Question

Suppose the world price of an Airbus-320 airplane is US$80 million, and the price of a comparable airplane made in Brazil is US$100 million. Suppose Brazil’s government imposes tariffs of US$20 million on an Airbus-320 airplane. Let us assume that 20 years later the world price of an Airbus-320 airplane becomes US$70 million, whereas the price of a comparable airplane made in Brazil becomes US$60 million.

Does an infant industry argument justifies Brazil’s tariffs on Airbus320 airplanes? Explain your reasoning.

Answer 1

The Infant induatry argument says that new industry often do not have the economies of scale that their older competitors from other countries may have, thus for certain time period they need to be protected until they can attain similar economies of scale..

Now in the upper scenario Brazil's tariffs is fully justified on Airbus320 for initial period.. so at beginning both the prices are same (US$100 million).. Then after 20 years when the Brazil industry attain the economics of scale it's airplane price reduce to US$60 million, which is cheaper compare to the Airbus320 which price at US$70 million.

Thus infant industry argument justified Brazil's tariffs on Airbus320 aeroplanes..

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