Races of Infant Industry Protection and Government Sponsored R&D Programs in Lead Markets - Implications for (Capital) Goods' Durability and Trade Policy

Infant industries have come to be associated with behind the frontier technologies in developing countries. This paper takes a fresh look at the infant industry problem and in the more contemporary perspective of developed-emerging economy competition in lead markets such as for example the global solar panel industry. The paper offers a simple dynamic model with learning to think about the problems of finding better mechanisms for global governance in these important industries. It is discussed how not only learning but also a myriad of other issues pertinent to the economic welfare inquiry is at stake such as the impact that durability (quality) of goods has on our consumption possibilities and the environment through turnover rates (waste management) and more ordinary externalities such as emission rates. Different policy scenarios (tariffs, ordinary subsidies, R&D subsidies and Non-Tariff Barriers (NTBs) such as standards affecting demand for innovation or learning) are considered under two different trading regimes. First one where all firms learn symmetrically in cost and the notion of national preference is purely idiosyncratic. Then one where learning paths and national preference partly could be conforming to national culture and institutions which may be fundamental determinants of our preference for things that endure. The best policy when preference is informative from a global governance perspective is either by targeting the supply side to make producers switch their learning priorities via standards for engaging in R&D programs. Or by targeting the demand side giving incentives that make consumers align their behavior with the most rational consumption choice once including the dimension of durability. However, the latter policy can only affect the intervening country’s own consumer welfare, whereas the former policy enhances everyone’s welfare. Hence the paper demonstrates that NTBs or standards can be welfare improving in ways that ordinary instruments such as tariffs and subsidies cannot. We can therefore not always think about standards as equivalent in form to tariffs. There is a need to open the black box on institutions and NTBs to really appreciate their good and bad aspects for international trade