I wrote this article in February 2025 after Donald Trump had announced tariffs on Canada and Mexico. Things have progressed since then. I didn’t post it because it feels a bit incomplete – that said, it mostly captures my ideas on what happens next. I might update it as I learn more.

The current North American trade war is nominally about border security and drug trafficking. At least, that’s the pretence that Donald Trump is using. It’s a bit baffling for Canadians as our border is not particularly porous – if anything, we need to keep more talented Canadians here – nor is there a huge drug problem. Certainly, it’s tiny when compared to America’s southern border.

To really understand why Trump wants to place tariffs, you must listen for other clues. He has repeatedly said that allies like Canada, Mexico, and the EU treat America badly. Exhibit A in his case is America’s trade deficit with these countries. In bare facts, he’s right that the USA maintains a trade deficit with most of its main trading partners. This is a problem for average Americans in a lot of ways. Levying tariffs over time will likely result in the re-shoring of some industries. But it’s incorrect to say that America’s trading partners are taking advantage of her. They’re only following basic economic incentives tied heavily to the US dollar’s role as the global reserve currency.

Trump likes that the US dollar is the world reserve currency. What he appears not to realize is that this status is the reason for the trade deficit, and the new tariffs are the first step to destroying the dollar standard. If Canada acts quickly and decisively, we can limit the damage of this trade war, while also hedging against the global monetary standard uncertainty.

A bit of history

The 1944 Bretton Woods agreement saw the US dollar pegged to gold at $35 per ounce, with signatory countries agreeing that these gold-backed dollars would now be used for global commerce. Nations could ship America a boatload of gold and receive dollars in return. These, then, would be used as an easy-to-manage settlement layer for international trade. One can settle a transaction in dollars more quickly than physical gold.

The problem with this arrangement is a paradox that became known as Trifflin’s Dilemma:

To provide enough dollars for global trade to function, the US had to run deficits
Running these deficits cast doubt about whether the US could maintain the $35/oz gold peg
This created a paradox where fulfilling the global need for dollars inevitably led to a crisis of confidence in those same dollars

As the issuer of the global reserve currency, the US needed to supply the world with dollars by running trade deficits. However, running persistent deficits undermined confidence in the dollar’s gold peg.

Another problem was the rise of the “Eurodollar” through the 1950s and 1960s. International banks – primarily in Europe – would issue USD loans without having physical currency or gold to back them. These fractionally reserved dollars were effectively created outside of the US jurisdiction and made the peg very hard to hold. In 1968, a two-market system was created where central banks could redeem dollars for gold at $35/oz, but the private gold price would float based on supply and demand. The private gold price quickly rose above $35/oz, making the decoupling readily apparent. In 1971, Richard Nixon officially ended the gold standard, allowing the US to reap the same benefits as the European banks: namely, to issue new dollars without needing any physical asset to back it up.

While maintaining the world’s reserve currency under a gold standard was a burden, maintaining the reserve currency under a fiat standard was a bonanza. US dollars were the most in-demand good in the world. They could be used to buy everything. In the 1970s, Henry Kissinger and other clever diplomats devised the “petrodollar” system, where Saudi Arabia and the OPEC states would price their oil in US dollars and use the surplus to buy US Treasury securities, the new asset underpinning US dollar dominance. This arrangement allowed the US to effectively “print oil” as needed to fund growth while ensuring a steady demand for Treasuries.

To the present

Over the ensuing decades, demand for US dollars was very high. Countries, companies, and individuals all followed this incentive structure to lead to the current position of a high US trade deficit and high US national debt. Some key points and consequences:

Bringing China and India into global commerce unlocked over a billion productive members of the industrial workforce. Firms realized that they could make many of the goods Americans wanted for much cheaper than they could be made in America.
Manufacturing jobs fled from America to other countries. To be clear, it wasn’t evil foreigners looking to hollow out the middle class; American firms chased cheap labour to maximize profit. As Americans bought more goods made overseas, the trade deficit deepened.
Profitable companies benefit their shareholders, who are predominantly the upper class. The rich got richer, and the poor lost their jobs (and got poorer on relative terms).

The US dollar’s position as the reserve currency has benefited Trump and the billionaires he hangs with. It also led to his elections, as the dispossessed former middle class turned to the only candidate who took them seriously and heard their pleas to make America great again.

Having hegemony and vacating it, too

Trump likes US dollar hegemony. When he heard that the BRICS nations were considering creating a new commodity-based currency for trade within their bloc, he threatened 100% tariffs on all exports to the US. This threat, ostensibly, is a bid to keep the US dollar as the reserve currency.

He doesn’t seem realize that tariffs are effectively a tax on America’s greatest export, the US dollar. What they signal to global investors is, “The US dollar is harder to buy. Do business elsewhere.” And so they will. By trying to protect the US dollar’s privilege, he’s effectively destroying it.

Embracing finitude

Canada has benefited from a world order in which the USA was the great superpower and its currency was the world reserve. America has the greatest army and made good on its promises to NATO. Free trade meant unlimited access to the world’s biggest and most diversified economy. Our abundant resources, priced in dollars, guaranteed a stable purchasing power over time. Canadian banks and investors had broad access to US capital markets for north-south trade infrastructure development.

US dollars bought the best stuff that money can buy, and to their credit, America spread the wealth. USAID and PEPFAR have done much good in the developing world. America’s security umbrella has shielded allies from dictators like Putin. But this golden age has ended. America is withdrawing from the world stage. The signal is loud and clear. There is no going back now.

The benefits of having a single money that everyone in the world desires and will use for trade are high. If the dollar is unseated as champ after 80 years, it will likely be replaced with something else. It won’t be the Chinese yuan, Indian rupee, or any other government currency. If not for America’s soft (and sometimes hard) imperialism over the past few decades, the dollar would have fallen from dominance as well. It’s more likely that a new, supranational currency will come that is backed by gold, bitcoin, or some basket of commodities, like the BRICS proposal (or John Meynard Keynes’ Bancor proposal during the Bretton Woods discussions).

When free trade with the world’s biggest economy is not guaranteed, and the US dollar is not the reserve currency, how does Canada respond? The first step is for The Bank of Canada to refill its vaults with gold, and, maybe, Bitcoin. This allows the Canadian dollar to hold value enough to buy whatever new currency emerges. We’ll need the ability to settle trade in multiple currencies or new trade settlement systems. But more than anything, we need a lot of investment to develop new export markets for our own scarce and finite resources.

The greatest barrier to Canadian trade diversification is internal. Our energy development remains hamstrung by interprovincial disputes, environmental review processes stretched to breaking points, and poorly designed Indigenous consultation frameworks. We need expedited regulatory pathways for critical infrastructure while maintaining environmental standards. The federal government must establish dedicated trade missions beyond traditional partners, particularly targeting emerging economies in Southeast Asia and Africa where our resources and expertise would command premium pricing. At least we need to stop shooting ourselves in the foot; if Germany and Japan come begging for LNG, don’t turn them away with some vague bromide about lacking a business case. Moreover, we need to stop exporting raw materials and start investing in value-added processing facilities that create both jobs and export products resilient to price fluctuations. The capital requirements are enormous, but the alternative – continuing our near-total dependence on a retreating American market – is far costlier in the long run.

We have vast amounts of energy in the forms of oil, gas, and uranium. We have very few markets for these products aside from the US. We need to build refineries and pipelines. We need LNG terminals on all three coasts. We need to continue the development and export of CANDU reactor technology. We need to generate and use more energy per capita than any other country to power AI and Bitcoin data centres, and silicon foundries for computer chips and solar panels. The list goes on, but the message is clear: it’s time to build.

Like our resources, our time in this transitional world order is finite. We have many opportunities, but we need to seize them now. We can’t assume that Trump will continue trying to have his cake and eat it for too long.