Trump's Reciprocal Tariffs: Ray Dalio Weighs On The Pros And Cons Of US' Action

Billionaire and veteran hedge fund manager Ray Dalio weighed on the pros and cons of tariffs, hours after United States President Donald Trump slapped reciprocal tariffs on all trading partners.

Dalio, in a social media post, sounded cautiously optimistic on tariffs, noting that it could raise revenue and help shore up domestic production capabilities.

At the same time, he also highlighted its adverse impact on "global efficiencies of production" and the potential "stagflationary effect" on the entire world.

The levies are "more deflationary for the exporting country", and "more inflationary for the importer" that imposes the tariffs, said Dalio, the chief investment officer of Bridgewater Associates.

Trump, as part of his 'Liberation Day' announcements on Wednesday, imposed a minimum 10% tariff on America's trading partners. The levies are higher on countries like China and India, whose products would be charged at the rate of 34% and 26%, respectively.

Such policies make importing countries—those levying tariffs—more protected from competition. This makes them "less efficient but more capable of surviving" if aggregate domestic demand is maintained through monetary and fiscal policy, Dalio explained.

Tariffs raise the revenue for the country imposing them that both the foreign producers and the domestic consumers pay, "which makes them an attractive tax", he said.

Levies of this kind are necessary in times of an "international great power conflict" to assure domestic capabilities for production, he noted.

Dalio further said that tariffs can "reduce both current account and capital account imbalances", which, in simpler words, means reducing the dependencies on foreign production and foreign capital which is especially valued in times of global geopolitical conflicts.

Tariffs can also lead to "second order consequences", which could involve a potential rejig in the monetary and fiscal policies of both – the countries imposing the tariffs and those hit by it.

In the aftermath of tariffs, the fiscal policy is eased in countries where there is disinflationary weakness, and tightened where there is inflationary strength, Dalio said.

"If the monetary policies are eased, real interest rates decline, and the currency is weakened in countries where the deflationary forces are greatest," he explained. On the flip side, the monetary policy is tightened, real rates are raised, and the currency is strengthened where the inflationary forces are greatest, he added.

"If tariffs are responded to with reciprocal tariffs, the effects will be more broad-based stagflation," Dalio further noted.