Should government protect local industry?

Anonymous asked this question on 7/29/2000:

Is there a case for the government using subsidies to encourage the development of domestic industries by helping them win export markets. Is this fair play, or is it a form of hidden protectionism?(For example Japan)

JesseGordon gave this response on 7/31/2000:

Well, there's a case for it, that people make quite often, but I don't agree with their rationale.

It's called the "infant industry" argument -- when an industry in its in infancy, the argument goes, it needs government protection to get started or it will be swallowed up by international competition. The problem is that the infants never grow up, because once the protections are established, they become "special interests" who are well-protected and never go away.

For example, in Japan, the auto industry in the 1960s was just getting started and faced harsh competition from the established US giants. They got lots of protection as an infant industry. If you read the news today, Ford & GM still have trouble getting their cars sold in Japan, and our trade negotiators regularly complain about automobile protectionism, even though Toyota, Nissan, and the rest are clearly no longer "infants."

Infant industry protection does make sense if there are international competitors and you want the industry in your country. But one should question why you want the industry in you country -- how do you offer some competitive advantage in the long run that will meet and beat the international competition? Toyota & Nissan did so by offering smaller cars than their US competitors, and they got firmly established when gas prices soared in the 1970s and 1980s and demand for smaller cars skyrocketed (but it's not like they planned that -- it was just luck!). Unless your industry does something different than the international giants, why should your taxpayers' money fund an industry instead of just letting your taxpayers buy the equivalent from abroad?

The REAL answer is usually because there's some person or organization in power who wants a good deal. They couch their request as an "infant industry" protection, but what's really going on is a guy wants to have a protected monopoly on producing local cars so he can make a personal fortune. The problem with protectionism is that the guy getting the monopoly has a big stake in it, and will spend millions to lobby for it, while the people paying their taxes or paying a little more for cars have much less stake. So the monopolist lobbies and makes arguments like "infant industry" and wins, and maintains his monopoly indefinitely.

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