The Wall Street Journal reported earlier that Trump was set to move ahead with tariffs on $200 billion in Chinese goods. The report followed other news outlets saying that U.S. officials were trying to restart U.S.-China trade talks.
The Dow Jones Industrial Average fell after Kudlow's comments, which came in a televised interview with CNBC's Becky Quick at the Economic Club of New York. Investors have been grappling with fears of a global trade war all year as they assess how protectionist trade policies would hurt companies' profits.
"I think, in its wisdom, the stock market sees ... the big story here is the change in policies" the Trump administration has brought to Washington "and the economic boom," Kudlow said, noting equities remain near an all-time high.
The Dow traded less than 2 percent from its all-time high, while the Nasdaq Composite and S&P 500 reached record levels late last month.
"The tariffs story may be a very good force for good," Kudlow told CNBC. "Don't rule that out."
"People want to blame President Trump for fixing a broken system, and I think that's unfair," said Kudlow, a former CNBC host.