US President Donald Trump's 'Liberation Day' tariffs escalate global trade war

Ray Dalio, the founder of Bridgewater Associates, explains why Trump is taking drastic measures with his tariffs.

Billionaire investor Ray Dalio has shared some interesting insights into why US President Donald Trump is taking measures to reduce trade imbalances and resolve the government debt crisis.

Many corporate and world leaders and economists have advised against tariff hikes as they could affect economic growth and employment. However, Dalio believes that tariffs are sometimes necessary in times of an international ‘great power conflict’.

These higher taxes would raise revenue for the country imposing them and lower reliance on foreign supply chains, boosting domestic production capabilities.

His belief that tariffs can be a way for countries to prepare their respective economies for global conflict aligns with his frequent warnings that the world is moving towards a high risk of war.

In his 2021 book, Visualizing the Improbable: The Deep History of the Unthinkable Events That Transform Our World and the Monumental Issues of Our Time, Dalio predicted that the US-China competition would introduce fundamental changes to how the world is run.

“It has been said that China's RMB should be appreciated, which probably could be agreed to between the Americans and Chinese as part of some trade and capital deal, ideally made when Trump and Xi meet, ” Dalio wrote.

He explained that tariffs could lower current account and capital account imbalances, meaning that they could minimise reliance on foreign production and capital, which might help a nation during geopolitical conflicts.

“Tariffs will make domestic firms less efficient as global supply chains constrict, but they can survive as long as domestic consumers continue to buy their goods. Of course, in a time of all-out war, a nation would do whatever was necessary to win the war, and the question of what is best in the long run wouldn't arise.”

While Dalio's analysis offers valuable insights into the potential economic and geopolitical implications of tariffs, it's important to note that he didn't imply that the US government is introducing tariffs in anticipation of an impending war.

Rather, he's offering insights into the general effects of these decisions and why a nation might take them, especially considering the broader economic and geopolitical context of the past few years.

Tariffs are a trade barrier that a country can use to isolate itself from the global economy, which can be advantageous in times of war to decrease reliance on foreign actors and increase the competitiveness of domestic firms.

The tariff is a tax on a particular good that is collected by customs officials at the border, ultimately raising revenue for the country imposing the tariff.

In his LinkedIn post, Dalio also highlighted that the US government debt crisis must be solved as the federal debt-to-GDP ratio has shot up to 120% compared to 58% in the year 2000.

"The production, trade, and capital imbalances (most importantly the debts) must come down one way or another because they are dangerously unsustainable for monetary, economic, and geopolitical reasons," he added.

The US debt is currently over $40 trillion and could cause a "heart attack" in the US financial system if it continues to grow unchecked, the Bridgewater founder warned in February.

"You're at a high risk of this heart attack, essentially, and now what are you going to do about it?" he had said.

The investor even noted that Elon Musk's Department of Government Efficiency's federal actions to slash the government budget might not be enough to resolve the alarming debt crisis.

Earlier this year, Musk announced his intention to create a new government agency focused on slashing the federal budget and increasing efficiency within the government.

The billionaire tech mogul said he would be applying for the role of the agency's CEO, and he urged President Biden to consider the proposal.

"I think it would be helpful to President Biden to have someone he trusts to help him solve the critical issues facing the nation, and I would be honored to serve in this capacity," Musk said in a statement.

However, the investor pointed out that the president would need to take the initiative to set up the agency and request his assistance.

"I would be willing to do this, but it will require President Biden to take the initiative to create the agency and ask for my help," he added.

Musk's interest in government service comes as no surprise, given his past ventures into renewable energy with Tesla and his role in founding SpaceX for space exploration.

His company, Neuralink, is also developing brain-computer interfaces to treat neurological conditions.

The billionaire investor's comments come as the US grapples with a burgeoning debt crisis and a sluggish economic recovery from the COVID-19 pandemic.

Moreover, Musk's potential involvement in government could inject fresh perspectives and innovative solutions to pressing issues facing the nation.