Economist Awarded By President Trump Says ‘Economically Impossible’ To Keep Car Prices Down

Phil Donahue was awarded the Presidential Medal of Freedom, as were Willie Mays, Yogi Berra, and Frank Gehry. What ties all these people together is anyone’s guess, but a commitment to freedom must be part of it. President Trump’s last two medals were given to golfers. Before that, he gave one to noted economist Arthur Laffer. What does Laffer think of all these new tariffs? He doesn’t like them.

Specifically, Laffer thinks that they’ll make the prices of even Big 3 cars go up and disrupt the American automotive industry in a bunch of harmful ways. The biggest impact, he thinks, will be in raising the cost of making cars in a way that makes them uncompetitive. Does this bother President Trump? He reportedly warned automakers not to raise prices, though he told NBC News this weekend that “He couldn’t care less” if carmakers did.

Trump advisor and Tesla CEO Elon Musk recently acknowledged that his government role comes with some significant downsides. Clearly, even without the politics, being a car exec comes with downsides. It’s hard for just about everyone in this industry, as the outgoing Volvo CEO noted, saying that it’s a great job for people who like “sleepless nights.”

Last week was the Book of Job, and this week is the Book of Gob. Or, well, Lucile.

Long-Term Tariffs Could ‘Jeopardize Over 825,0000 Jobs’ According To Laffer Paper

Arthur Laffer runs something called the “Laffer Center For Supply-Side Economics,” which is all most of you should need to know about where his politics lie. Laffer became famous in Republican circles for something called the “Laffer Curve,” which showed that there’s a point at which you tax people so much that it disincentivizes economic production, thus causing government revenue to drop.

Some republicans mention this curve when calling for tax cuts, a strategy more palatable than calling for cuts to popular government programs like Social Security and Medicare. Since then, he’s been one of the go-to economists for many conservatives.

There are many who have argued that the 25% tariffs on imported cars are bad for consumers and car companies in the near term. Laffer, in a just-released paper that was leaked to The Autopian, provides a similar argument that’s a little more sympathetic to President Trump, though it makes a great case for why it’s going to be bad even for American automakers.

It’s not entirely clear to me why this 19-page paper isn’t public, so I can’t post it and link it, but I’ll try to excerpt the key parts so you understand his argument. He starts off by acknowledging that the United States-Mexico-Canada Agreement (USMCA), an update to NAFTA negotiated by President Trump in his first term, has so far been a big success, and that the current temporary exemption to USMCA-compliant vehicles should remain in place.

Why?

A 25% tariff without USMCA exemptions would create immediate and cascading cost pressures throughout the North American auto industry. The cascading effect would be particularly significant, as components crossing borders multiple times during production would face compounded tariff applications, likely multiplying the effective tariff rate far beyond the nominal 25%. This becomes especially problematic when considering the narrow profit margins within the industry. Manufacturers typically operate at around a 10% margin, with suppliers functioning at even lower margins, leaving minimal capacity to absorb these additional costs internally.

The scale of a 25% tariff on the integrated North American supply chain makes it economically impossible for manufacturers to shield consumers from price increases.

How bad would it be? Here’s his estimate:

By applying a 25% tariff and distributing the total impact across projected new light vehicles in 2024, the analysis estimates that without a USMCA exemption, the per-vehicle tariff impact could reach $4,711. With a USMCA exemption, this impact would decrease significantly to $2,765. Importantly, these calculations assume auto parts face tariffs only once, whereas in reality, components typically cross North American borders three to four times during assembly. Consequently, an auto manufacturer with 100% North American production could experience even greater vehicle price increases than a manufacturer with no North American production if there is no exemption for USMCA-compliant auto parts.

This, to me, is the key piece. It’s not only that costs would go up, it’s that American companies would be less competitive, and prices might become even higher for American-made cars from American-made companies because of the highly integrated supply chain that was a result of both NAFTA and USMCA.

The potential damage to North American integration comes at a time when global competitors continue to benefit from their own regionally integrated supply chains. The European automotive sector relies on the seamless trade mechanisms within the EU single market, while Asian manufacturers leverage exceptionally dense supplier networks across China, Japan, and South Korea. Disrupting the USMCA framework would place U.S. manufacturers at a structural disadvantage against these competing regional production networks.

Additionally, tariff-driven cost increases inevitably compress profit margins, leading to reductions in research and development budgets across the U.S. automotive industry. This financial constraint threatens critical technology transitions in electrification, autonomous driving, and connected vehicle systems—areas where global competitors are aggressively investing. The resulting innovation gap could have long-lasting consequences for the U.S. automotive industry’s ability to maintain leadership in emerging vehicle technologies that will define the next generation of transportation.

These disruptions coincide with unprecedented Chinese automotive export expansion, raising additional strategic concerns. Chinese manufacturers are leveraging domestic overcapacity to aggressively capture international market share with competitively priced, increasingly high- quality vehicles. The additional burden of tariff-related costs and operational disruptions intensifies these competitive pressures on U.S. producers, potentially accelerating market share erosion in both domestic and international markets.

Whether you agree with Laffer’s politics or not, he very carefully articulates what a lot of people in this industry have said publicly and privately. For the last 5-7 years, automakers in America, and in particular the Big 3, have created a system that relies on both the support of the Inflation Reduction Act and the open trade policies of the USMCA. Trying to toss both at the same time just creates chaos. In Laffer’s estimation, keeping USMCA goods out of the 25% tariff might have some impact on pricing, but it won’t be as potentially devastating.

Otherwise, it’s possible that the cumulative impact of tariffs could cause a hit to GDP of about 1.1% and cost the economy more than 850,000 jobs.

This paper caused a bit of a stir at the end of last week, so Laffer told the Associated Press that his intention wasn’t to be critical:

“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.”

[…]

“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.”

How has President Trump responded to all of this? Well…

President Trump ‘Couldn’t Care Less If They Raise Prices’

There was a story last week in The Wall Street Journal that said President Trump had a conversation with automakers and told them they better not raise prices if tariffs go up:

When President Trump convened CEOs of some of the country’s top automakers for a call earlier this month, he issued a warning: They better not raise car prices because of tariffs.
Trump told the executives that the White House would look unfavorably on such a move, leaving some of them rattled and worried they would face punishment if they increased prices, people with knowledge of the call said.

Instead, Trump said, they should be grateful for his elimination of what he called former President Joe Biden’s electric-vehicle mandate, which involved subsidies and emissions requirements to encourage electric-car production. He made a lengthy pitch for how they would actually benefit from tariffs, two people on the call said, adding that he was bringing manufacturing back to the U.S. and was better for their industry than previous presidents.

President Trump denied saying that, or even implying that, on a call with NBC News this weekend:

When pressed if he told CEOs not to raise prices, as reported in The Wall Street Journal, Trump added, “No, I never said that. I couldn’t care less if they raise prices, because people are going to start buying American-made cars.”

Trump continued, “I couldn’t care less. I hope they raise their prices, because if they do, people are gonna buy American-made cars. We have plenty.”

To be clear here, I don’t think the president is talking about domestic automakers here, he’s talking about foreign ones. Or, specifically, he’s talking about foreign-made cars. The challenge, Laffer argues, is that the supply chain is a little too stretched at this point, and without any long-term exemptions, it’s foreign companies who might have a price advantage.

Why? As Laffer points out in his paper, a vehicle like the Cadillac CT5 is built in the United States with a motor and transmission also built in the United States. Yet, only a total of 15% of the share of North American content is U.S. or Canadian (to further complicate matters, the law makes it so that it doesn’t matter whether it’s from Canada or the United States, so we don’t even know what that mix is). Another 49% of the content is from Mexico. And the rest is presumably from somewhere else. On top of that, the steel and aluminum used to build the car are also subject to hefty tariffs.

The competitive Lexus IS is made in Japan, and it’s likely that most of the parts also come from regional Asian suppliers entirely unaffected by these tariffs. The 25% tariff only gets applied once to the car coming into the United States. That’s a lot of money, of course, but if the Cadillac’s parts aren’t USMCA-compliant or don’t get a USMCA waiver permanently, then it’s possible that it’ll be harder to keep the CT5 cheap than the Lexus IS.

There have been complaints, including from the president, about parts criss-crossing the border numerous times. It sounds strange, but it’s often way more efficient, or that’s not what would be happening. People want nicer cars with more features and don’t want to pay a lot more for them. Extreme efficiency is the only way to do that given how narrow the margins are in making cars, selling cars, and providing supplies for making cars.

Elon Musk Says Political Backlash ‘Costing Me A Lot’

I was driving around suburban New York yesterday and passing through a slightly more middle-class town when I noticed a mix of protestors. What were they protesting? Tesla. It was one of hundreds of Tesla Takedown protests aimed at Elon Musk’s company over his role in DOGE.

Indeed, Tesla’s share price has fallen a lot. Is this politics? Is this the slow update of models? Is this the Cybertruck falling short of its promise? Who knows, but it’s clearly bothering him according to this Bloomberg story:

Elon Musk acknowledged that his job as head of President Donald Trump’s effort to cut the size of government is “costing me a lot” when it comes to his other big job, as CEO of Tesla Inc.

Political backlash from Musk’s recent political forays in the US and around the world have weighed on Tesla at home and abroad. “It’s costing me a lot to be in this job,” Musk said at a town hall event in Wisconsin, noting some of his political opponents have highlighted the stock’s retreat.

“What they’re trying to do is put massive pressure on me, and Tesla I guess, to you know, I don’t know, stop doing this,” Musk said. “My Tesla stock and the stock of everyone who holds Tesla has gone, went roughly in half. I mean it’s a big deal.”

Musk was saying this at an event during which he handed out million-dollar checks to volunteers working in a state supreme court race. Over the last few weeks, Musk has seemed to want people to be empathetic to his plight. Which, lol. Car CEOs have been involved in politics in the past and are, in general, conservative. None that I can think of have been quite so vocal in such a specific way. Perhaps this is the reason why.

If You Want ‘Mental Stimulation’ And ‘Sleepless Nights’ Come Work In The Auto Industry, Says Departing Volvo CEO Jim Rowan

Former Dyson exec and, most recently, Volvo CEO Jim Rowan, is departing the company and being replaced by the guy who was there before him. On the way out of the door, he gave an earnest and insightful interview to Autocar that details the many challenges facing his company and the industry at large.

In addition to the quote above, he focused on how difficult times are right now:

Rowan expects a significant change in around 18 months as brands start to disappear, from legacy car makers and from Chinese upstarts.

“They’re just not all gonna survive,” he says. “There’s not enough business for everybody. A lot of them are not making money already. They’re selling cars at a loss just to keep cash coming in. Eventually, that plays itself out and you’re going to see a thinning out of the multi-brand car companies that are going to need to say: ‘I can’t keep all these brands alive, so I’m going to need to shrink.’

“I don’t think you’re going to see car companies buying car companies. There’s just not enough business for everybody. So those guys will die out. The ones that are left will be much stronger because there’s less competition, and we’re going to be forced to be pretty lean to get through this.

I can’t excerpt the whole thing, so go and read it because he makes a lot of interesting points about the importance of software and how much an electric skateboard platform changes the game:

“With internal combustion engines, ‘premium’ is derived by [the likes of] ride quality,” he says. “If that was your brand attribute, you spent a ton of money because you put a big, heavy engine in the front of the car. You want to throw that car through the corners at 120kph [75mph]. You’d spend a lot of money on making a really smooth engine, on a really nice chassis, on suspension.

“Then, bang, all of a sudden there’s a new technology. You take a flat skateboard design and you get a nice low centre of gravity. Now you don’t have to offset this big, heavy engine in the front of the car, so suspension and, to some extent, chassis design becomes far less important. With battery technology, it’s not about the explosiveness and the smoothness of your engine, because you get torque for free. So now, what’s your brand attribute?

These are all good questions.

What I’m Listening To While Writing TMD

Have I not done “The Final Countdown” by Europe here? That seems impossible. This might be a rerun, but it’s a perfect one.

The Big Question

If you had to guess, what would the North American Content of your cars be?

Top Photo: The White House, all Arrested Development GIFS via Giphy.