How do tariffs work to protect infant industries?
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Tariffs, which are taxes on imported goods, can be used as a policy tool by governments to protect infant industries, which refers to emerging domestic industries that are not yet competitive on the global market. The idea behind using tariffs in this context is to provide a temporary shield or protection to give these industries a chance to develop and become self-sufficient before facing international competition.
Here's an explanation of how tariffs work to protect infant industries:
1. Identify the Infant Industry: The government first identifies industries that are in their early stages of development and require protection to compete with established foreign industries.
2. Impose Tariffs: Tariffs are then applied to imported goods that directly compete with the products of the infant industry. These tariffs are set at a level that creates a price disadvantage for imported goods, making them more expensive than domestically produced alternatives.
3. Price Increase: As a result of the tariffs, the price of the imported goods rises, making them less attractive to consumers. Domestic products, even if they are initially more expensive or of lower quality, become more competitive in the local market.
4. Market Share and Growth: With reduced competition from imports, the infant industry has the opportunity to expand its market share and grow. This can result in economies of scale, improved technology, increased production efficiency, and eventually, lower costs.
5. Gradual Reduction of Tariffs: The protection provided by tariffs is generally intended to be temporary. As the infant industry becomes more competitive and matures, the government gradually reduces the tariffs. This motivates the industry to strive for efficiency and innovation, knowing that protection will not be indefinite.
6. International Competition: Over time, as the infant industry becomes established and competitive, the tariffs are phased out or significantly reduced. This exposes the industry to international competition, promoting efficiency, productivity, and the ability to succeed in the global market.
It's important to note that while tariffs can be used as a protective measure, they can also have negative consequences, such as higher prices for consumers, potential trade conflicts, and reduced market access for exporters. Therefore, the decision to implement tariffs as a means to protect infant industries should be carefully considered, taking into account the potential benefits and drawbacks.