Original author: Ray Dalio, founder of Bridgewater Associates
Original translation: Rhythm Little Deep
Editor's note: The article systematically analyzes the multiple impact mechanisms of tariffs: the basic level includes six major effects such as fiscal revenue, efficiency loss, inflation differentiation, and industry protection; the deeper impact depends on the dynamic adjustments of various countries' policy countermeasures, exchange rates, and monetary fiscal policies. The article points out that global imbalances must be resolved through drastic adjustments, with long-term effects depending on market trust and national competitiveness, and specifically discusses the debt dependency issue brought about by dollar privilege, predicting that China and the U.S. may reach a currency agreement through non-market means, triggering complex policy chain reactions.
The following is the original content (reorganized for better readability):
Tariffs are essentially a special type of tax, and their impact is mainly reflected in the following six basic areas:
1) Revenue function: Shared by foreign producers and domestic consumers (the specific sharing ratio depends on the elasticity of demand on both sides), this dual tax base characteristic makes it an attractive fiscal tool.
2) Efficiency loss: Reduces global production efficiency.
3) Inflation differentiation: Creates stagflation pressure on the global economy, resulting in a deflationary effect on the taxed country and exacerbating inflation in the taxing country.
4) Industry protection: Enhances the competitiveness of domestic companies in the taxing country, although it leads to efficiency loss, it can improve the survival rate of companies when monetary and fiscal policies maintain overall demand.
5) Strategic value: A key means to safeguard domestic production capacity during great power competition.
6) Balancing effect: Simultaneously improves the imbalance of the current account and capital account, which can be simply understood as reducing dependence on foreign production capacity and capital—this is particularly important during global geopolitical conflicts.
The above belongs to the first-level impact.
Subsequent developments depend on four major variables:
Countermeasures from the taxed country
Exchange rate fluctuations
Monetary policy and interest rate adjustments by central banks
Fiscal policy responses from the central government
These constitute the second-level impact.
Specific transmission paths include:
1) If retaliatory tariffs are triggered, it will lead to broader stagflation.
2) Countries under deflationary pressure typically adopt loose monetary policies, leading to a decline in real interest rates and depreciation of their currency; countries under inflationary pressure tend to adopt tightening policies, raising real interest rates and their currency exchange rates.
3) Fiscal policy will be targeted to implement stimulus in deflationary areas and contraction in inflationary areas, thus offsetting some price fluctuation effects.
Therefore, assessing the market impact of large-scale tariffs requires consideration of numerous dynamic factors, which goes beyond the aforementioned six basic areas and needs to be analyzed in conjunction with the second-level policy feedback mechanisms.
Three basic judgments always hold:
1) The imbalances in production, trade, and capital (especially the debt issue) must be resolved, as they are unsustainable in monetary, economic, and geopolitical dimensions—the current international order will inevitably be reshaped.
2) The adjustment process is likely to be accompanied by drastic and unconventional changes (as discussed in my book "The Road to National Bankruptcy: The Big Cycle").
3) The long-term monetary, political, and geopolitical impacts ultimately depend on: the credibility of wealth storage in debt and capital markets, the productivity levels of various countries, and the attractiveness of political systems.
Current discussions about the status of the dollar are worth noting:
The advantage of the dollar as a major reserve currency lies in its ability to create excess debt demand (although this privilege often leads to excessive borrowing).
While a strong dollar is beneficial, market mechanisms will inevitably induce abuse of privilege, ultimately forcing us to take extreme measures to address debt dependency.
It is particularly noteworthy that China and the U.S. may reach a currency appreciation agreement through a summit meeting and other non-market adjustment means, which will trigger the second-level chain reactions mentioned earlier. I will continue to monitor the developments and analyze the impacts at various levels in a timely manner.
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