The infant-industry argument refers to the need for protection of emerging industries in a country in order to allow these industries to become competitive with their foreign counterparts. Many times, firms within industries have the potential to become major players in the economy, but their newness to the industry disadvantages them in comparison to older and bigger firms. The argument predicts that if firms having the potential to become as competitive as other foreign firms are protected by the government, they will eventually succeed in becoming as competitive as the foreign firms. The government can pursue this protectionism by implementing trade policies such as tariffs or subsidies. Also, as years go by and the industry matures and attains the economics of scale necessary to become competitive, government aid is expected to decrease until the industry is independent and competitive.
One of the problems that the infant-industry argument poses is that most of the times it is hard for governments to choose the right industry to protect. It is often difficult to identify which industries could truly become competitive in world markets. Another criticism for the infant-industry argument is that the industries that are being helped lose motivation to become more efficient and competitive. If industries continue to rely on government protection, they will lack any incentive to reach their potential. According to Grieco & Ikenberry, this would lead governments to be confronted with, “an uncompetitive industry and a hard choice between allowing that industry to remain in place, (…), and permitting trade but forcing a larger and perhaps more painful reallocation of national resources across sectors...” (46)
As a result, the major challenge with the infant-industry approach is that governments must be perceptive when choosing which industry to protect, because if they support the wrong industry, it could lead to more problems than progress.