Author: Ray Dalio; Compiled by: Block unicorn

Tariffs are taxes that:

In order to increase revenues from the implementation of tariffs, these revenues are paid together by foreign producers and consumers (how much each pays depends on their relative flexibility), which makes tariffs an attractive tax.

Reduce global production efficiency.

It has a stagflation effect on the global overall, and has a more deflation effect on producers subject to tariffs, and an even more inflationary effect on importers subject to tariffs.

Ensure import/tariff businesses in the market from foreign competition, which makes them less efficient, but they will be more likely to survive if aggregate demand is maintained through monetary and fiscal .

In times of conflict between major international powers, tariffs are necessary to ensure production capacity.

It can reduce the imbalance between current accounts and capital accounts. In layman's terms, it means reducing the dependence on foreign production and foreign capital, which is particularly important in global geoconflict/war periods.

And the above are the first-order consequences of tariffs.

What will happen next depends largely on: How the region that is subject to tariffs responds to tariffs; How exchange rates change; How central banks adjust currencies and interest rates;

How central banks adjust their finances to cope with these pressures.

And these are second-order consequences.

More specifically:

If the tariff is imposed, the impact will be manifested as wider stagflation.

If the currency is relaxed, the real interest rate falls, the currency with the greatest depreciation of the deflationary pressure (this is the normal reaction of the central bank), and/or the currency with the tightening, the real interest rate rises, the currency with the greatest inflation pressure (this is the normal reaction of the central bank).

Free fiscal in areas with weak deflation and/or tighten fiscal in areas with strong inflation, these changes will neutralize partial deflation or inflation effects.

Therefore, tariffs involve many dynamic factors, and to judge the impact of large tariffs on the market, many aspects need to be measured. These effects go beyond the first six points of the tariff first-order effects I mentioned, and these first-order effects are affected by the second-order effects I mentioned. However, the clear fact as background and future is that the imbalance of production, trade and capital (the most important debt problem) must be reduced in some way because they are dangerous and unsustainable in monetary, economic and geopolitical aspects (and therefore the current monetary, economic and geopolitical order must change).

These changes may be accompanied by sudden, unconventional adjustments (as I described in my new book How to Bankrupt: The Great Cycle). Long-term monetary, and geopolitical effects depend mainly on people's trust in the quality of debt and capital markets as safe storage of wealth, the level of productivity in each country, and the attractive system that makes it livable, work and investment.

In addition, there are many discussions on the following issues now: 1) Is the US dollar beneficial or harmful as the world's main reserve currency; 2) Is the US dollar strong or bad? Obviously, the US dollar is a good thing as a reserve currency (because it creates greater demand for U.S. debt and other capital than when there is no such privilege). However, because markets drive such things, this inevitably leads to abuse of this privilege, excessive lending and debt problems, which brings us to where we are now (i.e., the need to deal with the inevitable reduction of imbalances of goods, services and capital, the need to take extraordinary measures to reduce the debt burden and reduce foreign dependence on these things due to geo-environment). More specifically, there isThe yuan proposed by the person should appreciate, which may be the part of the agreement between Americans and people in trade and capital transactions, preferably when the leaders of both sides meet. This and/or other non-market, non-economic adjustment will have unique and challenging effects on application, which will lead to some of the second order consequences I mentioned earlier to buffer these effects.

I will continue to focus on what will happen next and will continue to update my views on the consequences of first-order and second-order.