Ray Dalio, founder of Bridgewater Associates, has issued a stark warning about the economic impact of U.S. President Donald Trump’s newly unveiled tariff policies. Dalio stated that the tariff regime could lead to a surge in global stagflation and significantly reshape U.S.- China trade relations.

Dalio’s analysis, presented in a recent commentary, breaks down the “first-order” effects of tariffs. He notes that tariffs can generate revenue for the imposing country while reducing global production efficiencies. This perspective aligns with Trump’s Liberation Day speech, where he reiterated claims that revenues from tariffs made the U.S. wealthy before the introduction of income tax in 1913.

The Trump administration, by imposing reciprocal tariffs on both allies and adversaries, is confident that this measure, combined with spending cuts, will quickly transform the country’s deficit into a surplus. However, critics of the Trump administration argue that the tariffs will increase prices for U.S. consumers. Others warn that these have the potential to damage international trade relationships and undermine the global trading system.

The Bridgewater Associates founder meanwhile cautioned that the tariffs are inherently stagflationary, creating a complex interplay of deflationary and inflationary pressures across the globe.

“Tariffs are necessary in times of an international great power conflict to assure domestic capabilities for production,” Dalio acknowledged, highlighting their strategic importance in periods of geopolitical tension.

Still, he also emphasized their potential to exacerbate existing trade imbalances and increase dependencies on foreign capital, which is particularly concerning during escalating international conflicts.

Meanwhile, Dalio’s concerns extend beyond the immediate impact of tariffs, delving into what he called the “second-order” consequences arising from retaliatory measures, currency fluctuations, and central bank responses. He warned that reciprocal tariffs from affected nations could trigger widespread stagflation, while monetary and fiscal policy adjustments could further complicate the economic landscape.

A key point of contention in Dalio’s analysis revolves around the U.S. dollar’s status as the world’s primary reserve currency. While acknowledging the benefits of this privilege, he cautioned against its potential for abuse, citing the nation’s “over-borrowing and debt problems.” Dalio suggested a potential solution in a negotiated appreciation of the Chinese yuan renminbi (RMB), a move he believes could be mutually beneficial for both the U.S. and China.

“It has been said that China’s RMB should be appreciated, which probably could be agreed to between the Americans and Chinese as part of some trade and capital deal, ideally made when Trump and Xi meet,” Dalio stated.

He stressed the urgent need to address existing imbalances, warning of their “dangerously unsustainable” nature. Dalio predicted “abrupt, unconventional changes” to the current monetary, economic, and geopolitical order.

Ultimately, Dalio concluded, the long-term impact of these policy changes will hinge on factors such as trust in debt and capital markets, countries’ productivity levels, and the attractiveness of their political systems for living, working, and investing.

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