President Donald Trump’s erratic behaviour—the sudden imposition of tariffs only to then reverse the decision—have left markets and policymakers scrambling. Is there a method to the madness? Perhaps not. But at its core lies a real macroeconomic problem, to which the tariffs are a misguided response.
At least, this is the argument put forward by two influential thinkers: Ray Dalio, founder of Bridgewater Associates and a theorist of financial systems; and Michael Pettis, a finance professor at Peking University.
Dalio and Pettis chart how, in the decades since the collapse of the Bretton Woods system, the global economy has been one of a lopsided symbiosis: that of the US’s persistent deficits on one side, and the surpluses of export-led powers on the other—first Germany and Japan, then South Korea, and finally China. This growing imbalance coincided with the decline of American manufacturing, the very trend Trump hopes to reverse.
Yet, Trump’s tariff measures are unlikely to arrest America’s industrial decline, Dalio and Pettis agree. Even so, the ensuing turmoil marks an acceleration of a deeper shift that has been gaining momentum for a long time.
Dalio’s Doomsday Prediction
Dalio warns that the tariffs are not the cause of today’s turmoil but just one of its many manifestations. The world is undergoing a breakdown of the “major monetary, political, and geopolitical orders”—a “Big Cycle” transition that, he argues in an article on X, comes “once in a lifetime.” The global economy has grown dangerously asymmetrical: borrower nations like the United States run persistent deficits while relying on creditor nations like China, which depend on exporting to America. This interdependence has long been fraying. Now, under the strain of mutual distrust and deglobalisation, it is unravelling.
The United States can no longer sustain the hollowing out of its manufacturing base or mounting debt burden, nor can it afford to remain dependent on strategic rivals for critical goods. As Dalio puts it, “It is obviously incongruous to have both large trade imbalances and large capital imbalances in a deglobalising world in which the major players can’t trust that the other major players won’t cut them off from the items they need… or pay them the money they are owed.” The current arrangement—America consuming and borrowing, China producing and lending—is, he concludes, “obviously unsustainable.”
Meanwhile, domestic and international politics are deteriorating. American institutions, once grounded in compromise, succumb to populist trench warfare. Globally, the American-led order gives way to a rawer, power-based system. Dalio’s diagnosis is dark, indeed.
Dollar Dominance
Pettis, though less apocalyptic in tone, offers a similarly bracing view of this structural imbalance. His critique focuses on the global role of the US dollar and the hidden cost of its status as the world’s safe asset. To maintain this dominance, the United States has been forced to absorb excess global savings—often the result of policies in countries like China and Germany that suppress domestic demand to fuel exports. In this system, some countries offload their imbalances while others, like the US, absorb them. With open markets and liberalised capital accounts, America has become the world’s shock absorber.
The consequence has been a long decline in American manufacturing, as trade deficits balloon while foreign capital pours in via Wall Street, inflating the dollar. In a Financial Times op-ed, Pettis argues that America’s economic woes stem not from bad trade deals but from the dollar’s outsized role and the country’s position as the world’s financial centre.
Trump’s tariffs, then, reflect a mounting urgency in Washington to confront this imbalance. Yet Pettis doubts that bilateral tariffs can do the job, calling them “an especially clumsy way of addressing the root causes of trade imbalances.” Instead, he proposes modest capital controls to prevent surplus nations from recycling an excessive amount of trade gains into US assets. Think of restrictions on how many houses or stocks foreigners are allowed to buy in the United States within a given time period. Though such controls would mark a break with half a century of American economic policy, similar measures are currently used by many countries, including China and South Korea. They would reduce capital inflows, lower the value of the dollar, and offer US industry a more level playing field.
A World Remade
Business as usual is over. Yet, Ray Dalio and Michael Pettis offer different perspectives on how that transition will look like, with Dalio's outlook being markedly more somber. For Dalio, Trump’s tariff offensive represents a desperate attempt to rectify a macroeconomic asymmetry that has reached its breaking point. However, he interprets these tariffs not as a viable solution but as further evidence of the coming implosion of the US-centered global system. He envisions a profound transformation toward multipolarity in economics, finance, politics, and ideology—one that will be extremely disruptive and likely accompanied by war.
Statement
Capital controls, thinkers like Pettis argue, could reduce the structural trade deficit in goods between the US and surplus states in a more constructive manner. These would lower the value of the dollar and hence enhance US manufacturers’ competitiveness. Nevertheless, this correction would challenge long-held assumptions, including the dollar’s dominance as the global reserve currency. Also, US stock markets are unlikely to sustain their current volumes. While a buoyant stock market and dollar supremacy are difficult to relinquish, such may be the necessary costs for reindustrialising the US economy and restructuring the global economic order.