Economist Discusses Tariffs and Inflation

Economist Artraffer shared insights on Fox Business recently, arguing that tariffs won’t actually increase inflation. Instead, he believes that the negative effects of import taxes would be balanced out by price reductions in exports.

On April 2, Trump introduced mutual tariffs affecting several countries but quickly announced a 90-day pause on these tariffs shortly after. During his appearance on “Kudlow,” Laffer countered the notion that tariffs contribute to inflation. He outlined his perspective on why trade barriers don’t necessarily elevate overall prices.

“Firstly, tariffs on imports will indeed increase their prices. But, it’s important to remember that U.S. exports will have to adjust as well to maintain the ability to purchase imports from elsewhere. So, an import tax functions like an export tax,” Laffer explained to guest host David Asman. “This mirrors Lerner’s symmetry theorem. Essentially, the prices of our exportable goods and services will drop, meaning increases in import prices will align perfectly with declines in export prices, effectively neutralizing the impact.”

Laffer referenced historical instances, particularly a 10% surcharge implemented during Nixon’s presidency, which he claims led to a significant decrease in inflation.

“Looking back at Nixon’s period, we didn’t experience the full impact of his 10% surcharge; in fact, inflation rates fell notably. And this didn’t disrupt trade; similarly, the Kennedy Round and NAFTA were also price neutral,” he noted.

Former President Nixon’s 1971 introduction of a 10% import surcharge aimed to bolster U.S. industries by addressing trade deficits, but its immediate impact on inflation was mixed, despite ultimately benefiting the U.S. dollar by making it a more competitive export.

Laffer then dismissed critiques suggesting that tariffs were causing inflation. “These critics fixated on the price issue lack understanding; they aren’t well-versed in economics,” he remarked.

Even with tariffs set to take effect on July 9, Trump has reportedly achieved an economic win. Key indicators of inflation have dropped to their lowest rates in four years. According to a report from the Commerce Department, the Personal Consumption Index, which serves as a primary inflation gauge for the Federal Reserve, revealed a decline in inflation to levels unseen since March 2021.