Economist Art Laffer explained on Fox Business Monday that tariffs do not drive inflation and said that the economic impact of import taxes is offset by corresponding price drops in exports.
On April 2, Trump announced reciprocal tariffs on several nations before declaring a 90-day “pause” on the tariffs days later. During an appearance on “Kudlow,” Laffer pushed back against claims that tariffs drive up inflation and explained his step-by-step case for why trade barriers don’t increase overall prices.
“Step one, tariffs on imports do raise the price of imports. But do remember that the U.S. exports to earn the wherewithal to buy imports from other countries. So if you have a tax on imports, it’s the exact same thing as a tax on export,” Laffer told guest host David Asman. “That’s called Lerner’s symmetry theorem, exactly the same. And, therefore, what happens is all of our exportable goods and services, their prices will fall. So the increase in prices of imports is matched 100% by the fall in the prices of exports. And the two net out to be zero.”
Laffer points to historic examples, such as the Nixon administration’s 10% surcharge, which led to a noticeable drop in inflation rates.
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“If you look at it with Nixon’s, the rate of inflation declined substantially with Nixon’s 10% surcharge that it also did not get. But it just doesn’t affect trade. The Kennedy Round did not affect prices and also neither did NAFTA affect prices,” Laffer added.
Former President Richard Nixon implemented a 10% import surcharge in 1971 aimed to address trade imbalances and protect U.S. industries by imposing a tariff on all dutiable imports. While the immediate effects on inflation were mixed, the policy led the U.S. to gain a competitive edge in exports due to the weaker dollar.(RELATED: Art Laffer Explains How Trump Can ‘Create Best Economy US Has Ever Had’ And ‘Beat’ Reagan’s Record)
Laffer then dismissed the critics claiming tariffs are driving inflation.
“These people who focus on prices just don’t understand straight up from Sikkim. They aren’t good economists. And they also aren’t good empiricists,” Laffer said.
Despite the looming tariffs set to take effect July 9, Trump secured an economic victory as a key inflation indicator dropped to its lowest level in four years. The personal consumption expenditures index, a primary inflation gauge used by the Federal Reserve, showed a decrease in inflation to a level not seen since March 2021, according to a report from the Commerce Department.
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