Markets have tumbled in response to Trump’s latest tariff announcements, and as expected, we have been flooded with news, hot takes, and apocalyptic headlines, some insightful, others clearly designed to spike your blood pressure.
Yes, there are valid reasons to be cautious about where the economy and markets might be heading from here. However, emotional investing rarely ends well.
On a more constructive note, I came across an article by Ray Dalio on how the tariff machine works. It is a worthwhile read for any students of the markets whether you are just starting out or simply trying to make sense of how the machine works without losing your sanity.
Here is a section:
Tariffs are taxes that:
1) Raise revenue for the country imposing them that both the foreign producers and the domestic consumers pay (how much paid by each depends on their relative elasticities), which makes them an attractive tax.
2) Reduce the global efficiencies of production.
3) Are stagflationary for the world as a whole, more deflationary for the tariffed producer, and more inflationary for the importer that imposes the tariffs.
4) Make companies in the importing/tariffing countries more protected from foreign competition in the domestic market, which make them less efficient but more capable of surviving if aggregate domestic demand is maintained through monetary and fiscal policy.
5) Are necessary in times of an international great power conflict to assure domestic capabilities for production.
6) Can reduce both current account and capital account imbalances, which in plain English means reducing the dependencies on foreign production and foreign capital which is especially valued in times of global geopolitical conflicts/wars.
Those are the first order consequences.
A lot of what happens from there depends on how:
1) Tariffs are responded to by the tariffed country/countries.
2) Currency rates are changed.
3) Monetary policies and interest rates are changed by the central banks and fiscal policies are changed by the central governments in response to these pressures.
Those are the second order consequences.