CEPR Discussion Papers 80, C.E.P.R. Discussion Papers.
  17. Clemhout, S & Wan, H Y, Jr, 1970. "Learning-by-Doing and Infant Industry Protection," Review of Economic Studies, Wiley Blackwell, vol. 37(1), pages 33-56, January.
  18. Mill, John Stuart, 1848. "Principles of Political Economy (III): Exchange," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, volume 3, number mill1848-3.
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Citations

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Cited by:
  1. repec:hal:cesptp:halshs-00111186 is not listed on IDEAS
  2. Lars Calmfors & Giancarlo Corsetti & Michael P. Devereux & Gilles Saint-Paul & Hans-Werner Sinn & Jan-Egbert Sturm & Xavier Vives, 2008. "Chapter 4: Industrial policy," EEAG Report on the European Economy, CESifo Group Munich, vol. 0, pages 105-124, 02.
  3. Iimi, Atsushi, 2007. "Infrastructure and trade preferences for the livestock sector : empirical evidence from the beef industry in Africa," Policy Research Working Paper Series 4201, The World Bank.
  4. Ann Harrison & Andrés Rodríguez-Clare, 2009. "Trade, Foreign Investment, and Industrial Policy for Developing Countries," NBER Working Papers 15261, National Bureau of Economic Research, Inc.
  5. Aleksandr Vashchilko, 2013. "Vertically related markets, tariffs, and technology adoption," Journal of Economics, Springer, vol. 110(3), pages 273-286, November.
  6. Caroline M. Hoxby, 2014. "The Economics of Online Postsecondary Education: MOOCs, Nonselective Education, and Highly Selective Education," NBER Working Papers 19816, National Bureau of Economic Research, Inc.
  7. Virginia Di Nino & Barry Eichengreen & Massimo Sbracia, 2011. "Real Exchange Rates, Trade, and Growth: Italy 1861-2011," Quaderni di storia economica (Economic History Working Papers) 10, Bank of Italy, Economic Research and International Relations Area.
  8. repec:hal:journl:halshs-00111186 is not listed on IDEAS
  9. Saure, Philip, 2007. "Revisiting the infant industry argument," Journal of Development Economics, Elsevier, vol. 84(1), pages 104-117, September.
  10. Alain Desdoigts & Fernando Jaramillo, 2009. "Trade, demand spillovers, and industrialization: The emerging global middle class in perspective," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00429016, HAL.
  11. Facundo Albornoz & Paolo Vanin, 2007. "Trade Policy and Industrial Structure," Discussion Papers 05-12R, Department of Economics, University of Birmingham.
  12. Dellas, Harris & Fernandes, Ana & Neusser, Klaus, 2007. "On the equivalence of quantitative trade restrictions and tariffs," Economics Letters, Elsevier, vol. 96(3), pages 331-336, September.
  13. Facundo Albornoz and Paolo Vanin, 2005. "Local Learning, Trade Policy and Industrial Structure Dynamics," Discussion Papers 05-12, Department of Economics, University of Birmingham.
  14. Alho, Kari E.O., 2008. "Regulation of Energy Prices in Russia," Discussion Papers 1128, The Research Institute of the Finnish Economy.
  15. Caroline Hoxby, 2014. "The Economics Of Online Postsecondary Education: MOOCs, Nonselective Education, And Highly Selective Education," Discussion Papers 13-024, Stanford Institute for Economic Policy Research.
  16. Tran Lam Anh Duong, 2011. "The Optimal Dynamic Infant Industry Protection in Joining a Free Trade Agreement: A Numerical Analysis of the Vietnamese Motorcycle Industry," Global COE Hi-Stat Discussion Paper Series gd11-191, Institute of Economic Research, Hitotsubashi University.
  17. Oleg Itskhoki & Benjamin Moll, 2014. "Optimal Development Policies with Financial Frictions," NBER Working Papers 19994, National Bureau of Economic Research, Inc.

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