Original author: Ray Dalio , founder of Bridgewater Associates
Original translation: Rhythm Little Deep
Editors note: The article systematically analyzes the multiple impact mechanisms of tariffs: the basic level includes six major effects, including fiscal revenue, efficiency loss, inflation differentiation, and industrial protection; the deeper impact depends on the dynamic adjustment of national policy countermeasures, exchange rates, and monetary and fiscal policies. The article points out that global imbalances must be resolved through drastic adjustments, and the long-term effect depends on market trust and national competitiveness. It also specifically explores the debt dependence problem brought about by the dollars privilege, and predicts that China and the United States may reach a monetary agreement through non-market means, triggering a complex policy chain reaction.
The following is the original content (for easier reading and understanding, the original content has been reorganized):
Tariffs are essentially a special type of tax, and their impact is mainly reflected in the following six basic aspects:
1) Revenue-generating function: shared by foreign producers and domestic consumers (the specific sharing ratio depends on the demand elasticity of both parties), this dual tax base feature makes it an attractive fiscal tool
2) Efficiency loss: reducing global production efficiency
3) Inflation differentiation: It creates stagflationary pressure on the global economy, creates deflationary effects on the taxed countries, and exacerbates inflation in the taxing countries.
4) Industry protection: Enhance the competitiveness of enterprises in the domestic market of the taxing country. Although it will lead to efficiency loss, it can increase the survival rate of enterprises when monetary and fiscal policies maintain total demand.
5) Strategic value: a key means to ensure domestic production capacity during the period of great power competition
6) Balancing effect: improving current account and capital account imbalances simultaneously, which means reducing dependence on foreign production capacity and capital - this is particularly important during times of global geopolitical conflict
The above belongs to the first level of impact.
Subsequent development depends on four major variables:
Countermeasures by the taxed country
Exchange rate fluctuations
Monetary policies and interest rate adjustments by central banks of various countries
Central Government’s Fiscal Policy Response
These constitute the second-level impacts.
The specific conduction paths include:
1) If retaliatory tariffs are triggered, it will lead to wider stagflation
2) Countries with deflationary pressure usually adopt loose monetary policies, which leads to lower real interest rates and depreciation of their currencies; countries with inflationary pressure tend to tighten policies, pushing up 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 to offset some of the price volatility effects
Therefore, assessing the market impact of large-scale tariffs requires consideration of many dynamic factors, which goes beyond the six basic levels mentioned above and requires a comprehensive analysis in conjunction with the second-level policy feedback mechanism.
There are three basic judgments that always hold true:
1) Production, trade and capital imbalances (especially debt) must be resolved because they are unsustainable in monetary, economic and geopolitical dimensions - the current international order must be reshaped
2) The adjustment process is likely to be accompanied by drastic and unconventional changes (as described in my book The Road to National Bankruptcy: The Great Cycle)
3) 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 their political systems
The current discussion on the status of the US dollar is worth noting:
The dollar’s advantage as the primary reserve currency is that it creates excess debt demand (although this privilege often leads to excessive debt).
Although a stronger dollar is beneficial, the market mechanism will inevitably induce abuse of privileges, and ultimately force us to take extreme measures to solve debt dependence
It is particularly noteworthy that China and the United States may reach a non-market adjustment measure such as an agreement on RMB appreciation through the summit meeting, which will trigger the second-level chain reaction mentioned above. I will continue to follow the development of the situation and analyze the impact at all levels in a timely manner.
