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The infant industry argument suggests that an industry may be developed under the umbrella of the government's temporary protection. Such a policy must weigh the future cost savings of an industry in which dynamic economies of scale are present with the current consumers' foregone rents due to higher domestic prices as well as higher imported prices of similar products. By establishing an import tariff that is somewhat related to the efficiency level of the domestic industry relative to the foreign one, the government articulates a rent redistribution mechanism, from domestic consumers to local producers, that may help the local industry to overcome the initial cost disadvantage and thus survive in the long run.
The argument that local industry can develop only if given a chance to reduce costs has been around for a long time. During the first Washington administration (1788-92), the first U.S. secretary of the treasury, Alexander Hamilton, favored the temporary protection of the American industry to facilitate its full and fast development as an effective way for the United States to become less dependent on English manufactures. Import substitution can certainly be welfare enhancing if learning is fast enough so that near-future cost savings overcome current consumer losses. It should be pointed out that an import duty not only makes imports more expensive. It also allows domestic producers of similar products to charge higher prices, thus softening domestic competition. This is perhaps the reason why Thomas Jefferson, then secretary of state of the Washington administration and representative of the rural South, bitterly opposed Hamilton's protection plan. Import duties immediately made consumption of all products more expensive for southerners while the North reaped the gains through an increase in jobs and industrial capability. Hamilton's policy - as later Friedrich List's proposals for Germany - was intended to be temporary but it was still around more than a half century after it was first implemented, and the issue of protection was second only to slavery in the contentious relations between the North and the South in the period leading up to the Civil War.
The academic debate surrounding the infant industry argument focuses on whether this policy can be effective and on analyzing whether the future gains offset current costs. But this is...