WASHINGTON (AP) — Noted economist Arthur Laffer warns in a new analysis that President Donald Trump’s 25% tariffs on auto imports could add $4,711 to the cost of a vehicle and says the proposed taxes could weaken the ability of U.S. automakers to compete with their foreign counterparts.
In the 21-page analysis obtained by The Associated Press, Laffer, whom Trump awarded the Presidential Medal of Freedom in 2019 for his contributions to economics, says the auto industry would be in a better position if the Republican president preserved the supply chain rules with Canada and Mexico from his own 2019 USMCA trade pact.
The White House has temporarily exempted auto and parts imports under the USMCA from the tariffs starting on April 3 so that the Trump administration can put together a process for taxing non-U.S. content in vehicles and parts that fall under the agreement.
“Without this exemption, the proposed tariff risks causing irreparable damage to the industry, contradicting the administration’s goals of strengthening U.S. manufacturing and economic stability,” Laffer writes in the analysis. “A 25% tariff would not only shrink, or possibly eliminate, profit margins for U.S. manufacturers but also weaken their ability to compete with international rivals.”
In a Friday interview with The Associated Press, Laffer said the report had caused a “kerfuffle” and cautioned that it only applied to the economics, rather than Trump's negotiating skills and strategic approach to trade.
“The report shows the economics of what would happen were the tariffs to be put in place," he said. "This is about facts, not how we feel.”
The economist was quick to also praise Trump as a negotiator who has deep knowledge of trade issues, indicating that the tariff threats could be used as they had during Trump's first term to ultimately lower barriers to trade and improve outcomes for the U.S. economy.
“Donald Trump is more familiar with the gains from trade than any politician I’ve ever talked to in my life,” Laffer said. ”Do not take this paper in any way, shape or form as criticizing Donald Trump and what his strategies are."
He added that he trusts the president and sees him as exceptionally competent.
While Trump’s tariff plans have frightened the stock market and U.S. consumers, Laffer's analysis and other reports show the possible economic risks if the threat of import taxes is unable to produce a durable set of deals with other countries. The paper reminds Trump that it’s not too late to change course, specifically complimenting the USMCA negotiated in his first term as a “significant achievement.”
“The United States-Mexico-Canada Agreement (USMCA) has served as a cornerstone of President Trump’s first term and has quickly become a dominant feature of North American trade policy, fostering economic growth, stabilizing supply chains, and strengthening the U.S. auto industry,” Laffer writes.
The analysis says that the per vehicle cost without the USMCA exemption would be $4,711, but that figure would be a lower $2,765 if the exemptions were sustained.
Trump honored Laffer with the highest civilian honor 45 years after the economist famously sketched out on a napkin the Laffer curve, showing that there's an optimal tax rate for collecting revenue.
The bell-shaped curve indicated that there's a tax rate so high that it could be self-defeating for generating tax revenues. Many Republicans embraced the curve as evidence that lower tax rates could generate stronger growth that would lead to higher tax revenues.
“Dr. Laffer helped inspire, guide, and implement extraordinary economic reforms that recognize the power of human freedom and ingenuity to grow our economy and lift families out of poverty and into a really bright future,” Trump said in awarding him the medal.
Laffer served on the economic policy advisory board of President Ronald Reagan, in addition to being a university professor. He has his own economic consultancy, Laffer Associates. In 1970, he was the first chief economist of the White House Office of Management and Budget.
Laffer also advised Trump during his 2016 presidential campaign and co-wrote a flattering book, “Trumponomics: Inside the America First Plan to Revive Our Economy.”
Trump maintains that 25% tariffs will cause more foreign and domestic automakers to expand production and open new factories in the United States. On Monday, he celebrated a planned $5.8 billion investment by South Korean automaker Hyundai to build a steel plant in Louisiana as evidence that his strategy would succeed.
Trump said the 25% auto tariffs would help to reduce the federal budget deficit while moving more production into the United States.
“For the most part, I think it’s going to lead cars to be made in one location,” Trump told reporters on Wednesday. “For right now, the car would be made here, sent to Canada, sent to Mexico, sent to all over the place. It’s ridiculous.”
