Bridgewater Associates founder Dalio: Understanding the Impact and Mechanism of Tariffs
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Bridgewater Associates founder Dalio: Understanding the Impact and Mechanism of Tariffs
If the response to tariffs is reciprocal retaliatory tariffs, the result will be broader stagflation.
Navigating Web3 tides with focused insightsAuthor: Ray Dalio
Translation: TechFlow
Tariffs are a form of taxation whose effects include:
1) Increasing revenue for the country imposing the tariff, with the tax burden shared between foreign producers and domestic consumers (the exact split depends on their relative elasticities), making tariffs an attractive source of revenue;
2) Reducing global production efficiency;
3) Having stagflationary effects globally, more deflationary impacts on the targeted exporting countries, and more inflationary impacts on the importing countries that impose the tariffs;
p>4) Shielding domestic firms in the importing/tariff-imposing country from foreign competition, offering them greater protection but also reducing their efficiency; these firms are more likely to survive if monetary and fiscal policies maintain domestic aggregate demand;5) Being necessary during periods of great power conflict to ensure domestic production capacity;
6) Reducing imbalances in the current account and capital account—put simply, decreasing dependence on foreign production and foreign capital, which is especially important during times of geopolitical tension or war.
The above describes the direct effects of tariffs (first-order effects).
Subsequent developments depend on the following factors:
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How the targeted countries/regions respond to the tariffs;
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Exchange rate movements;
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How central banks adjust monetary policy and interest rates;
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How governments adjust fiscal policy in response to these pressures.
These constitute the indirect effects of tariffs (second-order effects).
More specifically, regarding these effects:
1) If the response to tariffs is reciprocal retaliatory tariffs, the result will be broader stagflation;
2) If monetary policy is eased, real interest rates fall, and currencies depreciate in countries facing the strongest deflationary pressure (a typical central bank response); or if monetary policy tightens, real interest rates rise, and currencies appreciate in countries facing the strongest inflationary pressure (also a typical central bank response);
3) If fiscal policy is loosened in regions experiencing deflationary weakness, or tightened in regions showing inflationary strength, such adjustments can partially offset deflationary or inflationary pressures.
Therefore, tariff policy involves many dynamic factors, requiring careful assessment across multiple dimensions to evaluate the market impact of significant tariffs. These impacts go beyond the six first-order effects mentioned earlier and are significantly shaped by second-order effects.
However, the current context and future trends can be clearly outlined as follows:
1) Imbalances in production, trade, and capital (especially debt issues) must be resolved in some way, as they have become dangerously unsustainable from monetary, economic, and geopolitical perspectives (thus necessitating a transformation of the current monetary, economic, and geopolitical order);
2) These changes may come through sudden and unconventional adjustments (similar to the scenarios I describe in my new book, How Countries Go Broke: The Big Cycle);
3) Long-term monetary, political, and geopolitical outcomes will largely depend on: confidence in debt and capital markets as safe stores of wealth, national productivity levels, and whether political systems make countries desirable places to live, work, and invest.
In addition, there is currently intense debate around the following questions:
1) Whether the U.S. dollar’s role as the world’s primary reserve currency is more beneficial than harmful;
2) Whether a strong dollar is a good thing.
Clearly, the dollar’s reserve status is beneficial (as it increases demand for U.S. debt and other capital, allowing the U.S. to over-borrow in ways it otherwise couldn’t without this privilege). However, because this phenomenon is market-driven, it inevitably leads to abuse of this privilege, excessive borrowing, and debt accumulation—precisely the predicament we face today (requiring non-market solutions to address inevitable reductions in goods, services, and capital imbalances, unconventional measures to reduce debt burdens, and reduced reliance on foreign sources, particularly due to geopolitical shifts).
More specifically, there has been discussion about allowing the renminbi to appreciate, which could gain mutual agreement as part of a potential trade and capital deal between China and the U.S., ideally reached during a meeting between Trump and Xi. Such adjustments, along with other non-market, non-economic interventions, would create unique and challenging consequences for the involved nations, triggering some of the second-order effects I previously mentioned to help mitigate those impacts.
I will continue to monitor developments closely and keep you updated on my evolving views regarding both first-order and second-order effects.
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