For a US president known for his capriciousness, Donald Trump has remained remarkably consistent on one issue: tariffs. But, while he made liberal use of them during his first term, he has embraced a far more aggressive approach since returning to the White House in January, and all signs indicate that his trade war is just getting started.

The difference between Trump’s first term and his second is “not just a matter of degree,” explains Ian Bremmer, Founder and President of Eurasia Group and GZERO Media. Instead of using tariffs “principally as leverage to be bargained away in negotiations,” Trump is now attempting to “reshape the global economic order and America’s place in it,” in what amounts to the “most significant challenge to the global trading system since its inception.”

It hardly matters that Trump’s approach is flagrantly illegal, observes Aziz Huq of the University of Chicago. The tariffs are not “responses to the declared ‘emergency’ on the southern border,” which means that the 1977 International Emergency Economic Powers Act “expressly and clearly forbids their use.” But it is a sign of “how weak America’s constitutional order has become” that US courts are unlikely to do anything about it.

The question, then, is how to respond. As America’s trade partners begin to roll out retaliatory tariffs, Harvard’s Dani Rodrik urges them to “resist the temptation to magnify the insanity.” Instead of tit-for-tat retaliation, which would hurt their economies and the broader global economy on which they depend, countries might pursue some “surgical retaliation”– targeting industries that support Trump politically – while making use of “instruments other than trade policy.”

One option, which Gabriel Zucman of the Paris School of Economics advocates, would be to tie “market access for foreign multinationals and billionaires to fair taxation.” This would ensure that those who “benefit the most from globalization” bear the costs of the “economic conflict” Trump has created, transforming a “battle between countries” into “one between consumers and oligarchs.”

Kenneth Jacobs, Senior Chairman of Lazard, highlights another “overlooked weapon” that countries running trade surpluses with the US could employ: a tax on the purchase of dollar-denominated securities issued by the US government or US firms. While such a policy – or even a “more subtle foreign dollar-reserve” strategy – would carry high costs for these countries, the costs for the US would be “far greater,” and “emerge much faster.”

In a sense, this approach would amount to calling the Trump administration’s bluff. As the University of Chicago’s Raghuram G. Rajan explains, the newly confirmed chair of Trump’s Council of Economic Advisers has argued that tariffs are warranted, because “exorbitant” global demand for US financial assets has made the dollar too strong for US exporters to compete, fueling a persistent trade deficit. Tellingly, however, even those who make this argument balk at giving up the “burden” that the dollar’s attractiveness supposedly represents.

Yet that is precisely where Trump’s trade wars – together with his establishment of a “digital gold” Bitcoin reserve – may lead, warns the University of Toronto’s Carla Norrlöf. If the Trump administration’s conviction that countries will pay any price to maintain access to the US market turns out to be wrong, the global dominance of the US dollar, and “all the advantages it confers,” could be “lost indefinitely.”

NEW YORK – Donald Trump’s return to the White House has ushered in a new era of American trade policy, one that represents a fundamental break from the past – including from his first term. Trump is significantly less deterred by consequences than last time. The “tariff wall” that he wants to build around the United States is not just a more aggressive version of his transactional first-term policies. Rather, it represents an effort to reshape the global economic order and America’s place in it.

The wall’s first bricks were laid on March 4, when Trump imposed 25% tariffs on imports from Canada and Mexico, and doubled the 10% tariffs on Chinese goods, pushing the cumulative rate on Chinese imports above 30%. Canada and Mexico immediately announced retaliatory measures targeting politically sensitive US industries and congressional districts. After two days of furious lobbying and market turmoil (for which Trump blamed “globalists”), the US granted a one-month reprieve for cars from Mexico and Canada and products compliant with the US-Mexico-Canada Agreement (USMCA).

But these temporary exemptions should not be taken as a sign that Trump is backing away from imposing tariffs on America’s closest trading partners. Trump has vowed to levy 25% tariffs on steel and aluminum imports by March 12, which will hit Canada especially hard. A tariff on global auto imports is supposed to follow on April 2, harming not only in Japan, South Korea, and Germany, but also Mexico and Canada, where US carmakers have built complex cross-border supply chains.

The administration also plans to unveil worldwide “reciprocal” tariffs, designed to match the tariffs that other countries place on the US, in early April. Officials will be scrutinizing all non-tariff practices (taxes, subsidies, currency manipulation, regulations) that the administration considers to be “unfair.” Countries such as India, Argentina, South Korea, and Brazil could face the stiffest measures.

But the difference between Trump’s immediate, aggressive use of tariffs and what we saw during his first term is not just a matter of degree. Gone are the days when tariffs were used principally as leverage to be bargained away in negotiations. Instead, the administration’s 2025 Trade Policy Agenda frames them as critical tools to reshore supply chains, revitalize the US manufacturing base, and replace tax revenue. The goal is not to address bilateral trade deficits or punish unfair practices, but rather to protect “the soul” of America and charge a sufficiently high premium on US market access. Negotiating the tariffs away would mean sacrificing these core policy objectives.

This shift reflects Trump’s conviction that the postwar liberal economic order was not the foundation of American prosperity, but its undoing. As he sees it, the US surrendered its economic sovereignty after World War II by reducing tariffs and allowing unrestricted capital outflows.

Trump began to challenge the bipartisan consensus supporting market liberalization and global integration during his first term, but now he is forcing the issue. His solution is to leverage America’s economic, military, and technological dominance to reshape global trade flows to its advantage and correct decades of misguided policy. That’s what the “reciprocal” tariffs are intended to do: not to create negotiating leverage, but to restructure global trading relationships.

At its core, however, the tariff-wall strategy has an audience of one: China. As indifferent as Trump has been to negotiating off-ramps for Canada and Mexico, he has shown even less interest in engaging with the Chinese government. The two rounds of 10% tariffs were not preceded by specific demands, nor have they been followed by attempts to start a bargaining process. Although China’s retaliation has been measured so far, the average US tariff rate on Chinese imports is rapidly approaching the danger zone where China’s leaders will soon feel that they must push back harder, lest they look weak domestically.

Even if some in the Trump administration see room for compromise with China, the preference is for containment – or even confrontation. As it starts building its tariff wall, the US will force allies to make a stark choice: purge Chinese components and capital from your supply chains – at least in the growing number of sectors deemed critical to national security (such as semiconductors, critical minerals, steel, and aluminum) – or you will be shut out of US markets altogether.

The risk of a new cold war is real, and the potential for escalation is high. A breakdown in US-China relations would have catastrophic consequences for the global economy and its two largest players. But the likely long-term impact of Trump’s trade strategy on the global economic architecture is even more consequential. With no grand bargain in the works vis-à-vis China or anyone else, we are witnessing a transition from a rules-based system of managed economic integration to one of coerced decoupling, chaotic fragmentation, and economic self-reliance.

Trump is likely to stay the course even in the face of severe economic dislocation. Of course, the administration is hoping that American consumers and businesses will feel the benefits of its strategy sooner rather than later. But Trump has already accepted that tariffs may cause “a little disturbance” for the US. “Will there be some pain?” he asked in February. “Maybe (and maybe not!) But we will make America great again, and it will all be worth the price that must be paid.”

Trump’s political support among Republican voters is durable enough to withstand economic fallout, at least for a while. And unlike during his first term, he faces no restraining voices within his cabinet or in Congress. As a lame-duck president largely concerned about his legacy, he has a significantly higher tolerance for pain than last time, both politically and in terms of market impact. That means his tariff wall is likely to endure.

The world is entering a period of heightened economic uncertainty not because tariffs will cause some inflation and supply-chain disruptions, but because the US is actively dismantling the economic order it created. Whether Trump’s effort to recreate American hegemony succeeds or fails, it represents the most significant challenge to the global trading system since its inception.

CHICAGO – US President Donald Trump’s sweeping tariffs on Mexican, Canadian, and Chinese imports rest on shaky legal ground. But they are unlikely to be struck down in court. By exploiting a gap between the law and brute power, the Trump administration is laying bare the weakness of America’s constitutional order.

The US Constitution assigns authority over foreign trade and taxation to Congress alone. While Trump has made an extravagant show of ignoring Congress’s duly enacted laws in recent weeks, his tariff orders themselves invoke federal law: the 1977 International Emergency Economic Powers Act (IEEPA). And yet, the IEEPA does not support Trump’s current tariffs.

The law’s language makes this clear. A president may declare a “national emergency” to address an “unusual or extraordinary” foreign threat to America’s “national security, foreign policy, or economy.” Once that is done, the IEEPA grants vast emergency-specific powers, including the authority to “regulate” the “importation” of “any property.” But these additional powers apply only to the emergency at hand; they may not be used for “any other purpose.”

Thus, in January, Trump declared an emergency “at the southern border,” citing the threat posed by cartels, migration, and narcotics. Let us take this declaration at face value and assume that there is a crisis at the border. Even then, the tariffs imposed this month cannot plausibly be understood as a response to it.

This is most obvious with respect to Canada, a country that plays almost no role in supplying the American fentanyl market. The discontinuity between the vast tariffs being imposed on Canada and the notional emergency at the “southern border” is so glaring that the tariffs should be viewed as illegal on their face. The off-and-on nature of these tariffs underscores their lack of rational connection to any particular policy.

China is a more complex case, but the result is the same. While China is a source of precursor chemicals for opioid production, former President Joe Biden’s administration already secured an agreement with the Chinese to limit these exports. Blunderbuss tariffs against China, disconnected from any evidence that the previous agreement has gaps, cannot credibly be framed as a response to the crisis at the southern border. As with Canada, Trump’s tariffs are obviously a response to some other issue.

Even with respect to Mexico, it is fair to ask whether the tariffs are truly aimed at changing the Mexican administration’s policies on opioids. As Mexican President Claudia Sheinbaum noted when she announced countermeasures this month, fentanyl seizures at the border had already dropped by 50% from October to January. Moreover, from 2019 to 2024, four out of five people detained at border crossings for carrying fentanyl were US citizens.

If there was any doubt that the latest tariffs are not really about the southern border “emergency,” Trump himself gave the game away in February, when he said that the purpose is to force manufacturers to move their plants to the United States. Similarly, in justifying the tariffs against Canada, he has not only complained about (non-existent) barriers for US banks seeking to enter the Canadian retail market; he has also explicitly linked the policy to his illegal ambition of forcing Canada to join the US against its will.

The president’s own words are sufficient evidence that the March tariffs are unlawful. Since they are not responses to the declared “emergency” on the southern border, the IEEPA expressly and clearly forbids their use.

To be sure, the White House would probably argue that the tariffs provide leverage over governments that could do something about the fentanyl problem. But permitting presidents to do whatever they want to create leverage with respect to a narrowly defined emergency would invalidate Congress’s decision to specify the focus and scope of emergency powers in the language of the IEEPA. The exception would become the rule.

Lawyers often use hypotheticals to support such arguments. But no hypothetical is needed here. In putatively responding to the opioid epidemic, Trump would effectively impose a new $1,000 tax on every American household – tantamount to adding a percentage point to Americans’ marginal tax rate. No reasonable interpretation of the IEEPA’s targeted authority allows for the president to trigger such sweeping changes.

Yet despite the obvious illegality of the policy, Trump’s authority is unlikely to be seriously tested before the courts. Since the 1980s, federal courts have flatly refused to second-guess factual claims behind an IEEPA emergency declaration, and judges have bent over backward to grant the president broad powers in these contexts. Even where a president expresses an unlawful purpose, the Supreme Court has been willing to turn a blind eye. In the case of the first Trump administration’s Muslim ban, the Court spun a fine web of casuistry to suppress and ignore the president’s many xenophobic and bigoted justifications.

Worse, in a challenge to Trump’s 2018 steel tariffs, one circuit court speculated vaguely about the president’s “independent” constitutional power over foreign trade. In effect, it conjured out of thin air a complete new presidential power that erased Congress’s clear and exclusive authority over foreign trade and taxation.

According to this reasoning, even the minimal limits imposed on presidential power to reorder foreign trade – at a steep price to American taxpayers – would fall by the wayside. Yet in the past decade, courts have been increasingly willing to ignore the constitutional text in pursuit of an ahistorical theory of the presidency as the sole and exclusive anchor of American democracy and liberties.

Foreign governments and citizens confronted by erratic and unjustified US tariffs can take little comfort in knowing that these measures are likely illegal. The refusal by US courts to call Trump’s bluff is a signal of how weak America’s constitutional order has become, and how unwilling federal judges are to confront its nemesis.

CAMBRIDGE – By wielding the threat of imposing across-the-board tariffs against Canada, Mexico, and China for no justifiable reason, US President Donald Trump has demonstrated that he is a major risk for America and its trade partners. But how other countries respond to Trump’s reckless policies will ultimately determine how much damage the global economy will sustain. America’s trade partners need to keep their cool and resist the temptation to magnify the insanity.

Most analysts seem to believe that responding in kind is the right thing to do. As expected, Canada and Mexico both threatened retaliation and eventually reached deals with Trump to avert the tariffs temporarily. But it is not clear why retaliation should be regarded as normal and desirable when the tariffs that trigger them are viewed (correctly) as crazy. Policymakers elsewhere must not lose sight of the truth that Trump has chosen to disregard: the costs of tariffs are borne mainly at home.

The instinct to retaliate is natural. To deter a schoolyard bully, one must confront him with determined opposition. But far from dissuading Trump, other countries’ tariffs will further feed his misplaced grievances. More importantly, the logic of retaliation fails in this instance. The tit-for-tat model works to ensure cooperation in certain circumstances, such as the prisoners’ dilemma. In this scenario, each actor benefits from their own unilateral move, but is made worse off when the other actor responds in kind. Trump’s tariffs do not fit this characterization.

Contrary to what Trump claims, US tariffs are paid mostly by American consumers and firms that use imported inputs. Thus, the “optimum tariff” argument by which a country could gain by exercising monopoly power on world markets does not seem to apply. Selective trade protection can occasionally play a positive role as part of a broader agenda for development or greener growth. But across-the-board tariffs hurt the US economy, and more so than they do other economies. Trump’s America is a prisoner entirely of its own making.

Likewise, retaliatory tariffs imposed by Canada and Mexico would mainly harm their own economies. As smaller players in world trade, they have even less ability to pass the costs of tariffs on to the United States. The presence of supply chains in North American trade (as in auto manufacturing) magnifies the costs of disruption, but does not alter the fact that the costs of import tariffs are essentially domestic. In the language of game theory, retaliation through import tariffs is not a “best response.”

Returning to the schoolyard bully analogy, imagine that you face an aggressor who is attacking you for no good reason. He seems mad, hitting himself with each wild swing of his arm. What should you do? You could respond in kind and mimic what he is doing, but that would be equally mad, since you would be hurting yourself even more in the process. The best strategy, then, is to minimize the damage by staying as far from the bully as you can and waiting for him to punch himself out and crumple in a corner.

To be sure, Canada, Mexico, China, and other countries that will bear the brunt of Trump’s trade actions do not have the luxury of insulating themselves from the US. They will feel some pain for sure. But they should not make things worse for themselves by “pulling a Trump” on their own economies. Some surgical retaliation against industries that support Trump politically may be unavoidable for domestic political reasons. But common sense and moderation should prevail, for the sake of their own countries and the global economy on which they depend.

Some worry that Trump might feel vindicated if others do not mount a strong response. But the surest way to put him in his place is to downplay his threats and treat him as weak. The most effective message America’s trade partners can give Trump is: “You are free to destroy your own economy; we do not plan to do the same. We will turn instead to other, more reliable trade partners, thank you very much.”

Moreover, America’s trade partners – even the small ones – are not entirely powerless vis-à-vis the US. They have instruments other than trade policy at their disposal. They can, for example, impose profits taxes on domestic subsidiaries of specific American multinational corporations. Gabriel Zucman of the Paris School of Economics has suggested that Canada and Mexico place a wealth tax on Elon Musk and make Tesla’s access to the Canadian market conditional on paying it. This approach has the advantage of potentially generating direct fiscal benefits at home.

In the wake of Trump’s actions, we should worry about the prospects of a calamitous race to the bottom. During the 1930s, a cycle of retaliation sent international trade into a tailspin and exacerbated the global depression. Avoiding such an outcome today is of the utmost importance. The good news is that the worst of the damage can be contained, and the costs will be borne mostly by the US, if others don’t overreact. America’s trade partners should keep calm and carry on.

PARIS – Through a flurry of executive orders, US President Donald Trump has spent his first weeks in office trying to dismantle the international order that the United States helped create after World War II. Under the banner of “America First,” his administration has withdrawn from the Paris climate agreement, the World Health Organization, and the UN Human Rights Council. And now, it is poised to go further. A sweeping review of all multilateral organizations is underway to determine whether the US should stay or go.

Trump is also determined to upend the international trade system. Less than two weeks after taking office, he announced steep tariffs: 25% on imports from Canada and Mexico, and 10% on imports from China (on top of the levies already in place). Since granting Canada and Mexico a one-month reprieve in early February, he has signaled that the tariffs are “going forward,” though seemingly with another month-long delay. He has also announced a 25% tariff on all steel and aluminum imports, and hinted at additional levies on automobiles, pharmaceuticals, and computer chips. Europe, too, could soon find itself in the crosshairs.

The consequences of the trade war Trump seems determined to stoke could be severe, and not just because of the sheer volume of trade that is at stake. Supply chains today are deeply integrated across borders, accounting for around 50% of intra-regional trade. In many cases, components cross borders multiple times before final assembly, so paying a 25% tariff each time an input crosses a border would quickly ratchet up costs.

Consider Mexico, which has surpassed even China as America’s largest trading partner in goods. Beyond disrupting supplies of Mexican avocados (a well-known example), tariffs would have serious repercussions on an agriculture sector that supplies 63% of US vegetable imports and 47% of its fruit and nut imports.

The automotive industry – one of Mexico’s key economic sectors, employing more than a million people and contributing around 5% of GDP – would also take a major hit. A recent S&P Global report shows that Mexico is now the largest source of US light-vehicle imports, outpacing Japan, South Korea, and Europe. Nissan, for example, sources 27% of its US sales from Mexico, while Honda sources nearly 13%, and Volkswagen 43%.

What should Mexico do? When Trump imposed tariffs on America’s neighbors in 2018, Mexican authorities responded strategically by targeting products from politically significant US states, slapping tariffs on apples, bourbon, cheese, cranberries, pork, and potatoes. But this approach has limitations, especially given the vast size of the US economy relative to its neighbors.

Still, Mexico, Canada, and Europe have leverage. America’s Achilles’ heel is its highly internationalized oligarchy: a small group of ultra-wealthy individuals whose fortunes depend on access to global markets. This vulnerability gives foreign governments influence.

The most effective countermeasure is simple: tariffs for oligarchs. Countries should tie market access for foreign multinationals and billionaires to fair taxation. As soon as Trump follows through with tariffs on Canada and Mexico, those countries should retaliate by taxing US oligarchs. In other words, if Tesla wants to sell cars in Canada and Mexico, Elon Musk – Tesla’s primary shareholder – should be required to pay taxes in those jurisdictions.

Of course, this strategy is explicitly extraterritorial, since it applies tax obligations on foreign actors in exchange for access to local markets. But rather than fearing extraterritoriality, countries should embrace it as a tool for enforcing minimum standards, curbing inequality, preventing tax evasion, and promoting sustainability.

Unlike traditional tariffs, an oligarch tax targets those who benefit the most from globalization: billionaires and the corporations they control. It shifts the economic conflict from a battle between countries – which fuels nationalist tensions and economic retaliation – to one between consumers and oligarchs.

Moreover, this approach could trigger a virtuous cycle. Countries with major consumer markets could collect taxes that multinationals have dodged elsewhere, gradually eroding the appeal of tax competition. It would become pointless for firms or individuals to move to low-tax countries, because the savings would be offset by higher taxes owed in countries with large consumer markets. The race to the bottom would soon be replaced by a race to the top.

Trump’s return to the White House carries alarming implications. But it also presents an opportunity. This is a moment to rethink international economic relations, calmly but radically. The best response is a new global economic framework that neutralizes tax competition, fights inequality, and protects our planet. Under such a framework, importing countries would enforce tax justice beyond their borders, ensuring that multinational corporations and their billionaire owners pay their fair share.

If it’s a trade war Trump wants, consumers in Mexico, Canada, Europe, and beyond should unite to ensure that Musk and his fellow oligarchs feel the cost.

NEW YORK – On a recent trip to Germany – where I gave a talk on the state of the mergers-and-acquisitions markets and what it implies about business confidence – I stumbled upon the house of Johann Wolfgang von Goethe, the towering writer who produced the most influential interpretation of the legend of Faust. It was a serendipitous development. In that story, a magician and alchemist bargains away his eternal soul to the devil for short-term power and riches. Last week’s tariff announcements could be viewed as America’s Faustian bargain.

Among CEOs and board directors on both sides of the Atlantic, confidence was already shaky. M&A markets are a good barometer for business’ appetite for long-term investment, and in the first two months of this year announcements were the lowest they have been in the past 20 years.

It is not difficult to see why. Confidence is inseparable from predictability, and over the last month, US President Donald Trump’s administration has initiated broad-based tariffs, thrown economic commitments into doubt, disrupted the work of federal agencies, and issued a series of policy pronouncements that could upend global geopolitics.

But the problem runs deeper than unpredictability. When your decision-making framework amounts to Faustian bargaining for short-term benefits, you often won’t recognize the long-term consequences of your actions until it is too late.

Tariffs are a case in point. The Trump administration believes that the US would have the upper hand in any trade war, because exports of goods and services are far less important to the US economy than they are to most of its trade partners. So, while tariffs would disrupt the US economy, they would harm China, Canada, or the European Union – among other targets – far more.

But trade wars have not typically stopped at goods and services; rather, they have often expanded to include capital controls. And herein lies the hidden cost of the Trump administration’s trade policy.

Today, foreign countries hold nearly one-quarter of US government debt. They raise the money to purchase this debt – thereby financing America’s chronic budget deficits and offsetting its low savings rate – partly by running trade surpluses with the US, which enable them to build up dollar reserves. They are in no way required to invest the proceeds of their trade surpluses in US debt, but they often do.

But what if America’s major trading partners introduced a tax on the purchase of dollar-denominated securities issued by the US government or US firms? A significant source of funding for Treasury auctions would evaporate, and the US government’s borrowing costs would rise. As more domestic capital flowed toward Treasury auctions, investment in other sectors would be crowded out, spreads would widen, and the cost of capital would increase. Mortgage interest rates, credit-card interest rates, and borrowing costs for businesses would rise, generating powerful market and economic headwinds. Even the threat of such a tax would affect US bond yields. It is not hard to imagine more subtle foreign dollar-reserve strategies that accomplish the same outcome.

Some might argue that America’s trade partners are unlikely to take such a step, since it would also carry high costs for them, from lost earnings on their US dollar reserves to higher risks from shifting investments to other economies. But the costs for the US would be far greater, and they would emerge much faster. It is a lot easier to shift financial investments than it is to establish new trade relationships.

Even if a tax or other policy that discouraged the purchase of US securities led to a kind of “mutual assured destruction,” America’s trading partners might decide it is worth it, not least because they have few other options to push back against tariffs effectively. The more aggressively trade is weaponized, the more tempted they will be to use this tool and “go nuclear.” The politics are certainly appealing: “If the US taxes our goods, we will tax its debt” would be a compelling rallying cry for the leader of an economy under pressure from US tariffs.

The Trump administration clearly likes the idea of using tariffs to wrest concessions from America’s trade partners. But the bargain the administration appears poised to make in service of its short-term goals creates enormous risks for America’s economy.

NEW YORK – A prominent economist once told me that macroeconomic policy debates are all about the prime mover to which other variables respond. The implication, he explained, is that “You can invert policy prescriptions simply by claiming a different forcing variable.” A paper by Stephen Miran, published just before he was nominated to chair US President Donald Trump’s Council of Economic Advisers, does precisely this. Since his views likely reflect those of the administration, they surely warrant close attention.

The traditional view of why the United States runs chronic trade deficits is that it overspends, owing largely to its fiscal deficits (the forcing variable). But the true forcing variable, Miran argues, is the rest of the world’s hunger for US financial assets, especially Treasuries. Foreigners want ever more US Treasuries for their foreign-exchange reserves and for financial transactions, and the US has had to run large fiscal deficits to meet this exorbitant demand. The resulting capital inflows keep the dollar too strong for US exporters to compete, leading to persistent trade deficits.

The argument is unpersuasive, for several reasons. First, consider the timing. The US started running a steady trade deficit in the mid-1970s. It began running a steady fiscal deficit around the same time, with the exception of the late 1990s, when capital-gains taxes and private consumption soared because of the dot-com boom, temporarily shifting the locus of US overspending from government to households.

While foreigners have been buying US financial assets for a long time, and US entities have been repaying the compliment, the “forcing” effect of dollar accumulation by foreign central banks really took off only after the Asian financial crisis of 1997, when East Asian economies, seared by the harsh conditions imposed on them by the International Monetary Fund, built reserves to protect against sudden stops in financing. Again, the timing is off.

Moreover, the US does not run a uniform trade deficit. Rather, it has a trade deficit in goods and a net surplus in services (nearly $300 billion in 2024). When economists encounter that kind of pattern, they see orthodox comparative advantage at work, which benefits the United States. Apple reaps large profit margins selling the superbly designed iPhone (and its software content) to the world, while Foxconn gets tiny margins manufacturing iPhones in China and India. Even though the overall trade numbers may reflect a large deficit, the US is far from being a victim.

Another problem is that any excess demand for US Treasuries from the rest of the world should show up in a huge excess premium for US bonds. Yet Miran complains that US bond interest rates don’t reflect such a premium, giving the US little benefit from producing high-demand financial assets. This seems strange. Why would such demand hold up the dollar but not push down US bond rates?

The simpler explanation is that the US Congress spends as it wishes, relying on the rest of the world to buy Treasuries to fund what domestic revenues cannot cover. Has there ever been a member of Congress who says the US should run deficits to accommodate the world’s need for Treasuries? If excess demand for US financial assets was really such a problem, the US Congress could simply run smaller deficits, have foreigners scramble over one other to buy the smaller issuance of Treasuries, and thus orchestrate lower US interest rates (and higher US production).

Moreover, if creating reserve assets is such an exorbitant burden, why not allow other countries to shoulder it? Far from entertaining this possibility, Trump recently threatened the BRICS group of major emerging economies for even daring to contemplate separate non-dollar payment arrangements. While admitting that the US does need foreign money to fund its fiscal deficit (perhaps a tacit recognition that the fiscal deficit really is the primary forcing variable), Miran suggests another reason to have foreigners buy US financial assets and use its financial system: Doing so gives the US more ways to punish foreign countries that step out of line including, alarmingly, imposing a selective tax on Treasury interest payments.

If the US does not want to give up its exorbitant burden, could import tariffs help US manufacturers overcome an overvalued dollar? As Miran points out, tariffs will partly be offset by a stronger dollar, as was the case in 2018-19, when the US imposed sweeping tariffs on China. But a stronger dollar will hurt US exports, and if the dollar prices of imported products do not change much, it is hard to see how US manufacturers will become more competitive.

Thus, Miran sets his sights on a concerted dollar depreciation, supported with interventions by non-US central banks who will be “persuaded” under the threat of tariffs or a withdrawal of US defense support. But even if such interventions were effective, foreign central banks would have to sell US Treasuries and buy domestic bonds, which would make the US fiscal deficit harder to finance.

Miran should be commended for trying to explain why the US is turning against the system it built. To be sure, the US fiscal deficit is not the only forcing variable. Chinese underconsumption also contributes to global trade imbalances. Moreover, the US has lower tariffs than some of its trading partners, some of them subsidize business more than the US does, and some have shown scant respect for intellectual property rights. But these issues are best addressed through negotiations (perhaps supported by implicit threats).

It is not clear where the Trump administration’s current path of “shock and awe” is supposed to lead. The claim that the dollar’s attractiveness is an exorbitant burden rather than an exorbitant privilege is unpersuasive, especially when those making such arguments are so reluctant to give up the burden. Markets are unnerved by the punishment that the administration, convinced that the US is a victim, is willing to inflict on close allies. If such behavior reduces the attractiveness of the dollar, perhaps it really will become an exorbitant burden. But that is not a future that any American should want.

WASHINGTON, DC – In a March 6, 2025, executive order, US President Donald Trump established a “digital gold” Bitcoin reserve, to be capitalized with any BTC seized by federal law enforcement. With the supply of BTC capped at 21 million coins, the administration wants the United States to secure a first-mover advantage as a major holder of an emerging store of value. But since it is unlikely that seized BTC alone can achieve the desired scale, the US also may purchase it on the open market.

Nor is the US alone. Around the world, governments are increasingly considering BTC as a reserve asset. In Brazil, Congressman Eros Biondini has advanced a proposal to require the central bank to accumulate BTC until it accounts for 5% of the country’s reserves. Meanwhile, Bhutan has become one of the world’s largest BTC holders, with its Gelephu Mindfulness City holding the cryptocurrency as a strategic reserve. El Salvador’s president, Nayib Bukele, continues to buy BTC as a strategic reserve, and legislators in Hong Kong have floated a proposal to add BTC to the city-state’s official reserves. China is rumored to be building a BTC reserve in stealth. And a recent Swiss popular initiative aims to require the Swiss National Bank (SNB) to include BTC in its holdings, though SNB President Martin Schlegel rejects the idea, citing concerns about the cryptocurrency’s volatility, liquidity, and security.

But the US government’s decision to join the reserve-diversification party raises serious doubts about the future of its own currency’s hegemony. If more countries or institutions decide to hold BTC instead of dollars, global demand for dollar reserves could decrease over the long term. Legitimizing a rival store of value may shake confidence in the greenback, eroding America’s global reserve-currency status and the advantages it confers. Without strong international demand for the dollar, the US could ultimately lose its “exorbitant privilege” to print and borrow at low interest rates. Endorsing BTC while defending dollar dominance thus requires a delicate balance.

Alongside the BTC policy, the Trump administration is also fundamentally reshaping US trade policy. It has slapped 25% tariffs on Canadian and Mexican imports; increased tariffs on Chinese goods (driving the total average US tariff against that country to 39%); and threatened similar measures against European agriculture. These policies have already created market turmoil – exacerbated by repeated delays and modifications – and invited retaliation.

Because Canada and Mexico rely so heavily on trade with the US, tariffs reduce their exports and dollar inflows, weakening their currencies. By contrast, China’s more diversified export base and controlled currency regime allows it to mitigate US tariff effects and support the renminbi. Moreover, since the US relies so heavily on intermediate inputs from China, the tariffs will raise US production costs, driving up consumer prices and inflation, and eroding the dollar’s appeal.

In addition to reducing demand for US goods and the dollars to buy them, Trump’s policies have introduced unpredictability and thus reduced confidence in US markets. His threats are already pushing the European Union to consider greater currency diversification, and to look for alternative markets. With fewer investors choosing to hold dollar-denominated assets, the dollar has begun to weaken.

Can the US really adopt BTC as a strategic reserve and pursue such trade policies without jeopardizing the dollar’s global standing? Countries commonly hold multiple reserve assets – euros, yen, pound sterling, or gold – in addition to the dollar. Yet BTC’s unique, decentralized structure and finite supply set it apart from these traditional holdings. By formally endorsing it, the US could inadvertently accelerate a global shift away from dollar reserves.

Trump and his team seem to be betting that other forces will kick in, owing to foreigners’ outsize dependence on the US economy. The assumption is that foreign producers will accept lower prices to remain competitive, or that foreign currencies will depreciate to offset the effects of US tariffs, shifting the burden onto foreigners rather than American consumers and producers.

Such is the thinking behind the so-called “Mar-a-Lago Accord”: the Trump administration’s strategy of leveraging punitive tariffs to weaken the dollar, reduce US borrowing costs, and boost manufacturing – all while preserving the dollar’s global dominance. Unlike the Plaza Accord or Louvre Accord, in which major economies agreed to coordinate exchange rates, the US is coercing its major trading partners and foreign central banks into weakening their currencies relative to the dollar, ultimately favoring US economic interests. However, if these economic partners refuse to cooperate, the plan could unravel, and all of the accord’s goals could be derailed.

Much of this strategy comes from a November 2024 paper by the designated chair of Trump’s Council of Economic Advisers, Stephen Miran, who has proposed that the US introduce tariffs in a measured way so that it can collect revenues from import duties without sparking prohibitively high prices for consumers. The US government would levy tariffs on imports from countries that benefit significantly from the US dollar’s reserve status, capturing some of the economic gains that are supposedly flowing to foreign economies. To avoid triggering a surge in domestic inflation, Miran envisions various offsetting currency movements. Through some combination of diplomatic and financial tools, foreign central banks could be persuaded to lower interest rates or use foreign‐currency swaps to keep US inflation in check.

Such will be the price of maintaining access to the US market, which Trump sees as a privilege to be earned. The administration will ratchet up tariffs for uncooperative countries, effectively forcing them to shoulder part of the dollar’s structural costs, or to align more closely with US security and economic objectives. The result would be a “graduated scale” of tariffs based on the selected criteria. Carefully calibrated tariffs and exchange‐rate management, according to Miran, would reinforce the dollar’s global role while also increasing government revenue.

It’s a nice thought. But the Mar-a-Lago Accord, accompanied by an embrace of BTC, could easily backfire. After all, endorsing an alternative reserve asset opens the door to challenges to the dollar’s dominance. Trump’s trade wars assume that US partners will comply. But if they start decoupling from the US market, seek alternative trade or security alliances, or embrace BTC or other currencies for large-scale reserve diversification, all bets are off.