Your Vanilla Latte on Tariffs

Making sense of it all

Note: If you are seeing opening this in your inbox, you may want to read this on the web since it may cut off part of this piece. Enjoy.

The best place to start is with the vanilla latte many of you enjoy regularly.

The coffee in your latte likely came from Brazil, Colombia, or Switzerland, the top coffee-exporting countries to the United States.¹ The vanilla probably came from Madagascar, which accounts for 75% of vanilla imports to this country.

Your vanilla latte will become more expensive.

This past Wednesday, President Trump displayed a chart resembling a microbrewery menu, listing "reciprocal tariffs" against over 90 countries and territories including European nations, the Falkland Islands², and even remote Antarctic territories like Heard and McDonald Islands—a place inhabited only by penguins.

The Prime Minister of Heard and McDonald Islands, Mr. Pingu, was reportedly seen at the White House negotiating a tariff reprieve.

These tariffs have landed as well as the time in college I dipped a friend I was dancing with at the end of the song, and we both immediately hit the ground.

The S&P 500 dropped by 10% over Thursday and Friday, and will likely drop more this week.

Libertarian economists Thomas Sowell and Tyler Cowen, who typically favor GOP policies, have expressed their dismay at these tariffs with Cowen declaring: “This is perhaps the worst economic own goal I have seen in my lifetime.”

Senators from both parties introduced legislation to give Congress oversight on tariffs.³

Reactions across the political spectrum have been predictable. Trumpers argue that we aren’t seeing the brilliant chess game Trump is playing. Never Trumpers point to the red cliff of the S&P 500 chart as evidence that he just nuked the economy.

Reactions notwithstanding, I became obsessed with one question: why?

I wanted to understand the most rational, coherent argument for these tariffs and evaluate it in earnest, despite my bias.

Let me disclose my bias: I don’t like Trump, and I don’t think he has the character to govern. But, I think it’s naive to think of Trump simply as a man with the political philosophy of William McKinley, the bravado of Hulk Hogan, and the temperament of Angelica Pickles from Rugrats!

Thinking that Trump is this one-dimensional is the Occam’s razor⁴ explanation for everything he does, but I don’t think he’s that simple.

Since the tariffpalooza announcement, three dominant narratives have emerged:

Let's evaluate each in detail.

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Note: Some of you may be familiar with tariffs, some of you less so. I’ve added a “Tariffs 101” section at the bottom of this piece if you want to learn or need a refresher.

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Choose your adventure narrative

Tariffs to raise money

President Trump has claimed that "you're going to see billions of dollars, even trillions of dollars coming into our country very soon in the form of tariffs." His trade advisor, Peter Navarro, said tariffs would raise about $600 billion per year.

What will they do with the money from these tariffs?

Trump has long wanted to replace the income tax with tariffs. The Tax Policy Center studied this claim and concluded tariffs wouldn't come close to covering the $34 trillion in income taxes expected over the next decade.

Even if they keep income taxes and argue that existing taxes, plus tariffs, plus DOGE reductions (which seek to cut $1 trillion in government expenses) would create a surplus to pay down the $36 trillion debt, this scenario is simply Trump fan-fiction.

You would need impossibly high tariffs to balance the budget (and assume countries won’t have alternatives), destroying the U.S. economy in the process. Business costs would soar, consumer prices would spike, unemployment would rise, and government spending on safety nets would increase.

It’s like burning your house so that you get insurance money; you’ll never get full value, and now you don’t have a house.

Tariffs to reset global trade & re-industrialize the U.S.

This argument reflects the administration's desire to bring back manufacturing to the U.S. The path to doing so was first laid out by Chief Economic Advisor to the Trump Administration, Stephen Miran, in a paper he published in November 2024 titled “A User’s Guide to Restructuring the Global Trade System”

The paper outlines a possible path for the Trump administration to reach the following outcomes:

1. Re-industrialize the U.S. to increase factory jobs and make our supply chain less vulnerable to disruptions like COVID or freak scenarios like that one boat that got stuck in the Suez Canal and halted global trade in 2021.

2. Weaken the dollar so that U.S. companies can sell their goods to other countries more cheaply and so that, seemingly by magic, the United States is able to refinance $36 trillion of debt.⁵

Near the end of the report, Miran makes a key point about the implementation of this master plan.

There is a path by which the Trump Administration can reconfigure the global trading and financial systems to America’s benefit, but it is narrow, and will require careful planning, precise execution, and attention to steps to minimize adverse consequences.

Careful planning. Precise execution. Minimize adverse consequences.

None of these elements exist in how this administration has rolled out these tariffs. The tariff rates appear to have been calculated by Econ 101 college students. According to Axios:

The formula is to divide the U.S. trade deficit with each country by that country's exports to the U.S. The final reciprocal tariff was then divided by 2, with a minimum of 10% (which applies even to those countries with which the U.S. has a trade surplus).

Let’s look at Angola, which got slapped with a 34% tariff. The United States has a trade deficit with Angola. Why? Because we import high-value goods like diamonds and oil. So what's the plan? Force every Angolan citizen to buy enough Ford F-150s to give us a trade surplus? The average Angolan spends just $1,315 USD per year on goods and services.⁶

Tariffs as Trump’s Bludgeon

Trump loves to negotiate. He sees tariffs as the biggest economic lever he has against friends or foes. As Derek Thompson writes in his column “There is Only One Way to Make Sense of the Tariffs”:

Trump appears to care more about the process of gaining leverage over others—including other countries—than he does about any particular effective tariff rate. The endgame here is that there is no endgame, only the infinite game of power and leverage.

This starts to make sense when you look at Trump’s declarations on Friday that he is willing to negotiate if countries offer him something “phenomenal”

What deals does he want to cut? That still remains unclear. You would expect countries to offer no-tariffs zones (essentially backing them into free-trade agreements), or payments from EU countries for NATO protection. These are hypothetical scenarios, but typical of Trump's negotiation style.

The problem is that Trump's deal-making, brash and irrational, may help in negotiations, but not in governance. To this point, economist Tyler Cowen writes in his Free Press article:

With President Trump one never quite knows what one is going to get, so any assessment needs to be provisional. But that is a big part of the broader problem—high and persistent uncertainty about the basic rules of the game.

For Trump's negotiating tactics to work, countries would have no choice but to lower their tariffs or magically increase imports from the United States.

What's more plausible is that most countries will see the United States as antagonizing them despite being the world's wealthiest country. In a lot of cases, they are likely to cut their own deals with China.⁷

What happens now?

Who knows? By the time you read this, everything might look different. Unpredictability is this administration's favorite tool, both domestically and abroad.

But here's what I do know: I genuinely tried to find the rational case for tariffs. What emerged is clear—the three dominant narratives used to justify Trump's tariff strategy simply don't hold up to scrutiny.

If this administration truly wanted to re-industrialize America, it would implement a strategy giving business leaders confidence to make long-term manufacturing investments. Business leaders are rattled right now.

It would continue the targeted reshoring of high-value goods like computer chips through the surprisingly successful CHIPS Act—which Trump has threatened to cut. As Kyla Scanlon wrote in her latest post:

Without sustained industrial policy (think: training, tech investment, stable regulations), tariffs alone won’t bring a big wave of well-paying manufacturing jobs.

Even with a coherent industrial policy, we must face reality: modern industrialization won't bring back jobs as Trump voters imagine. The revived mills won't be filled with workers. They’ll be filled with robots. Yes, there will be high-paying jobs managing these robots, but only a fraction of what people expect.

This is what's so frustrating about this gambit. Nearly every country would love to have America's combination of robust service industries and advanced manufacturing. Yet there's no scenario where imposing broad tariffs won't damage our service trade surplus.

Trump may end up getting concessions he can declare as a win…and for our sake, I hope he does. The man doesn’t do well when he thinks he is losing, and he may make even more impulsive, harder-to-undo decisions.

I just hope that in the path to pyrrhic victories, we are not left in the ashes holding our vanilla lattes, wondering what the hell just happened.

You are right, Donny.

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What are they?

Tariffs are penalties imported from South Korea, the importer, Best Buy, has to pay a 25% tariff on top of the price they paid Samsung. In theory, Best Buy can choose not to pass on the cost of the tariff to the consumer. In practice, they want to preserve their profit margins by passing the cost to the consumer.

Why do countries impose tariffs?

Tariffs have been used for centuries as a way to regulate trade. In essence, a country levies tariffs on specific goods or trading partners to encourage domestic production and consumption of those goods.

For instance, imagine the U.S. government wanted more tennis shoes to be made domestically. It could impose tariffs on imported tennis shoes from countries like Vietnam or China. This would make importing shoes more expensive for U.S.-based retailers like Nike or Adidas. As a result, these companies might explore sourcing shoes from domestic manufacturers instead, especially if local production becomes cheaper than importing tariffed goods.

Do tariffs work?

Yes and no—and the duality of outcomes is key to understanding what is going on right now. Tariffs can sometimes achieve the goal of protecting domestic industries and reducing reliance on imports. But there are ways that tariffs can become self-defeating:

• Increase costs for consumers because imported goods become more expensive, which leads to inflation.

• Other countries may impose retaliatory tariffs which will hurt U.S. companies that export goods and services.

• Increase production costs. For instance, inputs like timber, drywall, and glass, essential in the construction of houses, are now subject to tariffs, which makes housing more expensive to build.⁸

How do tariffs impact trade balances?

Tariffs are one tool that governments use to influence trade balances, which can either be a surplus or a deficit. A trade surplus occurs when a country exports more than it imports, while a trade deficit happens when imports exceed exports. At the end of 2024, the United States had a trade deficit of $918.4 billion, meaning it imported $918.4 billion more in goods and services than it exported.

While tariffs can reduce imports and help narrow trade deficits in theory, they don't always work as planned because:

• Higher tariffs may hurt exports if other countries retaliate with their own tariffs.

• Domestic industries may not have the capacity to replace the goods that just got tariffed.

So, why don’t all countries use tariffs to run at trade surpluses?

The simplest answer is that some goods are essential but cannot be produced domestically at competitive prices (or at all). For example, the U.S. imports coffee because the only place you can grow coffee in the United States is Hawaii. Or consider that Birkenstocks (the state shoe of Washington State) are made exclusively in Germany. So, the United States buys coffee from other countries and imports Birkenstocks from Germany.

In these cases, you want trade with these countries because they can offer you a better product than you can make or a good that you can't produce yourself. This principle is called comparative advantage and explains why global trade exists.

There are reasons why the U.S. has had a trade deficit for decades. The merits of those reasons are a whole different discussion altogether.

But to answer the question above, countries don't use tariffs to run trade surpluses because the value they get from comparative advantage exceeds the value they get from running a trade surplus.⁹

1. Switzerland is the third largest importer of coffee to the US according to USAFacts. This is because Switzerland has one of the most advanced roasting industries in the world. They don’t really sell the raw beans (since they can’t grow them), but a roasted/processed version

2. “Che, se le dicen Las Malvinas, boludo!”

3. Which they should have anyway, but that’s for another time.

4. Occam's Razor is the principle that the simplest explanation with the fewest assumptions is usually correct.

5. This is part of the so-called Mar-A-Lago accord, which you can read about here.

6. According to MacroTrends.

7. Seeing Japan and South Korea respond to U.S. tariffs alongside China was not in anyone’s bingo card, trust me.

8. Get used to your roommate for the next 20 years!

9. Please note that I’m generalizing, and they may be one country, at one point in history, by which this sentence isn’t true. But what I’m saying is directionally correct.