Renowned economist Arthur Laffer recently issued a warning about President Donald Trump’s planned 25% tariffs on automobile imports. According to Laffer’s new analysis, these tariffs might increase the cost of a vehicle by $4,711 and could impair the competitive edge of U.S. automakers against international rivals.
In his 21-page report, Laffer, who was honored with the Presidential Medal of Freedom by Trump in 2019 for his economic contributions, recommends maintaining the supply chain agreements with Canada and Mexico embedded in Trump’s 2019 USMCA trade agreement. As it stands, the Trump administration has given temporary exemptions under the USMCA to auto and parts imports, effective from April 3, to delay tariffs on non-U.S. content within vehicles and parts. This strategy allows time to develop a framework for such taxation.
Laffer emphasized in his report that without these exemptions, the tariffs could cause substantial harm to the auto industry, undermining U.S. manufacturing aims and shaking economic stability. Imposing a tariff of 25%, he noted, would considerably reduce, or even eliminate, profit margins of domestic car producers, thus affecting their international competitiveness.
In a subsequent interview, Laffer mentioned that the report stirred a “kerfuffle” due to its focus on economic outcomes, not Trump’s trade deal-making skills. Laffer praised Trump as a capable negotiator who understands trade significantly, implying that the tariff threats are a strategy to reduce trade barriers and enhance the U.S. economy strategically, much like in Trump’s first term.
Laffer assured that the paper was not a critique of Trump’s strategies and maintained that he had confidence in Trump’s economic competence. However, the potential economic dangers of import tariffs are concerning if negotiated deals don’t materialize effectively. Laffer complements the president’s achievements like the USMCA as being crucial for his presidency, driving economic growth and stabilizing supply chains.
Without the USMCA exemptions, the per-vehicle cost would escalate to $4,711, whereas maintaining those exemptions could lower the cost to $2,765. Trump previously celebrated Laffer with the highest civilian honor for his contribution to tax policy, particularly the Laffer Curve, demonstrating that excessively high tax rates could hinder revenue growth—a concept embraced widely by many Republicans.
Laffer has had a prominent career, including advising former President Ronald Reagan and founding his own economic consultancy. He also provided advice during Trump’s 2016 presidential campaign and co-authored “Trumponomics: Inside the America First Plan to Revive Our Economy.”
Trump argues that the planned tariffs could induce foreign and domestic car manufacturers to increase their production within the U.S. One such example he highlighted is a $5.8 billion South Korean Hyundai investment to develop a steel plant in Louisiana. Trump assures that these auto tariffs would substantially decrease the federal budget deficit while boosting U.S.-based production.
According to Trump, consolidating car production in one location, rather than spreading it to various countries, is the ultimate goal. For him, relocating and centralizing auto production would resolve the current logistical inefficiencies.