Don't respond to Trump's tariffs with tariffs.
Imposing or increasing existing tariffs lead to increasing prices, decreasing living standards, weaker competition and increased inequality.
This is a longer English version of my letter to Dagens Nyheter which was published 27 January. It was also published by Sydöstran 28 Januari.
Donald Trump’s obsession with tariffs as a means to “fix” current account deficits shows how little he understands of economics. A current account deficit occurs when a country’s financial savings are negative. If Americans consume and invest more than the country produces, it leads to a current account deficit. That deficit is financed by an inflow of capital.
What Trump would get if he knew how to google “effects of tariffs”
Source: Google.com
Trump’s ignorance is not only comical. It is also harmful, mostly for American consumers, but also for American companies that import goods and services in order to produce finished products.
A tariff makes an imported good more expensive, which affects American consumers. Those consumers for whom consumption constitutes a large part of their disposable income are most affected. This leads to increased inequality and possibly increased poverty in the US.
Lower imports also lead to higher prices through lower competitive pressure on markets. Domestic import-competing companies can raise their prices without risking losing market shares to foreign companies. At constant costs, this also leads to increased inequality as the share of capital owners in the production result increases.
Now voices are being raised within the EU that we, like the last time Trump was president, should respond to US tariff increases by raising tariffs on American goods. We should not do that.
Unfortunately, protectionist voices often find it easier to get what they want because they are better organized. The benefits of tariffs are concentrated in import-competing companies that can easily organize themselves. They also have large resources and often good contacts with politicians and officials in important positions. The disadvantages of tariffs are spread across many consumers, who are poorly organized and represented in Brussels' lobby organizations.
We have just gone through a period of high inflation that has led to reduced real wages and living standards. Don't let tariffs worsen our living conditions!