Infant Industry Argument: Theoretical Framework And

3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032

INFANT INDUSTRY ARGUMENT: THEORETICAL FRAMEWORK AND CURRENT OPPORTUNITY OF ADOPTION Mamdouh Abdelkader yiwaFiahimaS Department of Economics, Department of Economics, Faculty of Commerce, Faculty of Economics and Political Sceinces, Damanhour University, Egypt Cario University , Egypta Gordon Fisher Gamal Atallah Department of Economics, Department of Economics, Faculty of Social Sciences, University of Concordia, Canada. University of Ottawa Canada.

Abstract---- This paper verifies the possibility of countries focus on technology intensive industries. using Infant industry protection strategy to In addition, developing countries can exploit the improve manufacturing competitiveness in increasing number of Regional Trade Agreements developing countries. The main theoretical bases (RTAs) to support their infant industries. RTAs of this strategy are: its significant role in creating extend the market size that may help infant dynamic comparative advantages in industries to develop their competitiveness manufacturing sector. This protection also gives through achieving economies of scale, learning by the industry time to learn by doing and achieve its doing and supporting backward and forward positive externalities. In addition, infant industry linkages. protection can be a virtual solution to market Keywords---- Infant Industry Arguments, failure which may impedes the establishment of Competitiveness, Industry Protection. such industry. This study supports infant industry 1. Introduction argument validity by showing successful One of the most important approaches to improving experiences of some countries at various times in manufacturing competitiveness of a certain country is history. It is found that most countries used such to protect its infant industries. Friedrich List (1841) policy to reach their industrialization. Some defines the infant industry " as a type of industry studies tried to refute the infant industry which is in its early stages of development; argument but they based their criticism mainly on potentially in need of some form of protective the failure of some developing countries to measures in order to survive and successfully correctly apply this policy, not on their theoretical compete with (foreign) mature competitors" (Govers, justification. Despite current WTO restriction to 2012). Because it is in its early stage of development, use infant industry, the paper argues that the the infant industry has high initial costs compared to chance of adopting this strategy still exists. This its well-established foreign counterparts; therefore, it can be mainly achieved by some policy space of needs time to achieve its competitive advantage. WTO rules to adopt this policy, especially if these Entrepreneurs do not have incentives to establish this 49

3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032

industry due to its initial high costs, so it needs book The National System of Political Economy temporary government protection to survive and (1841), List began by criticizing the classical compete internationally (Ali, 2013). However, to economics doctrine of Cosmopolitan Economics deserve such protection, the infant industry should (based on the laissez-faire principle), which supports have strong potentials allow it to increase its the necessity of government intervention in order to efficiency and cause its costs to decline, eventually to prioritize national interests. He argued that reach a competitive state. These potentials should government intervention is important to establish the involve achieving its dynamics such as learning by productive power1 of the country. This temporary doing, economies of scale, and externalities (Kruger intervention should concentrate mainly on Infant- & Tuncer, 1982). It is also not necessary to associate Industry protection, because of the lack of experience Infant Industry protection with Import Substitution and high risks involved in its establishment (Kicsi & Strategy; it can be used to achieve Export Oriented Buta, 2010, and Shin, 2015). Protection policies industrialization. East Asian countries adopted infant should not be limited to trade, but must include industries to upgrade their export oriented strategy in macroeconomic policies to enhance the socio- addition to import substitution. Bustelo (1996) economic environment. List was not against free reported that South Korea and Taiwan, for example, trade; he argued that protection was only permissible used protection not only to substitute imports but also when counties showed uneven levels of development, to enhance export sectors. In this paper, we will because free trade would make industrial present the theortical debate regarding Infant Industry development in the developing nation difficult and Argument (section 2), as well as the criticism of such maintain the country at an unvarying developmental policy (section3). It is also important to verify stage. In such a case, the protection of Infant- whether currently developed countries have adopted Industries would be necessary for industrial such policies (section 4). Section 5 shows the current development. When all trade parties show similar restrective WTO rules of using infant industry levels of development, free trade represents gains for strategy. In section 6, we will illustrate if currently all countries as the differences in their natural and developing countries are able to use infant industry human resources offer more benefits. policy under the World Trade Organization rules and In this section, we will review theoretical arguments current global environment. of Infant Industry Strategy: 2. Infant Industry: Theoretical Arguments A. Dynamic comparative advantage The argument of infant industry was first Ricardo‟s concept of comparative advantage (1817) theoretically formulated by Friedrich List (1789- depends on inherited factors of production over a 1864) in Germany, who was influenced by the ideas given period: i.e. it is a static concept. The main of Alexander Hamilton (1755-1804) and Henry Cary weakness of this static comparative advantage is its (1793-1879) in the USA, List based his theory on the historical experiences of different countries and then 1 List indicated that the productive power in a country is introduced some new theoretical arguments. In his determined by many factors. These factors involve political and social institutions, natural and human resources, an industrial base, and public work. 50

3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032

disregard for the structural context in developing industrialization was interrupted in its early stages. countries. In most cases, the static advantage of these Consequently, most developing countries reverted to countries lies in agriculture or natural resources. net export of raw materials and net import of Relying on these activities alone may inhibit industrial goods. Meanwhile, developed countries industrialization and higher economic development. focused on increased return activities such as The prices of agricultural goods and raw material manufacturing and knowledge-intensive products suffer from large natural fluctuations both upward (Zambakari, 2012). Many developing countries may and downward. GDP fluctuates accordingly, and have dynamic comparative advantages in some developing countries cannot reduce the extent of industries, but depending on static advantages alone these fluctuations. Furthermore, agriculture and makes it impossible for them to compete natural resources require skills and experience that do internationally. Protection is necessary for them to do not correspond to industrial activities. Thus, focus on so in the long run (Alavi, 1996). such activities hampers industrialization. In addition, To make matters worse, developed countries agriculture and natural resources have diminishing increasingly support their agriculture sector which returns to scale, which lead to deterioration in means that developing countries quickly lose their productivity, unlike specialization in activities that comparative advantages in that sector. Nguyen have increasing returns to scale such as (2008) showed that EU countries and the USA manufacturing. Erik (1996)2 indicated that, extensively support agriculture which makes historically, no country has ever achieved economic producers able to export at lower than their real costs. progress by depending only on diminishing returns to It also ensures that developing countries will be scale activities. unable to compete with those products at home or However, the theory of comparative advantage has internationally. In 2002, for example, the cost of not completely ignored factors of production growth; agricultural production in Europe was two or three but, it has left it entirely to market forces. This does times more than that of South Africa. However, EU not guarantee acceleration in economic development, subsidies for farmers make this cost just one-third of and it also deviates resources from industrialization that of South Africa. (Shafaeddin, 2000). Developing countries are also To not continue specializing only in agriculture and unable to deal with important dynamic issues such as natural resources, it is necessary to add a dynamic how to overcome the technology gap, how to face meaning to the comparative advantage. The concept high competition from developed countries, how to of a dynamic comparative advantage indicates that improve the manufacturing sector among other the comparative advantage can change over time. In factors (Ohno, 2001). other words, a nation can lose its comparative Because developed countries convinced, and even advantage over time and/or can gain another one. coerced, developing countries into adopting Developing nations ought to adopt policies to protect specialization based on static comparative advantage, infant industries and then create dynamic comparative advantages in manufacturing 2 Cited in (Zambakari, 2012) 51

3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032

(Suranovic, 2006 and Schydlowsky, 1984 as cited in important role to support and protect this industry Alavi, 1996). (Alavi, 1996, Surnavic, 2006, and Grossman, 1989). B. Learning by doing C. Market Failure The term learning by doing is a dynamic process that Some studies argue that the existence of market refers to the accumulation of experience and failure requires government intervention to protect knowledge in the process of production (Alavi, infant industries. One of the most important forms of 1996). It also leads to improvement in production market failure is due to imperfect capital markets in efficiency and a decrease in average costs developing countries. Their financial institutions are (Unterschultz, Lerohl, Peng, & Gurung, 1998). In any not effective in providing investment funds, new industry, there is learning by doing. Infant especially for new sectors. The establishment of an industries, however, are unable to compete infant industry can only exist according to its internationally without government intervention due profitability. Making small or zero profits in its early to early stage discrepancies. Government support stages creates an obstacle to the development of this gives these industries time to acquire knowledge and industry. First-best policy is to improve capital experience through learning by doing and then market efficiency. When governments encounter increase productivity and decrease their average costs difficulties in matching this policy, they should turn (Grossman, 1989, Arrow, 1982 as cited in Alavi, to protect the infant industry as a second-best policy 1996, and Nathan Associates Inc., 2004). (Krugman & Obsfeld, 2003 and Mityakov & However, learning by doing within the industry only Portnykh, 2012). cannot justify government protection because External positive externalities, which cannot be producers can be compensated in the future. There compensated, are also considered a form of market must be also a possibility of learning spillover within failure. The market mechanism is unable to and between industries (Kruger & Tuncer, 1982). In compensate the first producer for the costs of other words, to deserve protection; the establishment establishment of the infant industry while other of the industry should not only result in internal producers benefit from this establishment, through externalities, such as economies of scale and learning technology or knowledge spillover, and the by doing, but also external ones. These result from movement of labor. Therefore the first producer's transferring the externalities into other firms in the incentive to establish such industry declines. As a same industry or others outside the industry. The result, intervention is necessary as a second-best technology spillover and gravitation of skilled policy to stimulate producers to develop such workers are good examples. Without government industry (Krugman and Obsfeld, 2003, and Ali, protection, producers would not be compensated for 2013). these external externalities, and then they will have D. International unfair practices less incentive to set up these industries. In Free trade is not completely dominated as many conclusion, government intervention should play an developed countries support their own industries. In fact, almost all of today‟s “rich” countries use tariff

3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032

protection and subsidies to develop their industries There are some arguments against the use of the (Chang, 2003). For example, the USA, the European infant industry policy that arise in the applied Union, and Japan increasingly subsidize or protect framework. The possibilities of this policy to their industries in high-technology intensive (Orhan, succeed, like any policy, depend on different 2012). circumstances of each country. There are several Their support is based mainly on "strategic trade problems that can come about when governments policy", which relies on imperfect competition in the adopt such policy. First, it is difficult to select the international market. It makes the choices of each industry which deserves protection. It requires proper firm (e.g. output and prices) based on the strategic criteria to choose the candidate industries. Second, it decisions of other foreign companies. The state role is possible for some parties to use this policy just to is to make the decision of its national firm dominate achieve private interests regardless of efficiency in order to achieve its dynamics. These arguments considerations. In their book, International involve the existence of market failure, generating Economies, Krugman and Obsfeld (2003) indicated external economies and economies of scale, sources that: of technology, R&D spillover, and innovation In practice, it is difficult to evaluate which industry (Orgun, 2012). really warrants special treatment, and there are risks It seems logical here to compare the strategic trade that a policy intended to development will end up policy in developed countries and the infant industry being captured by special interest. There are many in developing countries. They have some similar stories of infant industries that have never grown up arguments. However, the first is based on imperfect and remain dependent on the protection. competition and directs its policies to well- In addition, some other counterarguments also appear established industries to achieve national interests at due to lack of information and small market size. the expense of other nations. The infant industry Many developing governments are unable to argument does not assume this market structure and determine which industries deserve protection and for directs policies to industries that are not established how long. This can lead firms or lobby groups in the developing countries which also have the submitting reasons to protect their firms. This lack of potential to achieve its dynamics in the future. governmental decision-making can also cause As long as developed countries support their resources to deviate from those deserving industries industries (based theoretically on the Strategic Trade to those that can survive in free trade independently Policy), it is fair for developing countries to protect (Govers, 2012). The situation could be made worse their industries based on the Infant Industry when the protected producers claim that their Argument. Moreover, the industrial support of industries still need protection for a longer time, not developed countries puts another obstacle to in order to compete internationally, but to benefit industrialization of developing nations. from that protection. In this case, protection will 3. Infant Industry Criticism result in impeding, not improving, the competitiveness of these industries. To continue

3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032

benefiting from protection, the producers may also Also, there are many least developing countries that have less incentive to achieve their competitiveness have small market size compared to developed ones (Surnavic, 2010, and Nathan Associates Inc., 2004) (Grubel, 1966, as cited in Govers, 2012). Small In addition, the infant industry argument assumes the market-sized countries, however, can form alliances existence of fair governments, but in practice, it may with other countries to enlarge market (Govers, 2012, be quite different. There may be political pressure to and Shafaeddin, 2000). protect certain industries, which do not have the Bell (1984) assessed the performance of infant competitive potential to achieve political interests industry application in some less developed (Nathan Associates Inc., 2004). Srinivasan & countries. He found that many industries failed to Tendulka (2002)3 indicated that attempts to help reach international competitiveness due to some infant industry reach their aims in the five-year specific factors. First, governments failed to select developmental plans in India, for example, failed to the right industries that are in line with relative factor achieve public interest. The result was that this policy endowments and who cannot therefore reach was used as a tool for distribution according to international competitiveness and/or adopt the right political interests. Nathan Associates Inc. (2004) also protection policies. Second, protected industries indicated that once protected Ghanaian industries failed to acquire technological capabilities that were separated and exposed to foreign competition, increased their productivity and which also helped the result became a negative added-value. them keep up with technological changes. The choice Ohno and Kenichi (2001) also concluded that the of production methods which were not in line with serious problem in adopting infant industry policy is relative factor endowments was also another cause of the government inability to design and implement infant industry failure. Finally, Bell (1984) also industrial development under temporary protection. indicated that another reason was governments‟ The role of government involves not only the inability to overcome market failure. This inability protected measures (e.g. tariff or subsidies), but also was greatly associated with external externalities, market failure corrections, macroeconomic including transfer of technological capabilities across management, income redistribution, and managing firms. These externalities led firms not to allocate external integration process, etc. However, in sufficient funds for technology enhancement. developing countries, governments have low Also, Gala& El-Megharbel (2008) concluded that the capacity, rigidity, red tape, corruption, low salary, failure of protecting and supporting some infant political influence, etc. Consequently, it might not be industries in Egypt (1980-2000) resulted from certain possible to enhance their industrialization even with factors: 1) Selected industries were outdated protection policies. activities (e.g. textiles, clothing, and leather products) Another counterargument states that small market with a limited effect to build industrial capability, size is a barrier to achieve economies of scale returns unlike the newer and more technology intensive and that it also restricts developing infant industries. industries; 2) The government did not associate its protection with the performance of its protected 3 As cited in Nathan Associates Inc. (2004). 54

3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032

firms. This association is necessary for deciding infant industry promotion (Maddison, 1991 as cited whether or not to continue in such protection; and 3) in Siddiqui, 2015). Harrison (1994) and Tybout The government did not use a specific time limit to (1992) empirically illustrated that there was a remove its protection which led producers not to positive correlation between such protection policy enhance their productivity while they continued and productivity growth. We chose a sample of receiving protection. different countries that achieved their As can be seen, criticism of infant industries appears industrialization in different times of their history. It when nations incorrectly apply it, but it is rare to find is useful to show how this policy is essential a study that criticizes the theoretical basis of the regardless of time. It is also crucial to show that the argument. This means that this criticism shows the main difference among these countries in adopting failure of some countries to apply infant industry such strategy is the existence of some changes in strategy and disregard several cases of success as we policy tools used for protection. illustrated above. However, it is necessary to mention England and the USA have started their protection these studies in order to realize the causes of failure policies by selecting some light industries and then to avoid them when a country intends to protect turned to heavy ones. Britain began adopting infant infant industries. industry promotion in the 18th century. It began by 4. Infant Industry: International Experiences protecting the wool industry which accounted for It is useful to verify whether the currently developed about half of British exports during the 18th centuery and most recently industrialized countries used infant thanks to protection (Chang, 2001). England, then, industry strategy during their early stages of turned to protect cotton products followed by iron. industrial development. We will review some The next group of protected industries included ship- experiences of these countries. building, fisheries, flax and silk (Shafaeddin, 1998). Friedrich List based his theory of infant industries on The USA also commenced by protecting several light the real experiences of already industrialized industries such as cotton cloth and wool (Chang, countries of his time. He says that developed 2001 and Shafaeddin, 1998. Between 1824 and1864, countries try to throw away the ladder to prevent the USA also turned to substantially protect its iron other countries from developing (Chang, 2001 and and textiles. Also, Irwin (2000) indicated the USA‟s Chang, 2009). Shafaeddin (1998) concluded that protection of the tinplate industry in the late 19th there is no country, other than Hong Kong, that has century (specifically in 1890). It also recently achieved its industrialization without protecting (with supported some industries such as computers, different protection degrees and varying policies) its aerospace, and the internet through giving R&D infant industries. Chang (2002) also stated that the support. Chang (2001) stated that all of such infant industry protection was used by now industries would not have existed without R&D developed countries to be rich in the nineteenth funding by the federal government. century. The history of developed countries In respect to protective policies, England and the industrialization proves that they depend mainly on USA have depended mainly on tariff protection that

3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032

included higher tariff rates on imported final goods Okazaki, 2016 and Chang, 2001). This reform and lower rates on imported raw materials that have included a foreign exchange allocation system that been used in the protected industries. The policy restricted the amount of foreign exchange permitted measures also included export subsidies and R&D to import each commodity. Hernandez (2005) funding (Chang, 2001). In England, in 1720, there indicated that after its occupation by American forces was a legislation specifically aimed at promoting between1945-52, Japan turned its focus to developing infant industries. It involved a decline in import heavy industries such as shipbuilding, automobiles, duties on raw materials, duty drawbacks on imported steel and aluminum refining. Ohyama and raw materials, export duties abolishment, an increase Braguinsky (2001) showed that the Japanese in export subsidies, a rise in duties on foreign government used some measures to subsidize a manufacturing goods, and product quality control. number of model factories in the cotton textile Chang (2009) summarized that in the 18th century, industry. The consequences of Japanese Britain was an aggressive user of industrial and trade developmental efforts were significant after World policies which tended to develop and support infant War II. For instance, Japan's GDP per capita grew by industries. In the USA, the first Tariff Act (1789) 11.6% between 1960 and 1970, which was an included protection contained high tariffs imposed on astonishing rate compared to what was happening in imported final goods and an exemption on raw most developed countries (Okuno-Fujiwara, 1991, materials from import duties (Chang, 2001, and and Chang, 2001). Shafaeddin, 1998). It should be noted that the International Monetary Canada also used the infant industry strategy; in 1879 Fund (IMF) and General Agreement on Tariffs and the Canadian parliament passed what is called the Trade (GATT) and other foreign countries requested National Policy. This Policy divided manufacturing Japan to remove its foreign exchange allocation goods into three categories depending on the system. In response to these pressures, Japan competitive pressure they faced. As industry was completely removed the foreign exchange allocation more vulnerable to foreign competition, the system in the 1960s. However, a new tariff system government imposed more tariff protections (Harris was introduced in 1961 whose primary purpose was et al., 2015). Harris et al. (2015) showed that the to protect growing infant industries. This new system growth rate accelerated much faster in industries that increased tariff rates for 251 goods out of 2233 total received the highest rates of tariff protection. Hinton commodities (Kiyota and Okazaki, 2016). In (2012) concluded that due to the National Policy addition, it used other protective measures such as tax Tariff of 1879, the Canadian cotton mills, as an advantages and subsidies in various forms. In the example, grew substantially. 1970s, Japan shifted its focus to technology-intensive In 1911, Japan introduced several tariff reforms industries, for example electronics and aimed at protecting its infant industries which also semiconductors. To promote these industries, Japan facilitated the import of raw materials as well as utilized various policy measures that were not limited controlled luxury consumption goods (Kiyota and to trade protection. They involved tax incentives,

3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032

R&D incentives, subsidized credit, direct subsidies, facilitated credit from state-owned banks (Hernandez, purchasing of foreign technology, barriers to entry 2005). and competition regulation, consultative system, and In respect to deserving industries, we found Taiwan, administrative guidance (Hernandez, 2005). for example, relies on the Stanford Research Institute Fujiwara (1991) showed that export competitiveness to select deserving infant industries. This institute in a number of technology-intensive industries, helped to select plastic, apparel, home appliances, particularly in the electronic sector, was mainly and consumer electronics until the early 1970s. Since attributable to the infant industry promotion strategy the 1980s, Taiwan has shifted its policies to support (Okuno-Fujiwara, 1991). high-tech, heavy, and petrochemical industries Hernandez (2005) showed that there is a consensus (Hernandez, 2005, and Lall, 2003). that East Asian governments extensively intervened With respect to Singapore, its major success factor to upgrade their industries. There are some was its ability to attract FDI by offering several similarities between protective policies used in the incentives that increasingly focused on high-tech postwar period in East Asian countries with those activities. The government intervention was focused used in other currently developed countries. on fields that supported the education system, R&D However, industrial policies in East Asian countries and infrastructure (Hernandez, 2005). Lall (2003) were more sophisticated. These policies involved also indicated that Singapore adopted highly better-designed export subsidies, less export tax interventionist policies, but always in the context of tariff rebates for the imported raw materials and free trade. It aimed at promoting selected industries machinery for export subsidies. They also contained by using policies to attract FDI inflows to achieve policies that tended to promote technological industrial development. capabilities and human capital accumulation (Chang, In China, despite its large market, the government 2001). realized that international competitiveness guarantees Bustelo (1996) showed that South Korea and Taiwan its survival in the global market. So, China has protected infant industries since the 1950s. merged the protection of its local industry (as in Protections involved an export-import system which Japan) with attracting FDI inflows (as in other East permitted firms to take import licenses according to Asian countries). China selected key industries. export targets. Korea and Taiwan relied on industrial First, from 1979-1986, it supported light industries development through several protective policies and textiles with measures such as direct control of (tariff and non-tariff), in addition to their support for quantity and price, and allocation of capital and accumulative technological capabilities to reach foreign exchange. It then focused on infrastructure, export objectives (Lall, 2003, and Lee, 1996). They energy industry, and material industries (coal, oil and also used certain policy measures aimed at achieving iron) until 1992. It also started to introduce FDI and high exports. These measures included duty giving incentives. From 1992 to 2001, China exemption for imported inputs, tax incentives, promoted automobile, machinery, electronics, petro- preferential access to capital, price controls, and chemical, construction and housing industries. Since

3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032

2001, it has been supporting high-tech industries. In capital-intensive activities, while at the same time, general, China adopted several policies to support its this agreement facilitated the support of industries such as financing leading industries, technological-intensive activities that are dominant in foreign exchange rationing, high tariffs, import developed countries (Natsuda & Thoburn, 2014). The quotas, and tax incentives (Kuchiki, 2007). agreement divided subsidies into three categories. 5. The Infant Industry policy and WTO rules The first category is prohibited subsidies that include From the international experiences of adopting infant export subsidies and subsidies for domestic, rather industry strategy, it is clear that countries have used than imported, inputs. The second category is the three main categories of policies to develop their actionable subsidies that are not necessarily illegal industries: tariff protection, subsidies, and FDI unless other countries present a proof of injury. The enhancement. WTO rules restricted using all of these third category is the permissible (or non-actionable) policies. Therefore, it is more difficult for currently subsidies, which involve subsidies that their target is developing countries to promote their industries. In promoting Research and Development (R&D), spite of developing countries participation in the regional development (assistance to disadvantaged WTO rounds, their developmental objectives are not regions or unemployment), and environmental met (Siddiqui, 2015). protection (subsidies to support plant and equipment In respect to tariffs, WTO restrictions included for new environmental regulations) (Natsuda & binding and decreasing import tariffs, restricting Thoburn, 2014). import quotas (Aggarwal and Evenett, 2014). It is evident from the Agreement that the usage of Shafaeddin (2009) concluded that developed subsidies to enhance industrial development is countries pushed developing countries to radically restricted. Although there is a policy space which is reduce tariffs on their industrial and agricultural reflected in some subsidy usage to upgrade goods, services, and to facilitate the activities of technological activities, regional development, and multinational corporations. This exchanged for slight environmental protection, these permissible subsidies decline in tariffs from developed countries on are often more afforded by industrial economics, industrial goods and in agricultural support. while developing economies have a shortage of Consequently, developing countries become less able public funds, which may create an obstacle to adopt to develop industries on a 'dynamic comparative such subsidies. In other words, the SCMs Agreement advantage' basis, while developed countries gained encourages the support of technological-intensive more access to developing countries' markets, industries that are dominant in developed countries especially in industrial goods. and limits the ability to support labor and capital- Subsidies are also restricted by WTO rules. The intensive industries that are dominant in developing Subsidies and Countervailing Measures (SCMs) countries (Shafaeddin, 2009, and Aggarwal and agreement restricted the ability of developing Evenett, 2014). countries to adopt policies aimed at enhancing their In respect to the ability of developing countries to industrial base, which depends mainly on labor and enhance FDI, WTO also restricted this ability.

3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032

However, FDI enhancement does not mean only the 2005). In this Article, developing countries are absolute increase in these flows, but, more permitted to use protective measures and sufficient importantly, means also the necessity of achieving flexibilities in their tariff structure to establish a positive effects on the economy such as job creation; particular industry and adopt quantitative restrictions strengthening the backward and forward linkages for balance of payment purposes. This article requires with domestic industries, and technology transfer. a form of compensation if the member uses it to “Trade-Related Investment Measures (TRIMs)” establish an industry. Since 1967, there is no country decreased developing countries ability to enhance used sections that require such compansation (Zedillo foreign investment direct inflows. TRIMs agreement et al., 2005). However, Section B of this Article does requires no discriminating treatment between not require compensation.It aimed at alleviating domestic and foreign investors. It results in the balance of payment problems through the imposition elimination of some performance requirements and of quantitive restrictions on the imported products if quantitative measures that governments may impose these imports negatively affected the balance of on foreign investors in order to develop backward payment and monetary reserves. Since Section B linkages from foreign investors to domestic firms, does not require compensation, several countries create jobs, and transfer technology (Shafaeddin, have used it. This section was revised in the Uruguay 2009, and Aggarwal & Evenett, 2014). Round and members must now announce their time Moreover, The Agreement on Trade-Related schedule to remove restrictive import measures taken Property Rights (TRIPs) created a legal framework to to solve balance of payment problems (Zedillo et al protect intellectual property rights (IPRs) such as 2005). Developing countries can use this section to copyrights, trademarks, patents, and industrial promote industries through using restrictive measures designs. It therefore limits the abilities of developing on trade that protect infant industries against imports countries to obtain technology spillover. that threaten their balance of payment (Amsden, 6. Infant Industry Policy: Current Possibility of 2000). Adoption In addition, there are other permitted provisions in The developing countries‟ opportunity to promote specific cases that can be used to protect domestic their infant industries can exist in some policy space industries in developing countries. In particular, there of the WTO and Regional Trade Agreements are some measures aimed at protecting from unfair (RTAs): trade practices that could distort the competitive A. Policy Space in WTO rules market internationally. These measures can be found Despite the above mentioned restrictions, there is still in the agreements of 'Subsidies and Countervailing policy space which is permitted after the Uruguay Measures' (SCM), and 'Anti-dumping Measures' Round. Article 18 (Governmental Assistance to (ADM). These agreements permit contracting Economic Development) is the first article that takes members to levy compensatory duties if the imports special rights of developing countries into are subsidized and anti-dumping duties if the imports consideration (Whalley, 1999, and Zedillo et al.

3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032

are dumped into the domestic market (Amsden, technology-intensive industries offers opportunities 2000). to accumulate capital and open up for innovation, The Safeguard Agreement moreover allows new technology and skill development. In addition, developing countries to protect their industries turning to technology intensive industries represents against the surges of imports. Countries are permitted a transformation from lower to higher value added to temporarily use import restrictions if these imports and from lower to higher productivity sub-sectors. increase either in absolute term, or relative to This kind of structural change is currently needed to domestic production, in a case that would lead to improve competitiveness in the manufacturing sector, serious injury in competitive domestic industries. especially in developing countries and to generate These restrictions help domestic industries to adjust funds to further upgrade manufacturing. structure towards improving competitiveness. Also, The policy space in the WTO to enhance technology- in Safeguard, it is approved that no measures should intensive activities has also increased. In SCMs be used against developing countries' products if they agreement, for example, the permissible subsidies are do not exceed 3% of imports (Whalley, 1999). partly aim at promoting such industries. In addition, With respect to foreign direct investment, the critical exports can be indirectly subsidized in case of point in TRIMs argument is that it prohibits establishment of science parks or export processing discrimination between domestic and foreign firms. If zones (EPZs). Also, WTO provisions related to the policy tool does not discriminate, it will be science and technology allows developing countries allowed. In other words, FDI measures that do not to develop their mid-technology and high-technology violate the national treatment principle and which are industries through science parks, R&D national consistent with WTO‟s rules are allowed (Natsuda & projects, in addition to temporary and transparent Thoburn, 2014). barriers to imports. For example, Korea, China, Developing countries can also follow a distinct Taiwan, and India have recently established science approach to protect their infant industries. This can parks aimed at promoting selected industries (e.g. be carried out through protecting technology- biotechnology). They have also adopted certain intensive industries because of their importance as policies that have included subsidies, special loans, well as the increased policy space available to and tax incentives (Amsden and Hikino, 2000). In upgrade such industries. addition, governments can use permitted

Contemporary technology represents a main safeguarding measures to adjust their industrial determinant to ameliorate growth and structure towards the adoption of technological competitiveness. Technology-intensive firms improvement or modification of their production innovate more, gain new markets and exploit process (Raza, 2005). available resources more productively. Higher To sum up, WTO rules reduced the policy usage to technology industries expand more strongly in protect domestic industries; yet, developing countries international trade (CIP Index, 2013). The can still currently select and protect strategic transformation from low to medium and high industries, especially in medium- and high-

3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032

technology. Developing countries can also select scale, learning by doing and other internal and certain operations or functions such as R&D, human external externalities. Therefore, these industries may capital development to better develop their industries. reach their maturation and achieve their international B. Regional Trade Agreements (RTAs) competitiveness. In addition, RTAs lead FDI to Regional economic integration is a preferential increase to benefit from the large market and agreement which links two or more economies facilitation of trade among parties. These flows may through the reduction or removal of barriers to enhance backward and forward linkages and economic transactions such as tariffs and technology transfer that support domestic industries administrative controls so as to increase standards of (Abdi & Seid 2013, Pokrivcak 2007, and Fox, 2004). living and peaceful relations (Abdi & Seid, 2013). To sum up, RTAs are a great opportunity for Recently, RTAs have been increasing as a developing countries to promote their infant consequence of the WTO framework based on MEN industries especially in countries that have small principle. Instead of removing or reducing tariffs for market size. Some of these regional agreements have all WTO parties, countries tend to do that for only a explicit articles to protect the infant industries of their subset of countries. Therefore, they expand the parties. For example, COMESA agreement, in article market for their domestic industries without breaking 49, devotes removal of non-tariff barriers and other WTO rules (Pokrivcak, 2007). These regional restrictions to infant industry protection. agreements become a considerable way to promote 7. Conclusion trade and growth. More than half of world trade The infant industry protection indicates that happens in the context of such agreements (Khorana temporary protection should be given to a deserving et al, 2009). Most countries, including developing industry to enable it to gain experience and compete ones, have joined one or more of the regional trade internationally (Krugman and Obsfeld, 2003). The agreements. 312 RTAs had been notified to WTO arguments of infant industry protection state that this until June 2005. All parties of WTO are members of policy can create dynamic comparative advantages in RTAs, except Mongolia (Afifi, 2007). manufacturing, which helps ameliorate RTAs have several effects. In addition to their static competitiveness. Otherwise, the economy would rely effects (trade creation and trade diversion4), they only on static comparative advantages which keep its have dynamic effects. The most important of these production structure dependent mainly on agriculture effects is protecting infant industries. RTAs give and raw materials. Protection also gives the industry industries an artificial “regional import substitution time to gain knowledge and experience through industrialization” environment (Abdi & Seid, 2013). learning by doing. In other words, a RTA expands the market in front of Some studies also referred to the market failure (e.g. such industries which lets them achieve economies of imperfect capital market and external externalities without compensation) as another reason for 4 Trade creation happens when higher-cost imports outside RTA members are replaced by lower-cost imports from the region. government protection. The study found this This leads to greater trade and specialization. Trade diversion takes protection a possible solution to alleviate pressure place when lower-cost imports outside the RTA members get replaced by higher-costs imports from a RTA member. 61

3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032

from unfair practices internationally, such as References subsidized and dumped imports. On the other hand, Aggarwal, V., & Evenett, S. (2014). Do WTO rules there are some counterarguments that arise due to preclude industrial policy? Evidence from the global inabilities to correctly apply it. For example, the economic crisis. Business and Politics, 481-509. government may be unable to select deserving Alavi, R. (1996). Industrialisation in Malaysia: industries, suitable protective policies, and the Import Substitution and infant industry performance. duration and level of such protection. London and New York : Routledge. The paper also found that most currently developed Ali, S. (2013). Why have most cases of infant- countries have adopted the infant industry strategy industry protection failed to generate benefits in during their industrial development periods. We terms of economic development? Retrieved from reviewed experiences of several countries as Academia. edu: examples (Britain, USA, Canada, Japan and East https://www.academia.edu/2364603/Why_have_most Asian countries). We selected countries that achieved _cases_of_infant- their industrialization in different times during the industry_protection_failed_to_generate_benefits_in_t history, to show that protection is vital regardless of erms_of_economic_development timing, even if policy measures may differ. Amsden, A. H. (2000). High-level Round Table on World Trade Organization (WTO) rules restricted the Trade and Development: Directions for the Twenty- possibilities of infant industry usage. However, first Century, INDUSTRIALIZATION UNDER developing countries can still protect certain NEW WTO LAW. UNITED NATIONS industries under WTO rules. This can happen CONFERENCE ON TRADE AND through: benefiting from measures that aimed at DEVELOPMENT. Bangkok. alleviating balance of payment problems, protecting Baldwin, R., & Krugman, P. (1986). MARKET from dumped and subsidized imports, as well as ACCESS AND INTERNATIONAL safeguard measures that protect from the surge of COMPETITION: A SIMULATION STUDY OF 16K imports. RANDOM ACCESS MEMORIES. Cambridge: Developing countries could also benefit from the NATIONAL BUREAU OF ECONOMIC support of the GATT 1994 for technology intensive RESEARCH, Working Paper No. 1936. activities. They can develop their mid- and high- Bell, M. (1984). ASSESSING THE technology industries through science parks, PERFORMANCE OF INFANT INDUSTRIES. Research and Development (R&D), and permissible Journal of Development Economics, 101-128. subsidies for such activities, in addition to temporary BUSTELO, P. (1996, December). IMPORT and transparent barriers to imports. PROTECTION IN NEWLY INDUSTRIALIZING Developing countries can also depend on their RTAs ECONOMIES. COMPARING BRAZIL ANO to develop their infant industries. These agreements MEXICO WITH SOUTH KOREA ANO TAIWAN. expand the market size and protect from competitors Retrieved from outside the country members. http://eprints.sim.ucm.es/26774/1/9627.pdf

3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032

CHANG, H.-J. (2003). Kicking Away the Ladder: Hartwich, F., & Patacconi, G. (2014). Beyond infant Infant Industry Promotion in Historical Perspective. industries and trade liberalization: Productive Oxford Development Studies, 31. development in a value chain and cluster context. Chang, H.-J. (2009, February 26). Economic History Global Commodities Forum. Vienna: United Nation of the Developed World: Lessons for Africa. Industrial Development Organization. Retrieved from Hernandez, Z. (2004). INDUSTRIAL POLICY IN http://hajoonchang.net/2009/02/26/eminent-speakers- EAST ASIA: IN SEARCH FOR LESSONS. programme-of-the-african-development-bank-lecture/ Washington, DC 20433 USA: World Bank. Duong, T. L. (2014). Optimal infant industry Hinton, M. N. (2012). INFANT INDUSTRY protection during transition to World Trade PROTECTION AND THE GROWTH OF Organization membership – A numerical analysis for CANADA'S COTTON MILLS: A TEST OF THE the Vietnamese motorcycle industry. The Journal of CHANG HYPOTHESIS. The Rimini Centre for International Trade & Economic Development, 23, Economic Analysis (RCEA). Rimini, Italy. 491-510. Irwin, D. A. (2000). Did The Late-Ninteenth-Century Galal, A., & El-Megharbel, N. (2008). DO U.S Tariffs Promote Infant Industries? Evidence from GOVERNMENTS PICKWINNERSOR LOSERS? Tinplate Industry . The Journal of Economic History. AN ASSESSMENT OF INDUSTRIAL POLICY IN KICSI, R., & BUTA, S. (2010). Protectionism and EGYPT. Cairo: The Egyptian Center for Economic “Infant” Industries. Theoretical Approaches. The Studies. Annals of “Dunarea de Jos” University of Galati. Govers, J. (2012). The Infant Industry Argument: a Kitano, T. (2011). Did temporary protection induce Critical Scrutiny . Stockholm: Stockholm School of technology adoption? A study of the US motorcycle Economics. industry. Tokyo : National Graduate Institute for GRANT, R. M. (1991). PORTER‟S Policy Studies. „COMPETITIVE ADVANTAGE OF NATIONS„: Kiyota, K., & Okazaki, T. (2016). Assessing the AN ASSESSMENT. Strategic Management Journal, effects of Japanese industrial policy change during Vol. 12, 535-548. the 1960s. Journal of The Japanese and International Grossman, G. M. (1989). PROMOTING NEW Economies, 31-42. INDUSTRIAL ACTIVITIES: A SURVEY OF Kruger, A., & Tuncer, B. (1982). An emperical test RECENT ARGUMENTS AND EVIDENCE. Public of the Infant Industry Argument. the American and International Affairs. Princeton: Princeton Economic Review, 72. No.5, 1142-1152. University, Woodrow Wilson School. Krugman, P., & Obstfeld, M. (2003). International Harrisa, R., Keay, I., & Lewisb, F. (February, 2015). Economics: Theory and Policy, Sixth edition. Berlin: Protecting infant industries: Canadian manufacturing Frete Universal . and the national policy, 1870–1913. Explorations in Kuchiki, A. (2007). Indistrial Policy in Asia. IDI Economic History, 15–31. Discussion Paper No. 128. Chiba, Japan: Institute of Developing Economies.

3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032

Lall, S. (2003). Reinventing industrial strategy: The https://econ.ucalgary.ca/sites/econ.ucalgary.ca/files/o role of government policy in building industrial hashi.pdf competitiveness. Working Paper Number 111. Ohno, K. (2001, January 11). Free Trade versus Washington, DC : G24 Intergovernmental Group on Infant Industry Promotion: The Possibility of Monetary Affairs and Development. Temporary Protection for Latecomer Countries. LEE, J.-W. (1996). Government Interventions and Retrieved from Productivity Growth. Journal of Economic Growth, http://www.grips.ac.jp/vietnam/KOarchives/doc/EP0 391--414. 3_VNinfant.pdf Melitz, M. J. (2005). When and how should infant Okuno-Fujiwara, M. (1991). Industrial Policy in industries be protected? Journal of International Japan: A Political Economy View. In P. Krugman, Economics, 66, 177– 196. Trade with Japan: Has the Door Opened Wider? (pp. Mityakov, S., & Portnykh, M. (2012). The Infant 271 - 304). Chicago: University of Chicago Press. Industry Argument and Renewable Energy Orgun, B. O. (2012). Strategic Trade Policy Versus Production. Arlington: Marshal Institute. Free Trade. Procedia- Social and Behavioral Mulatu, A. (2016). On the concept of Sciences, 58, 1283 – 1292. ‟competitiveness‟ and its usefulness for Policy. Porter, M. E. (1990). The competitive advantage of Structural Change and Economic Dynamics, 36, 50- nations: The competitive advantage of nations:. 62. Harvard Business Review. Nathan Associates Inc. (2004). Infant-Industry Raza, M. A. (2005). WTO rules for protection of Protection and Trade Liberalization in Developing industry. Economic Review, 5/6. Countries. Washington: USAID. Sauré, P. (2007). Revisiting the infant industry Natsuda, K., & Thoburn, J. (2014). How much policy argument. Journal of Development Economics, 84, space still exists under the WTO? A comparative 104–117. study of the automotive industry in Thailand and Shafaeddin, M. (1998). HOW DID DEVELOPED Malaysia. Review of International Political Economy, COUNTRIES INDUSTRIALIZE? The History of 21:6, 1346-1377, Trade and Industrial Policy: The Cases of Great DOI:10.1080/09692290.2013.878741. Britain and the USA. Geneva: Nguyen, J. (2008). The Generalized System of UNCTAD/OSG/DP/139. Preferences. Retrieved from CiteSeer: Shafaeddin, M. (2000, July). WHAT DID http://citeseerx.ist.psu.edu/viewdoc/summary?doi=10 FREDERICK LIST ACTUALLY SAY? Some .1.1.501.3929 Clarifications on the Infant Industry Argument. Ohashi, H. (2003, March). Learning by Doing, UNCTAD/OSG/DP/149. Geneva, Switzerland: Export Subsidies, and Industry Growth: Japanese UNCTAD. Steel in the 1950s and 60s. Retrieved September 27, Shafaeddin, M. (2009). The political Economy of 2016, from WTO with special reference to NAMA Negotiations.

3rd International Conference on Social Sciences Economics and Finance on 26th - 27th August 2017, in Montreal, Canada ISBN: 9780998900032

Political Economy of International Organizations. Geneva. Shin, H.-Y. (2015, March 30). Revisiting Friedrich List‟s National System of Political Economy. Retrieved from ECONOMIC THOUGHT History, Philosophy, and Methodology: http://etdiscussion.worldeconomicsassociation.org/? wea_paper=revisiting-friedrich-lists-national-system- of-political-economy Siddiqui, K. (2015). Trade Liberalization and Economic Development. International Journal of Political Economy, 44, 228–247,. Suranovic, S. (2006). International Trade Theory and Policy Analysis: Introductory Issues. The International Economics Study Center. Unterschultz, J., Lerohl, M., Peng, Y., & Gurung, R. (1998). A Nutraceutical Industry: Policy Implications for Future Directions. Edmonton, Canada: Department of Rural Economy, University of Alberta. World Trade Organization. (1986). General Agreement on Tariffs and Trade, Text of the General Agreement. Geneva. World Trade Organization. (n.d.). The WTO Agreements Series 2. Genève. Xu, B. (2006). INFANT INDUSTRY AND POLITICAL ECONOMY OF TRADE PROTECTION. Pacific Economic Review, 363–378. Zambakari, C. (2012). Underdevelopment and Economic Theory of Growth: Case for Infant Industry Promotion. The Journal of Sustainable Development, Vol. 8(Iss. 1), 171-187.