 Welcome to the discussion series on free trade and liberalization as part of the 1991 project at the Mercator Centre. This series on trade is a joint effort by Mercatus' 1991 project and Columbia's Deepak and Neera Raj Centre. I'm Shruti Rajagopalan and in this conversation, I will be talking trade with Professor Arvind Panagariya, who is the Director of the Deepak and Neera Raj Centre in Indian Economic Policies and the Jadij Bhagwati Professor of Indian Political Economy at Columbia University. In the past, he has served as the first Vice Chairman of the Niti Ayog in Government of India and as the Chief Economist of Asian Development Bank. He is the author of a number of books, but for today's conversation, we will focus on his recent book, Free Trade and Prosperity. Welcome, Arvind. Thank you, Shruti. Pleasure to be with you. I'm so thrilled to start part two of our conversation. So when India embarked on protectionism and import substitutions and near autarky then in the 60s and 70s, it was the orthodoxy for developing countries. There were a lot of arguments for protectionism that were given in those times. The most salient of those arguments was that infant industries need to be protected, especially in developing countries. There has been a sacred history here because the argument is a very old one, more than 200 years old actually. While even in the 17th century, in some form argument had been made, we trace it to Alexander Hamilton. I think that's where we have a clear kind of statement or the argument, at least in its most kind of rudimentary form. Later on, John Stuart Mill had a paragraph, Blessing the Argument. Frederick List wrote a whole book. So John Stuart Mill was around in 1848. Frederick List, who gave the argument a slightly different twist, applying it to the entire manufacturing sector. And he was much more comfortable with protection to infant manufacturing sector, even for several decades and so forth. He wrote in 1856 a very influential book. And then Charles Francis Bestable in 1887 wrote on it, each adding a different side to it. But all this while, this was not taken very seriously. It was seen that that's a possible interesting argument, but industrial countries were already way out of the range where you would say that any of their sectors were infant for protection. And as a result, it didn't play any major role in terms of countries invoking the argument to protect the sectors. But after the Second World War ended in the developing countries began their process of development, the argument acquired new salience. And that is the time James Mead kind of reexamined it very carefully in his book, for which he actually eventually won the Nobel Prize, the first Nobel Prize in International Trade. And the last, I would say, very important contribution to it came from Robert Baldwin, who in fact questioned even the manner in which James Mead had reformulated the argument. James Mead was the first one who made the distinction between external economies of scale and internal economies of scale. And Baldwin came along and said that even when economies of scale are external, the argument really doesn't hold. So that's sort of rough history and we can take it along. So what exactly is the argument of infant industry protectionism? I guess aspects like what is an infant industry? How long should the protection continue? What are the logical aspects, if any, of those who favor protectionism to further infant industries? So first I'll give you what the basic idea is. And then I'm going to poke the holes in that idea from different angles. So the basic idea is that look, there are these learning economies of scale that when you carry out production activity, there is some learning process. And that learning process leads to decline in the cost of production in the future. So production today basically lowers the cost of production tomorrow. So that's the kind of working hypothesis initially. So what happens is that if today the production costs are higher, then the world prices of the same product, then the industry is not able to stand competition from those outside producers who have had a longer history of production and therefore they have already done their learning. So nevertheless, tomorrow if I actually allow production activity in my own country to take place, then tomorrow my costs would decline sufficiently that the resulting profits will more than outweigh the losses that I incur today in net present value terms. But since the infant is unable to stand competition from the established foreign manufacturers today, it never comes to life. And so a socially desirable manufacturing activity fails to emerge. That is the sort of premise and so you say that well, you know, then if we give temporary protection today to the industry, then it will come into existence, it will do its learning and it will then become competitive tomorrow. So that is the basic kind of argument, basic set of circumstances laid out by the argument. Here I might point out that originally when we go back to Hamilton and Mill, they had not seen this nuance at the time that ultimately even for the activity to be socially desirable, today's losses have to be recovered in net present value terms by profits tomorrow. So the mere fact that industry is profitable tomorrow is not sufficient for the industry to be protected justifiably. Those profits have to be large enough to more than offset the costs that I incur today or the negative profits that I incur today. That was the point that Bestable made afterwards in 1887. So largely by the time we come to the Second World War, the argument stands where Bestable is left and that's how I have just outlined it to you. So I guess the crucial assumption is one about learning. So I want to take you back one step behind before we get to trade. How do firms learn? Is firms learning internal? By doing, is it external? What is a good model to think about firms learning to then bring it in as an assumption which bolsters these infant industry protectionism arguments? So Shruti, what I'm going to do is I'm going to use a highly simplified example and I want to be very, very specific in the way we are specific in economics models. So I'm going to lay down a very, very simple model which captures the essence of the argument and also allows me therefore to pick out where the problems are. We can pinpoint precisely where the problems are. So I'm going to in the next half hour simply kind of lay out this and step by step make a distinction between internal economies of scale, external economies of scale, then also the sources of those economies of scale. How if it is an externality, it travels from the firms today to firms tomorrow. All that I think makes matters and so let's take a very clear, simple example. The example may appear overly simple but that's only done for keeping the exposition clear. None of these assumptions is actually necessary. I can generalize it. I mean generalization is not an issue here. So all the simplification I'm doing is to make it clearer for the listeners to be able to see where the problems arise and how the argument is made in the first place. So what we'll do is we'll think in terms of a two-period model because it's about learning. So we have to have at least two periods. We can have multiple but we'll simplify. We'll just say two periods that there is today and there is tomorrow. We will also say that this is a particular product for which domestically in the country where we are considering infinite industry protection, demand is fixed. So we'll just say the product is widget and there is one demand for one million widget today and there is demand for one million widget tomorrow. So very simple demand. It's a fixed demand. So if you want to think in the demand curve, it's a vertical demand curve with price on the vertical axis and quantity on the horizontal axis. Okay, next we say we also will rule out any exports by assumption of high transport costs. So I want to think a very simple situation in which the production required is only one million. As I said, none of these assumptions is necessary to make the argument but they are useful for simplification. So that's the basic domestic structure that we are going to work with. Total production activity to take place is one million widget today, one million widget tomorrow. Now on the delivered import price. So we will also say that there's possibility of importing widget and the import price is fixed both today and tomorrow at $90 per widget. So finally the per unit cost of production. So what is the per unit cost of production at home? Today or period one per unit cost of production is 100 which is more than the $90 delivered price by the foreign manufacturers. The import price is 90. So today the production cost is 100 and therefore it's unprofitable to produce and no firm will come in to manufacture it just based on that fact. But in period two tomorrow the cost because of this learning economies of scale drops to let's say $79. So this is the learning effect of manufacturing activity in period one. And at $79 tomorrow there will be a profit therefore of $11 whereas the loss today is $10. So we'll also say finally one more technical assumption that the social rate of discount is 0%. So tomorrow's income is as good as today's income. Normally social rate of discount is a positive number. It could be 5%, 3%, 2%. But again it's a simplification. It is just numbers are simplified by making the assumption of zero discount rate. So we can compare tomorrow's $11 with today's $10 and say that well loss of $10 today is more than offset by $11 income tomorrow. And therefore the activity is a socially desirable activity. This is a project that the country should undertake because the benefits in terms of net profit in net present value terms are positive. So that's my basic kind of structure. So if we do the cost benefit analysis it will tell you tomorrow my profits are $11. Today it's $10 and the value of tomorrow's $11 today is $11 because my social rate of discount by assumption is 0. And so on net I'm making a profit or the benefit is $1 million, $1 on each widget and $1 million widget demand. So total $1 million net benefits. So widget manufacturing at home is socially desirable activity. So that's my starting point. So now in this starting point, the assumption that is being made is one that learning in time period one is going to reduce the costs in time period two such that overall there is a benefit by keeping the industry protected. So now the second part of that question is, is that assumption a sensible assumption? Is that in fact how firms learn is all learning internal to the firm or can firms also learn through competition? So let's you know at this point we are going to lay it out as the proponents of the argument actually laid out. So what you have said is extremely valid and very important. And when we come back to ultimately round off the discussion of the argument itself, once I've gone through the conceptual basis on which the argument is made. Then what you pointed out will be very important. In practice, I think, you know, I completely agree with you. So let's come to that. Towards the end. But first, you know, what I have done actually is said in fact nothing about how the learning is taking place. It's a production activity somehow which is leading to the learning. So the next step exactly you already anticipated of course, you know, the next step is then to ask the question whether this learning is internal to the firm or it is external to the firm. So we are first going to say that let's say that learning is internal to the firm. What that precisely means is that when the cost declines tomorrow, the cost is going to decline tomorrow only for the firm which already engaged in production activity today. The new entrance tomorrow cannot come in and produce at the same cost of production. So that is what the internal nature of learning means. That whatever learning that has happened, it may have happened because there was some innovation. It may have happened because the firm actually trained the workers, the workers acquired skills. But whatever be the source which we will actually identify more explicitly later on. Right now all we are saying is that whatever learning takes place takes place within the firm and it cannot be taken advantage of by any new entrance tomorrow. So this is the assumption. Well, if that is the case, then what we know is that the per unit cost of production will fall tomorrow only for those firms or that firm which produces the product today. And then the firm knows that well, when it goes into production activity, it is going to incur a loss today of $10. But tomorrow it will make a profit of $11. So it is only a matter of finding a way to cover my losses of $10 million today. So there's a $10 per widget loss which is on a million widget is $10 million loss. And I just need some way to finance basically that loss. Well, I can go to a bank, produce my blueprints of production to the bank and borrow money from the bank to finance my losses today of $10. And then tomorrow when I make the profit of $11 million, I would pay back the $10 million to the bank. Because here again, if the capital markets are undistorted, in that case, I can borrow, given that the social rate of discount is 0, the interest rate will also be 0. This is again an assumption about the financial markets, about the capital markets that with no distortions in the capital markets, the social rate of discount is 0, then the interest rate is 0. So tomorrow I have to pay back $10 million to the bank. And I go back, pay back $10 million and there I've got the net profit of $1 million. There is no need here for the government to step in because my profits tomorrow offset my losses today. And financial markets allow me to borrow and then repay the loan. So in this case with internal economies of scale, no intervention is actually required. That's what James Mead pointed out. In 1955, James Mead kind of pointed out this was the next kind of big step from Bestable. Bestable sort of had not made this distinction between internal and external economies of scale. And so as long as the economies of scale are internal, no intervention is actually required. So this obviously begs the question that if we took away that all learning is internal to the firm. So if we tweak the assumption a little bit and let's not bring in free trade just yet. Let's just keep it to the domestic economy. If we assume as is more realistic that actually incumbent firms tend to share their learning with new entrants, how does that impact this argument for infant industry? So this is still very much within the domestic market. We're not yet introducing outside entrants to the market outside of that domestic economy. Let me be clear here that obviously the outside possibility of outside imports is there because that's how we are determining the $90 price and the domestic firms sell the product for $90 precisely because if they were to raise the price above $90, then the imports will beat it out. So the presence of although there are no imports because it is not even required, domestic firm is able to actually compete with the imports at $90 as long as the economies of scale are internal. So now let's turn to the possibility of external economies. What does it mean for the learning economies to be external to the firm? So what what externality here means is conceptually speaking, that although the firm that produces today is the firm that entered the market today, but whatever learning it takes place. Now we are not saying what is the source, what's the reason, but whatever learning takes place and whatever cost reduction happens tomorrow becomes available to other new entrants as well. So what is assumed is that for whatever reason, maybe the workers kind of break away from this firm today or something of that sort and the productivity is gained by the workers and they kind of go to the other firms tomorrow or maybe the firm undertook some kind of innovation, but innovation becomes also available to the others tomorrow. For whatever reason, the cost reduction happens not just for the firm that is an entrant today, which we will call the incumbent firm, but it is also available to the new entrants tomorrow. Now what will happen in this case? What that means is that when tomorrow production activity begins, cost will fall to $79 not only for me, for the incumbent firm, for the firm that did the manufacturing activity in period one, but for all the new firms that enter also in period two. If that is the case then all those firms have no losses to recover from period one because they were never producing anything in period one or they can produce it at $79. When they enter and there is competition among them, the price itself will drop to $79. You see that this is and this is the free ridership problem here that because they cost declines for anybody who wants to manufacture tomorrow because the innovation or the workers, more productive workers become available to everybody, cost declines for everybody to $79 and then competition among them drops the price to $79. So the firm today, the incumbent firm, which did the initial manufacturing activity whose production activity led to this decline in the cost of production tomorrow simply cannot recover its losses in the period one. It lost $10 million in period one and whereas with economies of scale staying internal, it could recover, in fact, make a profit of $11 million in the second period and more than recover the losses in the first period, it cannot do it now when it comes to period two. So it will never enter the market in the first place. So it will say, well, I know that tomorrow everybody's cost will decline to $79. I will have to also sell at $79 and if I have to do that, then I cannot recover my losses in the first period. So there's no point, I will not enter the production activity. And this is where then the legitimate argument is made that well, this socially desirable production activity will fail to emerge because markets failed in a sense is a market failure. And so if I introduce protection in period one, so if I introduce a $10 per widget tariff on imports, then imports today will also come at $90 plus the 10% custom duty therefore will be sold at $100. That will make my domestic firm today viable. So the domestic firm that chooses to order number of firms that choose to enter the market to undertake production activity today will see that although their cost of production at $100, imports will also be coming in at $100, so therefore they can compete with them. So production activity will happen. And as a result, of course, the protection will make it possible. Tomorrow you can remove the protection because learning would have then taken place. And so there is temporary protection which makes production viable and it allows a sector which is socially desirable to actually emerge. So this is the essential logical argument that is made by the infant industry protection proponents. And you can, you know, papers have continued to come. You know, we have an original paper by Pranab Badhan which made this argument. Then afterwards there is also, you know, around 2003 or 2004 there is a paper by Mark Mallitz, for instance, which also essentially exploits this particular argument. Before we get to the prospects of exports and all, I still want to sort of take an issue with this argument if you see. Yes. This is really an issue that Robert Baldwin took with it way back in fact and pointed out that there is really, you know, once you examine this argument more carefully even. So this was, you know, James Mead was the one who resurrected to some degree, you know, with this learning kind of external economies that, you know, once the learning is external and other firms can also take advantage of the reduced costs in period two, then indeed a case of protection can be made. Now, what I want to, I mean, you know, what I want to do is ask the question more fundamentally question, right, that what is it that allows the other firms, new entrants in period two to actually be able to benefit from this learning that is happening from the production activity of the incumbent firm in period one, right. The whole question here is that how is this externality traveling from the period one incumbent firm to the period two entrants? I mean, you know, it's almost looks like a magic that somehow, you know, although the learning happened, it was the incumbent firm that undertook the production activity, but everybody is actually able to produce this product at this lower cost of production. So what is the source of this externality, right? I mean, ultimately, where is learning taking place and how is this learning spilling over to these other firms that enter in period two? That is simply not made clear at all by this kind of mechanical argument, right. The mechanical argument that says that, you know, whatever is the production activity in period one, on account of that, the cost of production declines for everybody in period two. But that's quite magical. That really is the critical crux of the matter. So I want to now kind of go further and make make this externality or the source of the externality a little more explicit. Let us say that workers employed in period one by virtue of the production activity acquire new skills. These are, you know, skills that they acquire on the job and that raises their productivity in period two. And it is that increased productivity of the workers for period two that lowers the cost of production of widget to $79 per widget. So now we make it explicit that the source of externality or source of this learning is skills that are acquired on the job by the workers. So we say now if period one firms employing these workers can prohibit them from offering their services to other firms in period two, learning will remain internal to the firm, right? So, you know, if they could write a contract with the workers that you are going to also remain with me in period two to the extent that I need your services, only then I'm going to employ you. Then of course you can internalize what could be potentially an externality. So in that case, of course we get back to the internal economies and there is no case for infant industry protection. But suppose that, you know, that the firm is not in that position to actually write a contract with the workers and there is this possibility that these workers tomorrow might actually go in and work for the other firms, which would then drive the price tomorrow to $79 per widget and that would then create the problem of externality that was the basis of the case for protection in the first place. Now question is that even if there is that possibility, is protection necessarily required? Well, I'll argue that and this is what Baldwin's argument was as well, that even then actually the firm has the possibility of avoiding the losses that might accrue. How? Well, the firm knows, right? The firm knows that it is giving, it is imparting a particular asset, the skills, right? That firm when it employs these workers today, it knows that it is imparting them a skill or it's imparting them an asset, which has a market value of about $11, you know, because the cost will go down to $79 and the widget would still be sellable worth $90 if it is to compete with imports. There is an $11 value per widget that's associated with the skills that today's firm is imparting to the workers, right? So recognizing that what the firm will do is it will offer the workers a wage that is lower in period one such that the per widget cost actually is also lower by $11. It just says that well, look, you know, I'm giving you some asset which will be valuable to you tomorrow. Yes. And therefore, I'm going to offer you a wage which is lower than the market wage today because tomorrow you are going to get the wage which is higher than the market wage and the difference is exactly $11 which is the worth of $11 per widget manufacturing which is the benefit you are getting in the form of this skill or this asset, right? So today then I can lower my cost in fact by lowering that wage for $11 per widget and that of course brings my cost to 100 minus 100 was the original cost but because I'm able to pay lower wage by $11, my cost comes down to $89 and that of course means that I can sell the widget at $89 per unit and out compete the importer and so I'm viable today and then of course tomorrow let the workers go price drops to $79 but no sweat. I've incurred no losses in my first period in the first place. In fact, I can sell the product actually at $90 because I know that imports will come at $90. My cost is $89. I will make a profit of $1 million and I'm happy and all set. So if the source of this external economy is skills that the workers acquire then clearly then logically the case for any protection collapses. So that at least is one example where once we specified the basic micro foundation of the externality we find that there is no case. So that's Baldwin's first point. Now we come to the second possibility. We can come to the second possibility. This is where we say that well, suppose the cost reduction in period two results from an innovation by the incumbent firm. So the firm actually invest in some sort of innovation and that innovation in period one is the source of the cost reduction tomorrow. So that's what we are going to look at rather than this source of externality being the reduction being the skills of the workers. We'll say that there is some sort of process innovation that the firm is going to undertake in period one which will eventually lower its cost of production in period two. So again to consistently continue our example we'll say that let's say that the innovation cost is about $5 million. So total cost that the firm is going to incur on the innovation which will reduce my cost tomorrow is $5 million. And then the regular production cost of widget is another $95 per unit. So I'm choosing the numbers so that the total cost of production per unit remains $100. So I'm just choosing those numbers. One could formulate it with different numbers but this is the easiest set of numbers that the part of the cost I'm incurring today on manufacturing widget is my cost of innovation. So $5 million I spend on innovation and then my remaining manufacturing cost is $95 per unit which eventually gives me $100 per widget cost today. And now you can say that the externality will be of the kind where this innovation will spill over. That's innovation becomes available to everybody tomorrow so the cost will fall to $79 for everyone tomorrow. So therefore I'm still saying that the innovation actually although done by this firm is external. If it is internal then there is no issue. Then we know that the firm can keep the innovation within itself and therefore tomorrow the cost need not drop to the price need not drop to $79. But I'm ruling that out that innovation is actually something that will become available tomorrow. Somehow the firms tomorrow will be able to observe something or the blueprints cannot be kept secret. So everybody tomorrow can produce it, produce widget at $79. So externality problem kind of remains. I keep that going. Now question I want to now ask is contemporary protection. So you know that this will not work I mean in terms of manufacturing or the sector emerging. It will not happen because if the innovation will become available tomorrow to everybody. Then we know that product will have to be sold at $79. Whereas the losses to the firm would be $10 million in period one. No profits to be recouped in period two. So if that is the case without some intervention this manufacturing activity or even the beneficial innovation will actually not take place. So the question we now ask is and this is the critical one can temporary protection solve this problem. Well, suppose we impose a tariff of $10 per unit in period one which leads to a rise in the import price $200. That's our contention that this might solve the problem. Now let's follow this up. Now suppose that this is done and the cost and the import price becomes $100 which is exactly what it costs me to produce today inclusive of the cost of innovation. Inclusive the cost of innovation. That is where we are. But now the incumbent firm has two options. Incumbent firm has two options. It can invest in the innovation and just break even. Then it just breaks even that the cost is $100 but imports are also coming at $100 because of the $10 tariff. And in period two of course the price drops to $79 profits are zero. So you break even. So it's viable for sure. That's one option for the incumbent firm. Now take option two. What is the second option for incumbent firm? The firm instead of undertaking innovation it says that I'm not going to invest anything on innovation why should I? Instead I will just produce the widget at the per unit cost of $95 and now I'll sell it for $100 because there is a tariff. There is a custom duty. So imports cannot come for less than $100. If I don't do innovation then my production cost is only $95 and I'm going to walk away with $5 million profit in period one. And in period two of course tariff will return to zero and nobody will produce anything because no innovation happened. Therefore the cost is not going to come to $79 but that is okay. Tariff will be removed. My cost will remain $95. Imports will come in at $90. So I will not do any production activity. I'll just make my profit in first period and go home. Well, the firm will naturally choose the second option here because in the first option it barely breaks even but in the second option it walks away with $5 million profit. So no innovation will actually take place and the outcome will be a net social loss. Because if the innovation had taken place then on a net the country would have been better off. But in this case it's basically a social loss because the consumer got hit by the high price of which only $5 million was actually captured by the domestic firm but the other $5 million that the consumer paid in higher prices actually is a loss. So in effect when innovation is costly even if it spills over it's an externality therefore prediction will not solve that problem. You have to do something else. I mean it's a situation that requires some intervention and the obvious intervention here is to grant a patent to the firm for the innovation so that that patent actually allows the firm to internalize the innovation itself. And then it becomes of course the production activity becomes feasible and the sector emerges. Alternatively the government could directly kind of subsidize the innovation. Give $5 million cover the cost of innovation. This is kind of R&D kind of subsidy. It can do that. That will solve the problem. But clearly what we see here is that logically speaking protection cannot solve that problem. And I think that really is the bottom line and that was the kind of point of Baldwin. That look and this is where he wrote actually. I'll read out this is something he says in very clear terms. It's quite remarkable that how the subsequent authors who wrote their papers on infant industry protection completely missed out Baldwin's point. They kept writing these models where magically the externality travels from the incumbents to the new entrance tomorrow. But that completely flies in the face of reality and what is the process through which the externality is traveling. And so Baldwin actually saw it all. He wrote it very clearly. And so I want to read out a quote from Baldwin in his 1969 paper. So it's almost more than 50 years ago. So he wrote that if the infant industry argument for tariff protection is worthy of its reputation as the major exception to the free trade case, it should be possible to present a clear analytical case based upon well-known and generally accepted empirical relationships unique to infant industries for the general desirability and effectiveness of protective duties in these industries. The contention of this paper is that such a case cannot be made. He couldn't have been clearer than that. But oddly enough, the future authors who made these infant industry argument cases for protection that is. Obviously, Baldwin was very careful. He says the infant industry argument for tariff protection is worthy of its reputation. So he's very clear that his questioning is not questioning the intervention. I mean, there is some other intervention like the patent or subsidy on innovation or it could be even subsidy on the skill formation and so forth. But what he's questioning is that protection is not the solution to the problem. And that is his point and it is completely valid. This is an incredibly helpful and clear exposition. My intuition was going in a slightly different way which was does this assumption make sense and what you have told us is leaving that aside, let's take the assumption on merit. Even if this assumption actually holds and we give it its due, protectionism is still not going to solve the problem that the assumption is hoping to solve. If I can just loop back to the older argument which is now let's say that in your model, the importers are able to produce the same widget at $90. For whatever reasons, either because they were entrants to the market sooner so they've already done the learning and they have now made the, they're now at the point of reaping the benefits from learning. So they're able to price their widget at $90 and that's the group that one needs to compete with if one enters the domestic market. Now, if learning is only possible by doing, but there's an externality in the future, that is, once the firm has learned, other entrants to the market can actually learn from that firm. Why doesn't that translate to learning from importers or why is that not a reasonable assumption? I mean, are these importers on Mars? Do they not speak the same language? Can workers not travel and train someone in the domestic industry? Just regular things that one would see all the time. Why has this assumption sort of stuck so long and hard that whatever they assume for the domestic industry, the same symmetrical assumption is not being made for the global industry? Absolutely. I think that's a million dollar question. I mean, if you look at really Koreans, for example, who did so well and we talked about in our first conversation, they were often actually bringing in these imports and then doing reverse engineering. They were really learning through reverse engineering how to do it at a lower cost. So that's how they, so absolutely right. And then there is a whole literature of diffusion of technology through trade, right? And then what the infinite industry argument is doing is to completely ignoring that. And as you've quite correctly pointed out that there is an asymmetry in saying this, that if you can learn by observing your own manufacturers, why can you not learn by observing the manufacturers that are outside? And then that really actually gets to the broader point which those of us who are on the side of free trade have often made that look, in the end, how are you going to learn the most by competing against the best in the world? And if you shield yourself against the best in the world, then you're not going to do that kind of learning. The example I frequently use from cricket that if you are trying to produce lots of such in Tendulkar's and Virat Kohli's and all the fantastic cricket players, are you going to do it? Are your chances better when you play test cricket and all the international P-20 and so forth? Or if you play only domestically in your, you know, Ranji Trophy or county cricket matches? And the answer is quite clear that, you know, you've got to play test cricket. I would actually take your argument one step further, if I may, the cricket analogy, which is one you have to play a test cricket with other test playing countries. But even if we have an IPL model, right, you benefit more by having global immigration and mingling and trade in IPL because now every team, whether it's Bangalore or Mumbai or Calcutta or Delhi, you know, all the teams in the IPL league can actually get foreign players. So you actually learn, you know, from the best players in the world, except now they're on your side, which is another model that a lot of, you know, firms have used for training their own people. They usually attract the best talent from abroad, someone who's already benefited from learning by doing, pay them, you know, a very high sort of reward or a remuneration for these kinds of training services. And that's how, you know, the process takes place in any world where there is some kind of trade and immigration. No, absolutely. I think, you know, this you can further generalize it actually because in a cricket place only where the human skills are involved, but when manufacturing is involved, there is also other technologies at work. And so that also extends to foreign investment, right? You know, if you allow foreign firms to come in, they will bring in new know-how, technology of production, new management techniques, you know, a lot of the management and organizational activities that are specific to the particular industry, they will bring those. And the domestic firms will then also learn from the foreign invested firms in bringing their costs down. You told the benefits of keeping, you know, the free trade channel open because protectionism is not going to get you what you want. And if you treat importers as symmetrically, as you treat domestic competition, then you can also learn from people who are already in the global incumbents, but in the global industry, and you may be able to solve the problem many different ways, right? The moment we start generalizing some of the assumptions of your very stylized example. But I want to talk a little bit about the downsides of protectionism, right? So the assumptions made in the model is that in time period one, any protection that is brought in will disappear in time period two because by then the firms will recuperate profits, right? Now, this of course assumes that the firms always do the right thing and are interested in earning their profits the correct way, right? But if we now think about the implications of that, it becomes quite clear that the moment you bring in protectionism, it is not going to be in the interest of any incumbent firm to allow that protectionism to go away, not just in time period two, but forever in the future, right? So that is, and that has a tremendous downside, right? That downside is millions of consumers in the domestic economy will now lose because it is in the interest of some firms which once upon a time were parts considered infant industries to continue that protectionism for a very, very long time to come. No, absolutely. I think there is this time in consistency problems, right? That not only this, you see what may happen is that I gave you the innovation example, right? And if you give protection, the firm happily comes in and produces interest protection activity, but it chooses not to innovate. Now similarly, if for example, your expectation in the model was not innovation, but one of training the workers, right? So suppose instead of innovation, it could have spent the $5 million on training the workers. And in the hope that the firm will train the workers and creates new skills, right? The government may give the protection. In either case, whether it's innovation or training of the costly training of the workers, once you give protection, once protection has been acquired, it becomes in the interest of the firm not to innovate or not to train the workers. Why waste your cost? Because the protection is already there and you would make bigger profit if you simply did not do this learning, whether it's through worker training or through innovation. So you're not going to do that learning. That's exactly what happens. Now then in fact, the argument you made actually comes out quite endogenously there. Then the firm has already entered the manufacturing activity in period one. And then it says that, hey, if you now take away my protection, then I'm gone, all these workers I am employing will become employed, right? And in the political space, that argument has a lot of salience as if these workers cannot find any other job elsewhere in the economy. And so the policymakers are very kind of sensitive to that and say, oh yeah, we'll extend the protection. And so the infant never grows into an adult. And the protection becomes self-perpetuating. So there are very rare examples. What this does is it takes the question that you got to worry about the effectiveness of the government. Are there effective governments which gets into a whole host of questions, right? First of all, how does the government know that this sector is my kind of infant sector which after protection will become very cost competitive, right? I mean, you're talking about picking the winners. But what ability does the government have to pick winners in the first place? And then even if it manages to pick the right kind of sectors, what ability does it actually have to credibly kind of make the protection temporary? And you find very rare examples. I mean, you do find examples that are very rare. I mean, Singapore, you know, they're in the 50s and maybe, not 50s, but maybe mid-60s or something, you know, what a very short period of time, five, six years, they would do it. But what they were doing was, you know, every six months, they were monitoring the firms. Okay, you know, the next six months, we'll keep this import restriction on. And if you don't do any learning, then protection goes away. And they were credible in all. And they did actually monitor continuously. But that also with very low level of protection, the protection itself was not particularly high. So, you know, you might find some capable governments. And it appears, oh, you know, they successfully did it. Truth of the matter is that logically, as we have seen, there was no case, you know, the case was not for protection anyway, you know, I mean, there may be case for R&D kind of subsidy or patents and so forth. But even when they say, you know, a lot of it is post hoc fallacy, you know, a lot of people will, I mean, Hajun Chang has made a career out of it, you know, that the Toyota got protected in 1930s and look how successfully it became in the 1980s. That really calls for your imagination to connect the two events. Just because, you know, you did this before protection was provided 50 years ago, it somehow become successful in 1980s. Question also is, you know, what kind of cost did you impose on the consumers, right? And this is one thing, you know, which the cost that the consumers pay is simply ignored. In the political process, the consumers simply don't count. This is my constant battle on the Indian auto industry. On the one hand, by allowing foreign investors to come in, we did without doubt actually, you know, improve the efficiency of the auto industry domestically. But at the same time, this kind of 100% protection that has been granted to auto industry for the last 30 years, you know, and before that, of course, there was complete prohibition on imports on automobiles. The result has been that the consumer has been paying, you know, one and a half times the price that customers outside India pay for the same car. Absolutely. You know, after 30 years, what happened? So obviously not enough learning happened, right? Yeah, and you know, I mean, your background is of course in trade. Mine is in public choice economics. So now if you start bringing in some of those assumptions and some of the models of public choice, then it's very clear the story that you're talking about, which is this is a classic case of concentrated benefits and dispersed costs, right? So in time period one, you will give the infant industry protection, right? So that's going to go to one or two firms are going to be protected. They're going to get all the benefits. The costs are obviously, you know, going to be dispersed both in time and across all consumers, right? Or everyone who would have used the imports. Now, because it is difficult for consumers to collectivize, right? Because the transaction costs of organizing themselves are very high. It's going to be very difficult for them in democratic politics to start lobbying for taking the protectionism away even though they benefit from it, right? The benefits of removing protectionism are small and dispersed, right? But in the case of protectionism, the benefits of keeping the protectionism alive, right? They are concentrated for a few manufacturers in a given infant industry or any other industry. So they actually also have the transaction costs or the costs of collectivizing on their side to ensure that they can keep the protectionism going year on year, right? So now once you bring in the models of democratic politics, the endogeneity only once again reinforces itself, right? This becomes self-perpetuating. Right, absolutely. I mean, this is really the story behind the Grossman-Helpman kind of models, right? That the producers are able to organize and so in the political process, it's the profits of the firms, profits of the enterprises that count. But what we economists call the consumer surplus, the benefit to the consumer, it doesn't count for the, you know, how the political process kind of works. And, you know, this also what happens is that, you know, once the government becomes willing to protect the industries, right? Selected industries. Then everybody comes in, I am an infant. You know, everybody wants to claim that they are an infant. So, and once granted protection as we discussed becomes permanent, it's not, you know, it's not temporary, right? I mean, the case is always made with temporary protection. But, you know, except for rare examples, he says don't have these cases where protection was actually granted on infant industry grounds and it was also temporary. Actually, that's a great point because one thing is how the economists are writing the academic models, right? And the model specifies that in time period, you know, T plus one or T plus two or T plus five, the protection should go away. But I have read a lot of these policies on the legal side. We rarely, I mean, even in the case of a pandemic or something like that might be the exception, we rarely see sunset clauses when we offer protectionism, right? Absolutely. If they are not built into the political process to have a sunset clause, right? So there's a remarkable government like, say, Singapore, which is constantly monitoring. But monitoring is different from, hey, we looked at this particular model. This model made sense to us. We're going to translate it exactly as policy. And now we're going to tell you that in time period, you know, T plus five, this protection is going to go away. We have rarely seen a credible commitment like that on the policy end. Very true. I mean, at least, you know, for temporary protection, I could think of this one Singapore example for the rest. I have not seen any, you know, for the point you're making, which is, you know, that there's a prior sunset clause in protection that I've never seen. At least I am not aware of any such sunset clause. But anyway, you know, that sunset clause is because of the other reasons, not on infant industry. Those are like safeguards and all. Yeah, I've actually seen the reverse, which is we are going to remove tariffs for a very brief period of time. You know, so this happened during COVID. There were many countries, including India, right? By notification. They say just for, just for six months, we're going to suspend tariffs on like, you know, PPE, mask, you know, protective gear, things like that. And after six months, you know, all the tariffs are going to come back in full form. So if anything, I have always seen sunset clauses airing on the other side, but not to further the infant industry argument, you know, as, as you have so clearly laid out. Now I have a question about, you know, infant industry protectionism with respect to building export capabilities, right? Now you've shown that, you know, either the learning is not going to happen, right? Or if, you know, the learning happens, it can also happen by reduced wages or by absorbing the cost of innovation, in which case you don't need the protectionism in the first place, right? As you showed in your, in your stylized example. Now, a lot of the protectionist arguments in India are that we need to protect the infant industry so that it can grow strong enough to compete with the rest of the world and become exporters, not just serve the domestic market by competing with importers, right? To build export capability, is there any merit in infant industry argument or does that also face very similar problems? See, if the argument is made in this way that we are protecting them until they become competitive and then they become exporters, then what we have already seen is that argument doesn't work because the infant never learns. Yes. You know, if it's innovation, then it's not going to do the innovation because worker training, it's not going to invest resources in worker training. And of course, if they, if the learning was internal, then no intervention in the first place was required. So, you know, ultimately to become exporter, first you have to be able to actually outcompete the import price in the first place and that here will never happen. Now on the export side, a different argument is sometimes given that, you know, that I'm going to give export subsidies to the exporters because they are infant and they need to learn the market, you know, that the foreign market is, they're trying to, they need to learn and so initially when they go in there, they would be losing simply because in the first few years they cannot, they have not learned about the market and all and therefore there's some learning, some learning will have to take place and then they will become actually successful exporters and more than recover the losses in the first period. It's the same problem. It comes back to the same issue that, you know, if it is, if the learning is internal, then the firm will do it on its own. You don't require any intervention. And if it is external, then your interventions of the kind, the subsidies, export subsidies will not solve that problem. So you come back to the same set of issues. There is also a good paper by Grossman and Hendrick Horne, I think, Gene Grossman and Hendrick Horne who make the point in a very different context, you know, where there is imperfect information about the firms and learning takes place in terms of revealing of the information and all. And they again show there that, you know, once you properly model the micro foundations, then there is no case for intervention. But there is one point I should make actually, you know, because from a practical standpoint, that logically clearly there is not a case for infant industry protection. But governments kind of do come under pressure to intervene somehow or the other on behalf of the enterprises and, you know, do something good. I mean, all governments want to do that. And there it seems to me, I always argued that, look, you know, if you feel compelled to intervene, then what you should do is you try to promote your infants who are likely to become exporters or who are already at small exporters at least, rather than those who are doing import substitution, right? Because, you know, there are many reasons. You know, the first of all is whenever you say that I'm going to do import substitution and therefore, you know, I'm going to promote the infant where I can do a lot of import substitution. The industry you're going to pick up is probably the most inefficient one. Because, you know, where, when you want to choose an infant for import substitution, you will ask yourself, where can I do the most import substitution? Absolutely. And so you'll say that, oh, this is where I'm importing so much. And this is where the scope for import substitution is so large. Well, but there is a reason why you are such a large importer of the product because in that product, you are the least competitive. That's your cost. Your cost disadvantage is probably the largest, which is why you are such a large importer of the product in the first place. So you are going to start with the product, you know, where you are the least competent to actually become competitive. Whereas, you know, if you try to do this intervention on behalf of exporters or mere exporters, then your chances are a little better because ultimately exporters will have to compete in the world markets against the best in the world. I mean, that's argument we already went over. And therefore, I think, you know, just exposing them through this intervention to the very best in the world and saying that, look, you know, this is what you have to be, that is more likely to give you some positive results. It is also the case that, you know, for exports, you're going to have to use some kind of subsidies, export subsidies. And subsidies attracted a lot more attention of the people that, ah, you're giving my money to those fellows. Yes. And if they don't deliver, then, you know, you can't continuously, in perpetuity, give my money to them. Yeah. This is the opposite of the tariffs. In tariffs, the government thinks that I'm collecting revenues. So I'm really kind of, you know, these bad guys, the foreigners, I'm really going to hit them hard, although ultimately that is not falling on the foreigners, largely it's falling on your own domestic consumers. But it has the appearance of actually being charged from the foreigners because they are sending you the goods and that's where you're collecting the duty and all. Yeah. So politically, those becomes much harder to remove. Yeah. Then you also get your revenue departments or revenue ministries who say that, oh, I can't lose this revenue, right? Custom revenue, when it generates this custom revenue, they become addicted to that, you know, the ministries. So they don't want to lose that. Yeah. So that also makes it import, import tariffs harder to remove. Yeah. There is an export subsidies, the revenue guys come in or at least the expenditure guys come in and say, look, you know, I mean, I better use for this money. Yeah. Why are we giving this to the profit making corporations? Yeah. This is actually a very lovely point you're making. You know, Frederick Bastiat who fought against a lot of the protectionist arguments, talked about the seen and the unseen effects, right? Yeah. And now you are telling us about seen and unseen redistribution instruments, right? Some redistribution instruments are more visible and some redistribution instruments are less visible. Yeah. So once we take all the political economy implications, even though neither is ideal, one might be the lesser of the two evils than the other because there might be more democratic pressure against it. So which is really a lovely insight. Right. Absolutely. Yeah. And you know, finally on infant industries, if infant industries are really going to grow one day and become exporters and so on and so forth, then I feel like in India, that growth should have come from the PSUs, right? The public sector undertakings because those are in one sense, you know, completely all the learning is completely subsidized. You don't even have to reduce the wages of the workers. They have tenure. They're never going to leave the job, all the costs of innovation, you know, you can protect completely. In fact, in many cases, public sector undertakings are also monopolies within the domestic sector, right? So they have protectionism on every side. So if this is really a true model of how an infant industry grows, then every public sector undertaking should have been a massive, you know, not just an efficient enterprise domestically, should have had massive spillover effects and should have also been part of export led growth. And what you instead find is when you take this kind of protectionism to its extreme end, you know, not what you came up with in your stylized model, you get nothing but incompetence and losses which are passed on to the taxpayers. If these models are really implemented to the full extent, you know, you're going to get Indian public sector enterprises. Yes. No, absolutely. Absolutely. This tells you that, you know, the same problems that arise from lifetime employment, right? I have no incentive to do anything, you know, why should I even work, correct? I'll give you an example of that as well, that, you know, but in the context of the reason of all this public sector service did not work, did not succeed and nobody became exporter recently because there was no incentive for them to either reduce the cost nor the workers had any incentive to deliver the work and all. And it is pretty much the argument applies to the infant industries also that once you protect them, you know, the industry has every reason to remain lazy. You know, why bother to learn? I'm protected and I got this market domestically fully given to me, it's reserved for me. So, you know, if the consumer is going to suffer, so be it, it's not my problem. And that is how we allowed the protection to really stay for 50 years. I mean, you know, almost, remember, it's a beautiful example if you think about it, that when we liberalized in 1991, right, what did we liberalize first? The licensing went away from capital goods, licensing went away from raw materials, it went away from components, all the intermediate inputs. It did not go away from consumer goods imports. Yes. Consumers didn't count. Yes. Consumers didn't count. So the consumer was still denied, you know. Yeah. And when in 2001, finally the licensing on consumer goods imports went away, it didn't go away because we did it on our own. Yeah. It went away because we were challenged in the WTO by the United States and we lost the case. So, you know, this whole thing about the political economy, which is so stacked against the consumer, I mean, today, most people in India believe that auto industry is such a huge success. But if it is such a huge success, then why as a consumer, I am being penalized? Yeah. But that has no salience. Yeah. That has no salience at all. And that's the kind of tragic side of this. And this is why in some ways, you know, the trade economists really see themselves as the champions of the consumers or the people. Yeah. Nobody else raises the concerns that the consumers have. And so the trade economists have to take it upon themselves to represent the case of the consumers. And, you know, the consumer interest is really important. And I say this particularly in a developing country, one that has, you know, got as many poor people as, say, India did, especially in the pre-liberalization moment. If the cost of consumer goods dramatically reduces, the person who's benefiting the most from it is actually the poorest people because their consumption inequality that they face on a daily basis just dramatically drops, right? So one of the things that, you know, people keep saying that you should ban all these cheap phones that are made in China or Taiwan. You know, India should make its own phones and things like that. And, you know, one thing I always realize when I'm in India is I see people of all income stratas, right? I have a nice latest iPhone, whatever is available in the United States. There's is a much, much cheaper version of that, right? But that phone is able to do 90, 95% of everything that my phone is able to do, right? In fact, some would go so far to argue that if it's Android and not Apple, it might be able to do even more things than my phone is able to do because, you know, it has more applications and things like that. So now the cost of, you know, my parents' housekeeper taking a picture on her phone is so much lower that she does not have to spend the same amount as what I spent to take a picture from my phone, right? And that, I think, is really important. So it matters, of course, for basics. It matters for food. It matters for t-shirts and shoes and everything else. Because of the telecom revolution in India, we have really seen it, you know, take place in phones. And one part of it, of course, is the network, you know, which is fairly very low-cost of 5G and data and cellular service in India. But a large part of it is also the hardware and, you know, the price of very cheap phones coming into India, if you put tariffs on that, the person who will experience the greatest pain because of that policy is actually not me and you, right? Or even my parents who live in India, it is actually their housekeeper or their Uber driver, right? Or their Rikshavala or their vegetable seller. These are the people who actually face the biggest cost of, you know, tariffs on consumer goods because they will actually be able to spend a much smaller proportion of their, you know, disposable income on these goods if cheap imports were available. So I think this is a battle worth fighting for because we normally separate trade economics and development economics or trade economics and inequality or, you know, something else. But trade economics is development economics, right? Trade economics is inequality, right? Reducing or growth enhancing. I think this is something really important. So when people keep saying consumers, I don't know who they have in mind, but they're just regular people, right? And there happen to be more consumers than producers in some of these economies. And in that sense, you're talking about, you know, imposing a massive tax on most people no matter how poor they are by protecting certain producer interests. Yeah, no, no, that's a mobile example you give. Actually, it's a very interesting history on this. And, you know, at the time, this was when we were in the liberalization phase. If you would remember, you may have read that there was this information technology agreement in Singapore. We didn't sign it right then, but two years later we did, maybe 1998 or something. We signed that. This is now called the information technology agreement one because there was a second one, which we did not sign, which we did not sign. But in this first one, we had signed it. And what that information technology agreement did was to say that, look, you know, all the technology products would go to zero tariffs for everybody who is a signatory on a non-discriminatory basis. So you will, you know, even if you're not a signatory, you will receive the benefit of that. But countries that sign it will eliminate their tariffs on all the information technology products. So as a result on all the mobile phones, and at that time these are only feature phones. They were not, you know, the smartphones had not come in yet. So those tariffs went to zero in India also. And when Prime Minister Vajpayee actually brought in the new telecom policy and implemented that, of course, revolutionized the whole industry. But a very, very critical part of their revolution was the fact that we had signed in the information technology agreement one. So these mobiles, very cheap mobiles could come in and they spread like crazy. I mean, the spread was breathtaking. I used to keep track, you know, like there will be 20 million new phones sold in one month. I mean, you know, compare that to our entire stock of telephones in 1991, which was 5 million. I mean, in 100 years what we have done, 5 million phones. Four times of that was being done in one month. Absolutely. Now once this happened, some infant industry guys came forward later on saying, oh, you know, we made a big mistake signing this information technology agreement. Because if we had not signed that agreement, then we would have been producing these, we would have produced these billion mobile phones. I mean, you forget that there will be no billion telephones if actually you had not allowed those imports to happen. Absolutely. Then revolution, that entire telecommunication revolution that happened with even the poorest people, poorest households acquiring a phone in their hands was because these cheap imports, cheap imported mobile phones could come in. Absolutely. So, you know, what you are saying about the Paris and Custom duties on these low quality mobile phones today actually applied with greater potency in the past, actually. You know, if we had not signed that agreement, there would have been no information technology revolution that we have seen during those years. Yeah. And you know, on the infant industry protection, I mean, what is stopping these phone manufacturers from producing the phones today? You know, if this is about learning, so much of the design is available. I mean, you can, I can pick a phone apart, one of these phones, I don't have the capability of reverse engineering it, but I'm sure I know some young bright people who do. So in a sense, there are other roadblocks or bottlenecks in the Indian economy that are preventing manufacturers from producing very cheap phones. And we need to think about that, but I don't think it has anything to do with the phone being an infant industry. Yeah, but you see, that is the point we made very early on in the last conversation. That, you know, if you actually benchmark yourself to free trade. Yeah. Right. And say that, look, I'm committed and I want my guys to be competitive to those guys. Yeah. They must compete against those guys. Then you go back and ask if they are not able to do it. What is the problem? This is what you're saying. Yeah. That, you know, there's something that's preventing these guys. Yeah. Then the bottlenecks get exposed. Then you can actually pinpoint where they are. Exactly. Whereas if you say that, oh, they got some disabilities in the domestic market. So I've got to neutralize their disability. And then I neutralize it by putting a barrier on the imports, which is 15%, 20%, custom duty high. Well, then you have not solved the fundamental problem. Yeah. Absolutely. Effectively, you know, you are trying to neutralize. I mean, you've effectively kept your inefficiency in place and simply made it harder for the goods to enter from the cheaper sources, thereby hurting your own consumers and customers. After all, at the end of the day, you are protecting it. You are effectively, you know, you call it protection. Yeah. You know, Henry George had a beautiful way of putting it. He said that, you know, the buyer wants to buy it. The seller abroad wants to sell the product. So who are we protecting here? You know, why? He even questioned the term protection. You know, he said, well, in what sense is this protection, you know, they're my people want to buy and their people want to sell it. By putting a custom duty, we are protecting anybody. You know, just to play devil's advocate for a moment. I know this is old wine in new bottle every 20 years, right? That's the infant industry argument. It just never goes away from the time of Alexander Hamilton till modern day India. But there is a new version of the infant industry argument. And this is specifically for network goods, not for ordinary goods and services, right? And so the interesting thing about network goods are these are goods where the firms are not competing in the market. They are competing for the market, right? So this is some of your platform services like say Facebook or TikTok. Actually, telephones are a classic network good, right? The value of me getting a phone line increases depending on how many people I know are already using a phone line. Otherwise, what's the point of me getting a phone line? I would have no one to speak about it. But you know, there are certain goods which are a special category which have these network effects, right? And now because China has successfully kept the competition out for many of the big network goods, you know, some of it was infant industry arguments, at least in popular imagination, some of it was about data and surveillance. So we'll keep, you know, the data surveillance arguments aside, but a large part was, you know, domestic TikTok or Facebook and protect them for X number of years then even when they're exposed to foreign competition, all your users are not going to suddenly leave because the market has already been won by that particular network good or platform. Now, many people are trying to make this argument for India that India should engage in protectionism specifically in the network goods space, right? That India should develop its own Facebook and its own TikTok and do any of the infant industry style arguments hold more for network goods than ordinary goods? How do you, how does one think about this problem? So one thing is clear, that it's a little different from infant industry because in infant industry we are saying there's a time element involved, right? That what I do today impacts tomorrow. But network industry has to do more with the size of the existing industry. It's not the size of the past production. It is an externality which is, you know, it's there in any given period. So if I could really start this whole thing on a very large scale then I could do it, right? So that's the point. Now, that being the case, first of all, you know, one example that you gave of course goes the other way where you said that, you know, the utility of telephone to you depends on how many others are using it. There you clearly want free trade, right? Because, you know, the cheaper my phones are, more people will use them and therefore, you know, so one has to first of all make that particular distinction, you know. Meaning, you know, pinpointing what the source of network economy is. Just as we saw in the infant industry case, it's very important here in the network economy scale case as well. So that's the first point that, you know, in many of these cases actually maybe free trade would reinforce your network economies as clearly in your example of the mobile phone. Now, on the production side, you know, when you say that somehow, you know, as a concrete example, take either Google or Facebook, right? That, you know, the more users of the platform the lower the cost of maintaining that platform, right? So, and the users maybe concentrated here domestically and all, but the problem, first of all, you know, in these cases, clearly none of this is concentrated domestically, right? Yeah. You know, Google, particularly if you think about it, you know, the information has to be available from tons of sources. So you have to be able to actually spread your platform around the world. I mean, we're not China. China's case is very different because there is a government which wants to control the information. I mean, people in India, people make this argument, oh, look, they threw out Google and therefore they were able to build up their own platforms. They didn't throw out Google. They told Google to follow what their domestic companies were following, which was to build firewalls to and take the censorship. And Google then decided that, well, this is not something they could do and they were pulled out. So that's not how it happened. Now, in our case, in the Indian case, you want to open platforms. I mean, you want information everywhere flow in and flow out. I mean, we're not doing, India is not doing what China is doing. So first question is, therefore, what has already started has started if you tomorrow say that I'm going to shut off Google, who is going to suffer the most? Everybody. Everybody. I mean, the information that you're seeking cannot be because I'm going to develop my platform. Well, good luck. I mean, because there's network externalities international, it's not national. So either you come in with huge amount of resources, get some VC like, you know, you say son to come in and give you some hundred billion dollars or something like that, you know, to build a platform which would be larger than Google. I mean, if you could do that immediately, then you could succeed. If you think that, you know, by keeping Google out for 10 years, right? I mean, you're going to build, I just don't see how you do that. Yeah. So here the infant industry argument takes a slightly different form right here. They are infants because they don't have the consumers yet, which will give them the entire market and therefore until they capture the market, they remain infant. That's the scale issue. It's a scale issue. It's not just a learning issue, but the time period comes in with scale, right? So the time period one versus the second. But if you could, you know, within your chosen time period, if you could get the scale. So it's not a learning issue, right? I mean, nobody is learning here. It's simply that the more people use it, the lower is my cost. That's the point that, you know, which is a little different. There's a case of external economy. In the case of external economy, sometimes you can write the case. Conceptually, you can certainly make the case that if it is an external economy, then conceptually you can make a case for intervention. Typically protection will not be the best remedy there. You would need to pinpoint the source of externality itself. Yeah. So you're saying that in the case of the network goods protections we've seen in other countries, they usually have to do with surveillance data, secrecy, authoritarian regimes trying to have censorship and keep free speech out. They have more to do with those arguments than any kind of network externality argument because you don't see them in non-authoritarian regimes yet. Yeah. No, I think so. At least, well, mainly we are talking about China. China, yeah. Because China has this large market of its own consumers. But it is also the country which wants its consumers to use its own only. Yeah. It doesn't want them to be informed by the others. Yeah. It's a very different objective. It is. That's worth pondering. And I would actually go one step further and say in India, because of the border conflict with China, India did ban Tiktok. And I was holding my breath for an Indian version of Tiktok to emerge. No, because they were already, I believe, 200 million users in India and people had already gotten a taste for Tiktok. So you knew the consumer market existed. An entrepreneur could have just simply stepped in and said, hey, there's this huge gap in the market. It's completely protected. All I need is an Indian partner so that a thing like a ban doesn't happen again. So let's put in a lot of funds. We know the technology Tiktok uses. The only people who did it in India were the Instagram. Instagram brought in reels and a Tiktok-like feature. But I was holding my breath for an Indian firm to come out and produce an Indian version of Tiktok. And I am still disappointed that it just never happened. It's a good example. It's a good example. Yeah. So you see, this can be also very misleading that if we stop the foreign companies from selling the product here, then automatically domestic supply will emerge. But it's a good example at least so far it has not succeeded. And it's not impossible. I mean, after all, there are efforts underway. Well, even if I step back a little bit, take Google again. There were a lot of language areas, Tamil, Malayalam, etc. where Google was transparent. Yeah. And we certainly had that market. How come no search engine actually came up which was catering to those languages? Yeah. I mean, why did everybody wait till Google actually got into that? Yeah. I mean, took a long time for Google to get into these specific languages. Absolutely. So it is very easy to kind of just mislead people into thinking that the problem is protection. Problem is not protection is something else. Yeah. No, I completely agree with you. We forget that each of the languages, we call them regional languages in India. But some of these languages you're talking about, like Tamil is spoken by tens of millions of people. Like West Bengal is 90 million people. So you're talking about, without including Bangladesh, you're talking about 90, 100 million in the world, right? So now these are the size of Germany and France, you know, in terms of the potential. So the fact that no one's doing it is probably because they don't see a stream of advertising revenue. They don't think these regions are rich enough or something to that extent or simply just lack of imagination on the part of Indian entrepreneurs that they didn't spot the opportunity. But you're right in that both the numbers existed and the technology existed. You just didn't see too many people come up with a simple solution for these kinds of problems. I think I'm so glad that we covered this infant industry argument in proper detail. It is of course not the only argument against free trade. There are a number of other arguments and they have to do with imperfect capital markets or they have to do with unemployment issues or diversification, coordination externalities. There are just so many arguments that keep popping up in favour of protectionism and against free trade. Hopefully in the next episode of this talk in part 3, you can walk us through many of the other arguments in favour of protectionism and against free trade and tell us exactly where the problems lie or if in fact they have some merit. Right. Let's do that. Let's do that. We'll do exactly in the next episode. Thank you so much for this effort. Thank you. Thanks for holding these conversations, Shruti.