Alan Blinder

Hard Heads, Soft Hearts

The most traditional argument for protection is the so-called infant-industry argument. According to this argument, promising new industries need a little breathing time if they are to flourish and grow—especially if they are subject to important 'learning curves' or significant economies from large-scale production. If we expose these industries to the rigors of international competition too soon, it is argued, the infants will never develop to the point where they can survive on their own. They will wither and die rather than develop into the sturdy pillars of industrial society they might otherwise become. On these grounds, it is possible to rationalize temporary trade restrictions.

Although the infant-industry argument is potentially valid under the right set of circumstances, it is a bit like a mirage. It looks great from afar, but it begins to break apart as you get closer.

First, we have the problem of when and how to wean the baby from the bottle. A protected industry leads a nice comfortable life behind the safety of a stiff tariff or a stingy quota. It is most unlikely to volunteer to give up the comforts of a protected home market for the joys of unfettered international competition. A nation that offers such protection must forever be on guard against 'infant' industries that somehow never grow up, but pass from infancy to maturity to dotage always protected.

Second, the infant-industry argument is valid only if the ultimate gains to society will be great enough to repay the losses incurred by protection in youth. But, if the future gains are really there for the taking, what prevents capitalists from starting the industry without protection, running it at a loss for a while, and then reaping substantial profits when the industry matures? The answer is: nothing—except the fact that those same capitalists can make even more money if the government protects them. Red warning flags should go up whenever private funds are unavailable for. new industries with allegedly glowing future prospects. The government may sometimes be able to 'pick winners' better than the private market can. But our entire economic system is premised on the idea that it does not happen regularly.

In this light, it is interesting to observe that the best of what once were our infant industries neither needed, nor asked for, nor received protection from foreign competition. Radios, telephones, televisions, computers, and plain-paper copiers were all infants at one stage. Biotechnology still is. Doubtless, the learning curves and economies of scale appealed to by advocates of the infant-industry argument were significant features of these industries. Yet somehow each industry flourished without government protection.

A particularly pernicious variant of the infant-industry argument often surfaces in this country and especially in Europe. I call it the 'senile-industry argument.' Old, well-established industries—steel, autos, and textiles are good examples — come to Washington asking for 'breathing space' while they retool with the latest technology. Just give us a little time, they ask, and we will be back, ready to compete vigorously. The 1981 plea of Roger B. Smith, chairman of General Motors, is a perfect example of such a request. 'Any voluntary restrictions should be short term,' he said, 'just to give U.S. automakers turnaround time to get the domestic industry back on its feet.'

Such requests sound reasonable and are often granted. And so the oldsters eagerly climb back into their diapers. The trouble is that the time to take them off never seems to arrive. The auto industry still has trade protection, though not as much as in the early 1980s. The steel industry is an even worse offender; it has been protected more or less continuously since 1969. And the textile industry has been sheltered since 1962. Yet these senior citizens seem never to grow up. They continue to have difficulty coping with the harsh realities of foreign competition and ask for more and more coddling.