I just discovered another objection to the infant industry argument. In a 2002 paper, Donghyun Park and Jung Hur demonstrate that a protected firm’s ability to export is not necessarily evidence that it is reaping the dynamic gains (economies of scale and learning-by-doing) touted by import substitution proponents.

In this note, we use simple graphical analysis to examine whether exports per se are evidence of the success of an IS trade policy regime. Our analysis indicates that it is possible for an IS industry to export even without the dynamic effects associated with the infant industry argument, according to which a domestic industry protected under IS eventually grows up to become internationally competitive.

In our analysis, the IS monopolist becomes more efficient only in the very limited sense that it moves down a given average cost curve, which remains above the world price everywhere. However, there is no growing up in a more fundamental sense of the infant industry argument – i.e. the IS industry’s price becoming competitive with world price. Indeed, in our analysis, the IS industry faces little incentive to grow up.

Therefore, exports per se do not necessarily tell us about whether IS enabled an industry to achieve significant efficiency gains over time. In fact, we showed that protectionism and economies of scale can combine to render exporting profitable for an IS monopolist that inherently cannot compete in world markets. Our analysis provides some grounds for caution in viewing exports as evidence of successful IS.