Dalio warns tariffs may trigger stagflation and global economic shifts

Ray Dalio, founder of Bridgewater Associates, has issued a stark warning about the potential consequences of U.S. President Donald Trump’s newly imposed reciprocal tariffs.

In his analysis, Dalio highlights that while tariffs can generate revenue for the imposing country, they also risk reducing global production efficiency and creating stagflationary pressures worldwide.

Dalio described tariffs as "necessary" during geopolitical conflicts to ensure domestic production capabilities and reduce reliance on foreign supply chains.

He explained that these measures could help address current account and capital imbalances, which are critical during times of international tension.

However, he cautioned that such policies could lead to abrupt changes in global monetary, economic, and geopolitical systems.

The U.S. dollar’s status as the world’s primary reserve currency adds complexity to the situation.

While this privilege creates demand for U.S. debt, it has also led to over-borrowing and mounting debt problems.

Dalio suggested that a negotiated appreciation of China’s renminbi (RMB) could be part of a broader trade agreement to address these imbalances.

Dalio emphasised the “second-order” effects of tariffs, including retaliatory measures, currency fluctuations, and adjustments in monetary and fiscal policies.

He warned that these dynamics could exacerbate existing economic challenges and destabilise global markets.

“Tariffs are more deflationary for the tariffed producer and more inflationary for the importer imposing them,” Dalio noted, underscoring their dual impact on economies.

The billionaire investor also pointed out the unsustainable nature of production, trade, and capital imbalances—particularly debts—that must be resolved to avoid long-term economic disruptions.

He predicted unconventional shifts in global systems driven by trust in debt quality, national productivity levels, and political stability.

Dalio’s analysis aligns with his broader concerns about escalating U.S.-China tensions and their implications for global trade.

While he acknowledged the strategic importance of tariffs during conflicts, he warned they could strain international relations and amplify risks of stagflation—a scenario combining stagnant growth with rising inflation.