Globalisation refers to the increasing integration of world economies through the flow of goods, services, capital, people and ideas. While it creates opportunities for growth, governments may impose trade restrictions to achieve specific economic objectives.
Reasons for Trade Restrictions
Trade restrictions can be motivated by a range of economic, political and social factors. One key justification is the protection of infant (or sunrise) industries.
Protecting Infant (Sunrise) Industries
An infant industry is a newly‑emerging sector that is not yet competitive against established foreign producers. Governments may intervene to give these industries a chance to develop the necessary scale, technology and expertise.
Market Failure: New industries often face high start‑up costs and lack economies of scale, leading to higher average costs than foreign competitors.
Learning Curve Effects: Experience reduces unit costs over time; protection allows firms to climb the learning curve.
Strategic Importance: Certain sectors (e.g., aerospace, renewable energy) are vital for national security or future economic diversification.
Positive Externalities: Spill‑over benefits such as skilled labour, research and development, and technological diffusion can justify temporary support.
Common Forms of Protection
Import tariffs – a tax on imported goods.
Import quotas – a limit on the quantity of a good that can be imported.
Subsidies – direct financial assistance to domestic producers.
Non‑tariff barriers – standards, licences or regulations that restrict imports.
Evaluating the Policy
While protecting infant industries can foster domestic capability, it also carries risks. The following table summarises the main advantages and disadvantages.
Advantages
Disadvantages
Allows time for firms to achieve economies of scale.
Encourages domestic innovation and technology acquisition.
Reduces dependence on foreign suppliers in strategic sectors.
Potentially creates employment and stimulates related industries.
Higher prices for consumers due to reduced competition.
Risk of “infant industry” becoming a permanent protected sector.
Fiscal cost of subsidies and loss of tariff revenue.
Possibility of retaliation from trading partners.
Conditions for Successful Protection
Clear time‑frame – protection should be temporary and linked to measurable milestones.
Performance criteria – firms must demonstrate cost reductions, productivity gains or export readiness.
Transparency – policies should be publicly announced and reviewed regularly.
Complementary policies – investment in education, infrastructure and R&D to support industry growth.
Illustrative Example
Consider a country that wishes to develop a domestic solar‑panel industry. The government imposes a 20 % tariff on imported panels and provides a subsidy of \$0.10 per watt to local manufacturers. After five years, the domestic firms achieve a cost advantage of \$0.05 per watt and begin exporting to neighbouring markets.
Suggested diagram: A supply‑and‑demand diagram showing the effect of a tariff on the domestic market for an infant industry, illustrating higher domestic price and increased quantity supplied by local firms.
Key Take‑aways
Infant‑industry arguments justify temporary trade barriers to allow new sectors to become competitive.
Protection must be carefully designed to avoid long‑term inefficiencies.
Monitoring and evaluation are essential to ensure that the industry is progressing towards self‑sufficiency.
Potential Examination Question
“Explain why a government might protect an infant industry and discuss two advantages and two disadvantages of this policy.”