Correspondingly, there is no guarantee that a policy of trade regulation and control will increase social welfare. It is because, in this case, the policy decisions are necessarily arbitrary. Critics claim that the damage inflicted by government failures is far greater than that inflicted by market failures. Moreover, market failures are relatively harder to identify, while government failures are easier to spot.
1. Self-sufficiency vs. Self-reliance:
The case for protection primarily rests on its possible contribution to self-reliance rather than to self-sufficiency. It is only in certain specific items relating to defence, energy, and health care etc., that a country should really have a long term policy of self-sufficiency (or complete import substitution).
However, there is a practical risk that the authorities may make a mistake in the selection of the items for import substitution. When that happens, the home country ends up having a misallocation of its productive resources.
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2. Discrimination:
It is impossible for a country to formulate a policy under which all sectors of the economy and all sections of the society are equally protected. By its very nature, the policy of protection is discriminatory. This adds to the problems of equity and welfare within the society.
3. Vested Interests:
Under a policy of trade regulation, vested interest tends to emerge and entrench themselves. This, in turn, leads to misallocation of productive resources, and inefficient and burdensome industries. A protected economy is thus handicapped in acquiring a competitive strength.
4. Choice of Industries:
Choice of industries which need to be protected is a highly difficult task because it should correspond to the economy’s potential and not to its current position.
The risk is that the industries chosen for protection may have inadequate developmental potential for the economy as a whole.
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Actually, a proper choice of the industries to be protected rests on estimates of the relevant social and private costs and benefits—a very difficult task indeed.
5. Administrative Cost:
A policy of protection requires the creation and maintenance of appropriate administrative machinery and entails a resource cost as well.
In addition, if the administrative machinery suffers from inefficiency, delays, obstructive legal provisions, cumbersome procedures or other weaknesses, the entire economy suffers from its all-pervasive ill-effects.
6. Dual Economy:
Depending upon the nature of hurdles faced by a developing economy, a policy of protection may result in the creation of only “purple spots” (or “islands of development”). In other words, it may result in the creation of a “dual economy” instead of a balanced one.