Interesting question

So, infant industry protection insists that you can only get an economy up and running if you protect said infant industries from foreign and more efficient competition. Thus tariffs!

Services generally do not face tariffs at all.

Some countries (India in programming?) have managed to build successful service industries without the protection of tariffs therefore.

What does this tell us about the case for tariffs and infant industry protection?

Discuss.

(That it’s bollocks is one useful answer of course)

17 thoughts on “Interesting question”

  1. Withholding taxes can be quite a good tariff.

    If you provide technical services to India, and get paid, then they take a percentage of the gross payment. You then get to credit that tax against UK tax, but as UK tax is on profit you end up out of pocket.

    The withholding tax can quite easily knock out all the profit on a job. Especially as the chaps tendering for contracts quite often don’t realize there’s an issue and so don’t price it in. Often the first you know of a project in India (or elsewhere) is a query from the project manager as to why he’s only been paid 80 when he was expecting 100, and asking when he’ll get the other 20 because his costs are 85…

    Add on the bureaucracy, and doing business in India as a foreigner is quite a bit harder than doing it as a local.

  2. I can’t comment on the merits of the “infant industry protection” argument – but there are two problems with your argument:

    First, the “infant industry protection” argument is that industry needs to be able to develop a domestic market, and tariffs help it do that, by fending off more sophisticated/profitable foreign competitors. However India’s service economy is generally not focused on domestic customers – tariffs are therefore irrelevant.

    Second, India does in fact have very significant non-tariff barriers. I’ve done business in India – or tried to – and the legal, regulatory and tax systems are so hostile to foreign businesses that I’d have gladly exchanged them for a 50% tariff.

  3. Tim, get real. Candidly, tariffs are there to protect consumers from low prices!
    With the growth of fully robotised manufacturing and innovations like 3D printing, tariffs are going to become somewhat irrelevant anyway.

  4. Surely, the cheapness and weakness of the currencies of developing economies provides (some) infant industry protection.

  5. At what point does an infant learn to stand on their own feet? Can have a tariff/protection for years, even decades. But it also insulates the industry from some of the competition. Why innovate when there’s no need to?

  6. Ralph Musgrave has it about right, although I don’t think we need to be so gender- or even species- specific.

    Tariffs allow meddling politicians to support their friends in inefficient businesses.

    How old is European agriculture? By my reckoning it must the the fourth oldest industry after hunting, spear-making and other hunting support ervices and prostitution (although some Bronze Age industry classifications may have put the last two together).

  7. Per Ciaran above, at least a tariff is simple and fairly unbureaucratic. Compared to non-tariff barriers (various regulations), a tariff is mercifully easy to take into account when selling into another country.

  8. “you can only get an economy up and running if you protect said infant industries from foreign and more efficient competition”

    Is that use of the word “said” indicate the Hand of Blarg at work?

  9. Ciaran – I’m not sure you’re correct. Given the resource being used by the outsourcers is a cheap and well educated workforce, the measurement is how well overseas companies have managed to come in and set up their own service centres to sell out services to other countries, as opposed to ‘home grown’ companies such as Infosys and TCS.

    And from what I understand, India did (and maybe still does, haven’t looked at this for a while) have significant barriers in terms of foreign investment in creating service companies. In most cases overseas companies had to get a local partner to work with, rather than setting up their own shop and employ people directly. It’s be interesting to look at whether these barriers helped the now ‘big guys’ such as Wipro to set up in the 90s and early 2000s.

  10. The only even one-quarter-respectable argument that I can think of for infant industry protection has to posit substantial economies of scale (“industry X will be viable in country Y, if only it can get big enough in the first place”). These economies of scale are just much less prevalent in most service industries than in most manufacturing. It follows that no one dares ask for IIP in services, whereas they will try it on in steel making.

  11. Why do we want to protect infant industries, anyway? I thought the whole idea is to put an end to child labour.

  12. Dave,

    You win.

    My two cents: Tariffs are almost always a bad thing. It is why we use them as punishment in the form of sanctions. Why anyone would willingly sanction their own economy is beyond me.

  13. Australia has given up on its infant industry protection of the local car manufacturers. I guess its hard to make a case for a 70 yo infant…..

  14. I think it’s useful in the cases of trying to get local businesses started in high-investment industries, taking “baby steps” before the country is ready to play with the big boys. I can see it being politically useful for turning around economies with precious little else going for them.

    If there’s little capital investment and you can start exporting from day one (like IT services) then tariffs aren’t necessary.

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