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When and How Should Infant Industries Be Protected?

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  • Melitz, Marc

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

Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3228378.

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Date of creation: 2005
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Publication status: Published in Journal of International Economics
Handle: RePEc:hrv:faseco:3228378

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  1. Redding, S., 1997. "Dynamic Comparative Advantage and the Welfare Effects of Trade," Economics Papers, Economics Group, Nuffield College, University of Oxford 140, Economics Group, Nuffield College, University of Oxford.
  2. 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, Elsevier, vol. 53(1), pages 53-79, February.
  3. Dasgupta, Partha & Stiglitz, Joseph E, 1985. "Learning-by-doing, Market Structure and Industrial and Trade Policies," CEPR Discussion Papers, C.E.P.R. Discussion Papers 80, C.E.P.R. Discussion Papers.
  4. Simon P. Anderson & Nicolas Schmitt, 2003. "Nontariff Barriers and Trade Liberalization," Economic Inquiry, Western Economic Association International, Western Economic Association International, vol. 41(1), pages 80-97, January.
  5. Kyle Bagwell & Robert W. Staiger, 1989. "A Theory of Managed Trade," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 801, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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  7. Young, Alwyn, 1991. "Learning by Doing and the Dynamic Effects of International Trade," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 106(2), pages 369-405, May.
  8. Mill, John Stuart, 1848. "Principles of Political Economy (III): Exchange," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, McMaster University Archive for the History of Economic Thought, volume 3, number mill1848-3.
  9. Clemhout, S & Wan, H Y, Jr, 1970. "Learning-by-Doing and Infant Industry Protection," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 37(1), pages 33-56, January.
  10. Mill, John Stuart, 1848. "Principles of Political Economy (I): Production," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, McMaster University Archive for the History of Economic Thought, volume 1, number mill1848-1.
  11. Alwyn Young, 1991. "Learning by Doing and the Dynamic Effects of International Trade," NBER Working Papers, National Bureau of Economic Research, Inc 3577, National Bureau of Economic Research, Inc.
  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, Elsevier, vol. 27(1-2), pages 41-55, October.
  13. Head, Keith, 1994. "Infant industry protection in the steel rail industry," Journal of International Economics, Elsevier, Elsevier, vol. 37(3-4), pages 141-165, November.
  14. Dixit, Avinash, 1984. "International Trade Policy for Oligopolistic Industries," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 94(376a), pages 1-16, Supplemen.
  15. Deardorff, Alan V., 1987. "Why do governments prefer nontariff barriers?," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 26(1), pages 191-216, January.
  16. Dinopoulos, Elias & Lewis, Tracy R. & Sappington, David E. M., 1995. "Optimal industrial targeting with unknown learning-by-doing," Journal of International Economics, Elsevier, Elsevier, vol. 38(3-4), pages 275-295, May.
  17. Mill, John Stuart, 1848. "Principles of Political Economy (II): Distribution," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, McMaster University Archive for the History of Economic Thought, volume 2, number mill1848-2.
  18. Baldwin, Robert E, 1969. "The Case against Infant-Industry Tariff Protection," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 77(3), pages 295-305, May/June.
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Citations

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Cited by:
  1. Facundo Albornoz and Paolo Vanin, 2005. "Local Learning, Trade Policy and Industrial Structure Dynamics," Discussion Papers, Department of Economics, University of Birmingham 05-12, Department of Economics, University of Birmingham.
  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, CESifo Group Munich, vol. 0, pages 105-124, 02.
  3. Aleksandr Vashchilko, 2013. "Vertically related markets, tariffs, and technology adoption," Journal of Economics, Springer, Springer, vol. 110(3), pages 273-286, November.
  4. 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), HAL halshs-00429016, HAL.
  5. Alho, Kari E.O., 2008. "Regulation of Energy Prices in Russia," Discussion Papers, The Research Institute of the Finnish Economy 1128, The Research Institute of the Finnish Economy.
  6. 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, Institute of Economic Research, Hitotsubashi University gd11-191, Institute of Economic Research, Hitotsubashi University.
  7. Caroline Hoxby, 2014. "The Economics Of Online Postsecondary Education: MOOCs, Nonselective Education, And Highly Selective Education," Discussion Papers, Stanford Institute for Economic Policy Research 13-024, Stanford Institute for Economic Policy Research.
  8. Iimi, Atsushi, 2007. "Infrastructure and trade preferences for the livestock sector : empirical evidence from the beef industry in Africa," Policy Research Working Paper Series, The World Bank 4201, The World Bank.
  9. 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), Bank of Italy, Economic Research and International Relations Area 10, Bank of Italy, Economic Research and International Relations Area.
  10. repec:hal:journl:halshs-00111186 is not listed on IDEAS
  11. Dellas, Harris & Fernandes, Ana & Neusser, Klaus, 2007. "On the equivalence of quantitative trade restrictions and tariffs," Economics Letters, Elsevier, Elsevier, vol. 96(3), pages 331-336, September.
  12. Oleg Itskhoki & Benjamin Moll, 2014. "Optimal Development Policies with Financial Frictions," NBER Working Papers, National Bureau of Economic Research, Inc 19994, National Bureau of Economic Research, Inc.
  13. Caroline M. Hoxby, 2014. "The Economics of Online Postsecondary Education: MOOCs, Nonselective Education, and Highly Selective Education," NBER Working Papers, National Bureau of Economic Research, Inc 19816, National Bureau of Economic Research, Inc.
  14. Harrison, Ann & Rodríguez-Clare, Andrés, 2010. "Trade, Foreign Investment, and Industrial Policy for Developing Countries," Handbook of Development Economics, Elsevier, Elsevier.
  15. Saure, Philip, 2007. "Revisiting the infant industry argument," Journal of Development Economics, Elsevier, Elsevier, vol. 84(1), pages 104-117, September.
  16. Facundo Albornoz & Paolo Vanin, 2007. "Trade Policy and Industrial Structure," Discussion Papers, Department of Economics, University of Birmingham 05-12R, Department of Economics, University of Birmingham.

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