Table of Contents
Trump's sweeping tariff announcements have fundamentally altered the global economic landscape, creating what experts now call a pre and post-Liberation Day world.
Key Takeaways
- Trump's approach to Canada stems largely from personal animosity toward Trudeau rather than deep strategic planning
- Liberation Day tariffs created two distinct camps: those believing US dominance is ending versus those seeing America strengthen its position
- China finds itself increasingly isolated as traditional allies like Japan and Korea failed to join a united front against US tariffs
- The dollar's reaction to tariffs has been surprisingly muted compared to Trump 1.0, suggesting markets are pricing in economic damage to America itself
- Canada occupies a unique middle position - gaining competitiveness through USMCA protection while facing global trade collapse risks
- Currency markets show Asian and commodity currencies most vulnerable to ongoing trade disruption
- Both major Canadian political parties are converging on similar policies focused on minerals, defense spending, and trade diversification
- China's hopes for stock market-driven wealth effects to boost consumption have been derailed by trade war escalation
- The US military's reluctance to underwrite global shipping routes for free creates new geopolitical vulnerabilities
The Trudeau Factor: Personal Politics Drive Policy
Here's something that might surprise you about Trump's intense focus on Canada - it wasn't really about trade deficits or strategic planning. According to currency strategist Mirza Baig, who's been watching this unfold from his base in Canada, roughly 70 to 80% of Trump's initial approach came down to one simple fact: he hated Trudeau.
"Trump just hated Trudeau. I think that was 70, 80% of it," Baig explains, noting how people tend to overcomplicate what's actually a pretty straightforward dynamic. Trump has this particular strength where he can spot a weakness and just exploit the hell out of it. There was already growing sentiment in Canada that Trudeau had outstayed his welcome, and Trump was quick to recognize that vulnerability.
The dynamic became crystal clear during Trudeau's visit to Mar-a-Lago, where according to secondhand accounts, Trudeau essentially admitted that tariffs would "destroy our economy." That was all Trump needed to hear - it confirmed weakness and gave him the opening to push harder.
What's interesting is how dramatically things shifted once Mark Carney took over negotiations for Canada. Suddenly, Trump became "remarkably statesmanlike" in those interactions. It shows how much of this really was personal rather than strategic.
The whole "51st state" rhetoric? Baig thinks we should take that literally. "I believe him that he wants Canada to become the 51st state of the United States and I think people should take that seriously." It's not a negotiating ploy or hidden message - Trump genuinely would prefer to expand US territory, even if he knows it's unlikely to happen in his lifetime.
Liberation Day: The Moment Everything Changed
When Trump announced his global tariffs on what he dubbed "Liberation Day," it created what Baig describes as a clear before-and-after moment in global economics. The scale and methodology caught everyone off guard, even those who'd been expecting aggressive trade measures.
The announcement has split the financial world into two camps with radically different interpretations of what's happening. The first camp argues that US exceptionalism has ended - that America has essentially shot itself in the foot by creating a self-inflicted stagflationary recession. They point to the dollar's failure to rally despite massive risk aversion as evidence that the greenback has lost its safe haven appeal.
But there's a second camp that sees Trump holding all the cards. Their argument? The rest of the world has way more to lose from this trade disruption than America does. China's isolated, nobody's joining their calls for a united front against US tariffs, and when push comes to shove, there's simply no alternative to the dollar-based financial system.
Baig admits he initially leaned toward the first camp but has been shifting allegiances as events unfold. "Foreign exchange markets seem very stable," he notes, particularly watching dollar-CAD which has held around 142 despite all the turmoil.
The key insight here is that America has essentially raised the price for participating in the dollar-based system rather than ending it entirely. The question becomes whether the world agrees to pay that higher price or if the cost actually breaks the system.
China's Isolation Problem
One of the most striking developments has been China's inability to build a coalition against US tariffs. Before Liberation Day, Chinese foreign ministers met with their Korean and Japanese counterparts, trying to establish a "united stand against any tariffs." Then the tariffs hit, and Japan and Korea immediately caved.
"China has no allies," Baig observes bluntly. "China has made a call for other countries to rally to their side and join them in kind of like a whatever united front tariff against the United States. Nobody's joined them."
This gets to a fundamental weakness in China's approach - their soft power game is terrible. They pick fights with countries they should be trying to win over, like the Philippines, instead of building the relationships they'd need for moments like this.
President Macron came out suggesting the rest of the world has leverage because they own US assets and could collectively sell American stocks and bonds. But as Baig points out, "good luck in trying to create a coalition to do that."
The isolation becomes even more problematic when you consider the practical realities of global trade. If China wants to ship products to Europe, those goods still have to pass through strategic chokepoints like the Straits of Malacca or the Andaman Sea. And who's going to protect Chinese shipping if America decides to step back from that role?
Dollar Dynamics: A Different Game This Time
Something fascinating has happened with currency markets that's quite different from Trump 1.0. Back then, tariff talk would send the dollar surging against targeted currencies. This time around, despite the massive scale of tariffs, the dollar's reaction has been surprisingly muted.
Baig has a theory about why this is happening. When Trump won, dollar-CAD was around 136-137. As tariff talk escalated, it rose to 142, then spiked to 148 when Trump announced 25% tariffs on Canada. But that was the high point - even as tariffs have gone higher, dollar-CAD hasn't followed.
What changed was market perception of the US economy itself. What had looked bulletproof suddenly started showing signs of vulnerability. "Tariff isn't just like a one-edged sword it's a double-edged sword and that can actually hurt the US economy as well," Baig explains.
Here's a striking statistic: in the MSCI All Country World Index, the US weight is around 66-67%. So an economy that's less than 25% of global GDP has two-thirds of world equity capital. For Canadian households, 70 cents of every stock dollar they own is basically an American stock.
When you start writing down US growth prospects, all that equity exposure becomes a problem. There's likely been some degree of repatriation out of American assets, which has reduced demand for dollars.
The Currency Battlefield
Looking ahead, Baig sees Asian currencies and commodity currencies as most exposed to trade collapse, even from short-term disruptions. The offshore dollar funding market becomes crucial here - foreign banks and corporates have trillions in dollar liabilities, much of it rolled through short-dated FX swaps.
"We really haven't seen a strain on dollar funding yet and if it comes to that point then we will find that well actually the dollar is a safe haven because the whole world is short dollars," he notes.
China's currency policy has become particularly interesting. Initially, Chinese signals were very clear about maintaining their currency anchor when Trump imposed 20% tariffs. The People's Bank of China reiterated their commitment to keeping the currency stable. But with escalation continuing and trade essentially stopping at 100% tariff rates, that anchor seems to be slipping.
"At times like these the PBC is not the one in charge. I think it it kind of the authority gets relegated upwards," Baig observes. A devaluation is definitely on the table now, even if we don't know what President Xi is thinking.
Canada's Strategic Dilemma
Canada finds itself in a uniquely complex position. On one hand, thanks to USMCA protection, Canada received no new tariffs on Liberation Day while Europe got hit with 20% increases. This essentially gave Canada a competitiveness boost and scope to expand market share in the US, which takes 80% of Canadian exports.
But here's the catch - a larger market share of a shrinking pie might not be such a great thing. If the US economy hits recession, Canada typically follows. And even though Canada doesn't export much directly to China, commodity prices are set in international markets where China dominates.
"So if Chinese economy really suffers and you have kind of like a global trade meltdown, you'll have the transmission mechanism to Canadian dollar and Canadian economy through the channel of commodity prices as well," Baig explains.
The upcoming Canadian election on April 28th has created an interesting political dynamic. Since Trump's victory, Canadians have been going through what Baig calls "the five stages of grief." First was denial - "we're America's best friend, so we're safe." Then anger when Trump went hard against the country. Now they're in the bargaining phase with Prime Minister Carney.
Both major parties are converging on remarkably similar policies: reducing interprovincial trade barriers, improving investment in minerals and energy, trading more with the rest of the world beyond the US, and ramping up defense spending. The carbon tax that was the conservatives' big differentiator is already gone.
The Recession Question
Market strategists are increasingly calling for recession, and the question becomes whether we're entering a GFC-type crisis period. Baig's take is nuanced - it depends heavily on how long this trade disruption continues and whether Trump provides any adjustment runway for companies.
"If you kind of like lay out a path that okay so two years from now tariffs will be x% then companies have a chance to adjust," he notes. "Apparently it takes 3 to 5 years to build a medium-sized steel mill in the United States."
The problem with Liberation Day wasn't necessarily the tariff levels themselves, but the overnight implementation that hurt American and foreign companies alike by giving nobody time to adjust. It's what Baig calls "an emerging market style of negotiation" - personality-based and unclear about end goals.
The uncertainty and suddenness become the key factors. If this approach continues, recession becomes likely. But it's not too late to modify the announcements and create adjustment ramps for companies and governments.
Europe and Japan: Caught in the Crossfire
European hopes rest largely on fiscal impulse turning positive from announced policies, potentially protecting the economy from US or global recession. But Baig has doubts about the implementation speed and effectiveness.
"Europe um things move slow and I think the way things are implemented will have a big impact," he observes. If other crises emerge - like dollar funding stress - risk aversion could eventually catch up with Europe too.
Japan presents a particularly interesting case. The Bank of Japan was finally moving against the cycle of other central banks, with the yen looking extremely undervalued due to global carry trades. But now they've been hit with this global crisis right as they were gaining monetary policy confidence.
The yen has appreciated as a safe haven, but Baig is reluctant to chase it stronger from current levels given rapidly increasing speculative positioning. "When everybody is rushing for one thing I kind of like lose my interest in it."
China's Consumption Conundrum
China's domestic rebalancing story has taken another hit from this trade escalation. The stock market was really their big hope for wealth effects to drive consumption - they can't inflate the property market anymore, so equities became the plan.
President Xi even brought Jack Ma out of hiding for photo ops, trying to create narrative around China becoming an AI innovation hub. Foreign interest was starting to return, with companies like BYD generating excitement even among investors previously burned by Chinese stocks.
"But now with this stuff, all of that is once again out, right?" Baig notes. The stock market wealth effect strategy is now questionable, and China's still suffering from its balance sheet recession while pursuing industrial policy focused on creating national champions rather than boosting consumers.
Looking Ahead: Acceptance and Adaptation
For Canada, Baig predicts the election will mark the end of the bargaining phase and beginning of a depression phase - when Canadians realize that domestic policy changes won't fundamentally alter their dependence on the US market. That eventually leads to acceptance of "whatever role the US assigns to us."
This could actually work out well for Canada if it means becoming America's Arctic sentinel or negotiating USMCA terms that preserve manufacturing. Canada has been significantly underinvesting in minerals - 40% of investment in the last decade went to housing versus a historical 20%. Meeting America's appetite for critical minerals could kick off needed investment in that sector.
The broader global picture remains messy and uncertain. We're likely moving toward a more multipolar but unstable world, with lower trajectory for global trade overall. That implies less demand for reserve currency and fewer capital flows crossing borders.
As Baig puts it, we're dealing with a "much messier world" where the old assumptions about free flow of goods and capital no longer hold. Trump's Liberation Day didn't end the system, but it certainly changed the price of admission.
