Noted economist honored by Trump warns that 25% tariffs risk 'irreparable damage' to US automakers

JOSH BOAK

Thu, Mar 27, 2025, 10:17 PM 3 min read

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, adding that 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 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.”

While Trump’s tariff plans have frightened the stock market and U.S. consumers, Laffer's analysis shows the administration has yet to convince even his favored economists that his import taxes would deliver as promised. 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.