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International Trade, Globalisation and Exchange Rates: Question 8

Syllabus 6.2

Multiple choice 1 mark

A small company in Kelmoor has just started manufacturing electric bicycles. Because the company is new, it has not yet built up the scale of production or the experience of established foreign manufacturers, so it currently makes electric bicycles at a much higher cost than firms in other countries. The government of Kelmoor imposes a temporary tariff on imported electric bicycles, intending to remove it once the domestic company has grown large enough and gained enough experience to compete without protection.

Which reason for imposing trade restrictions does this scenario best illustrate?

Choose an answer to check it, then compare with the worked solution below.
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Worked solution

Step 1: Recall the reasons governments give for trade restrictions

  • Protecting an infant industry: a newly established domestic industry is given temporary protection (for example a tariff) so it can grow, gain experience and reach a scale where its costs fall enough to compete internationally, after which the protection is intended to be removed.
  • Protecting a declining industry: an older, established industry that is losing competitiveness (for example because of rising costs, or growing competition from abroad) is protected to slow its decline and preserve jobs.
  • Preventing dumping: restrictions are used to stop foreign firms from selling in the domestic market at artificially low prices (below their own cost of production), often to drive domestic competitors out of business.
  • Correcting a current account deficit: restrictions are used to reduce spending on imports, improving the balance between money leaving and entering the country.

Step 2: Match the scenario to a reason

Kelmoor’s electric bicycle company:

  • is described as newly started, not as an older firm in decline, which rules out protecting a declining industry.
  • has genuinely higher costs because it lacks scale and experience, with no mention of foreign firms selling below cost, which rules out preventing dumping.
  • is protected for reasons of cost and experience, not because of any stated balance of payments problem, which rules out correcting a current account deficit.
  • is a new firm being given temporary protection specifically so it can grow and become competitive before the protection is removed. This is the defining feature of the infant industry argument\boxed{\text{infant industry argument}}.

Final answer

  • The scenario best illustrates protecting an infant industry, option B.