What it’s like on the frontlines of Trump’s tariff’s war

0:00Global trade is under immense pressure from many angles. What's the mindset that you've seen in your customers, these American businesses who are ordering from China? It's very ugly. There will be bankruptcies from this. People are pretty pissed off realizing, hey, you know, you built your whole life, built your whole career around this. And now all of a sudden, you know, maybe your business model doesn't work. They're sitting there thinking, okay, we still have to set up our customers. They're trying to figure out where they can reconfigure and how quickly they can do that. Ironically, like some of this stuff might increase the demand for global shipping.

0:32A lot of what's happened is manufacturing has moved. Final assembly manufacturing has moved to places like Vietnam. But a lot of the components are still made in China. If you're like, oh, trade's going to go down. You're like, actually, trade might go up. We have seen a tremendous growth in global trade really since year dot. When you look at this, you see anything that changes that path. Human beings have an innate desire to find a customer or a supplier that helps them make their life better. And if a certain government tries to rein it in, guess what? The main line of trade will move elsewhere.

1:01and civilization will advance. And there's many cases where cities that were once great got left behind. My personal prediction, you didn't ask me my prediction, but I'll go ahead and say it. I'm here with a man who is really at the center of this tariff storm and the impact of these trade wars, Ryan Peterson, the CEO of the very, very fast-growing logistics platform Flexport. And we're going to talk about geoeconomics and trade, but also software and AI and the future of globalization. So Ryan, praise your time for you. So thank you very much for being here. Yeah, that's great. Now, let's start with the biggest headline.

1:40Global trade is under immense pressure from many angles, every angle potentially. The US tariffs on Chinese goods are currently 145%, I think, and China has responded with 125 % saying they won't go any higher. you are seeing the fallout in real time across your platform what's breaking first well the uh importers from china people shipping from china the u.s are basically a state of distress right now um because that 125 remember is added to the previous tariff and trump in his first term put in 25 tariffs on most chinese goods not most but a lot of chinese goods and then by the continued those and increased them in some places so that's 170 and then you know there was already tariffs before Trump ever took office of a few percent on average.

2:27So that breaks most business models. I think you're going to see trade. And people are in a really difficult... I talked to a customer yesterday at 103 containers worth of furniture shipping from China. So 170 % duty, I think, is their duty rate. And that is 145 of which they didn't know when they placed these orders. So when the containers arrive in one of the big ports in the US, they're slapped with an additional unplanned... Yeah. And when they're deciding right now whether to even ship them or call the factory and tell them sorry and ruin their reputation with their factory or do they import them and just take a huge loss.

3:05And I think that kind of conversation is happening in businesses all across the United States today. And so it's very ugly. There will be bankruptcies from this. And so my personal prediction, you didn't ask me my prediction, but I'll go ahead and say it, is I just think there's going to be a trade deal between the U.S. and China. That's my prediction. I have no firm evidence for this, but I can't imagine that Donald Trump wants his legacy to be in his first quarter in office, bankrupting thousands and thousands of businesses and jacking up the unemployment rate. Consumers are one thing. They'll be upset they can't get their stuff, but they can buy other stuff instead of that.

3:40Let's dig into that a little bit because for many of us, what we see of globalization is that we can buy a billion things on Amazon. on. So if we go a layer at a time, you know, we talk about containers, we talk about containers on ships. You know, it's been 60 years, I guess, nearly 66 years, I think, since the Ideal X and the first containers were put together. But just help somebody who hasn't been inside one of these 20 foot long things understand what goes in there, because it's not all iPhones, is it? But the iPhone probably ships by air most of the time. It's a very valuable product. So it's, yeah, but most of the things that you see are shipped by ocean freight, anything really.

4:23I mean, that's the beauty of the container. It's standardized and you can just put anything that fits inside a rectangle can go in there. But from China specifically, a lot of consumer electronics, although also, yeah, some of that flies by air, furniture, apparel, you name it. Now, a lot of it, it's low complexity goods. So things like apparel that are relatively easy to produce and it's just about an intensive labor operation. A lot of that work has already left China over the last decade for cheaper countries with cheaper labor. China's done a great job of increasing its standard of living.

4:59And with that, the labor value, the dollars per hour have gone way up. And so if it's just cheap labor between the tariffs that Trump put in in his first term and just the rising inflation of labor costs in China, a lot of that moved to Southeast Asia, Bangladesh, Sri Lanka, Cambodia, many other countries around the world over the last decade. So it tends to be higher complexity things where there's an ecosystem of subcomponents. That's why electronics is the hardest thing to move out because you've got, you know, no one company makes all of the things. You're like buying little components from other companies.

5:32And so therefore you have an ecosystem and that basically is in Southern China. Yeah. And that ecosystem, of course, has all of its codes and clues, how they pass information, how you understand, how you have the vibes of what people want, what people need, who's good, who's not good, which is why it's not a simple case of lifting and shifting. And we'll talk about that a little bit later in our conversation. But if we just come back to the container and the ship, I mean, the scale is staggering, right? Some of the biggest ships have, what, 24 ,000 containers on them. So give us a sense of what's in a container and therefore what's in a ship, like in dollar terms.

6:11Well, by the way, this is the first opportunity we have to just say how dumb the industry can be sometimes. There's 24 ,000 TEUs, but that's only 12 ,000 containers. A TEU is a half container, which I think just frustrates me to no end because at least once a week, I hear somebody get a metric completely off by 50%. Right, because you've got the 40-foot, but the TEU... There's seven TEUs, but they may have the EUs. He's like, yeah, we can't keep doing this. Okay, so let's just clarify that. The TEU is the standard packet size of a container, but actually containers are 40... TEU is 20 containers are 40 foot long so a teu is half of the container we see on on the back it's like measuring your revenue in 50 set pieces it's pretty crazy uh anyways um yeah the ships are enormous the ships uh however those mega mega ships the 24 000 teu ones basically there's not that many ports in the world that can handle a ship of that size they're they're in china they're in singapore and they're in rotterdam maybe felix still i have to check the european um networks But the U.S.

7:11ports are not capable of handling a ship that large. I think the largest ship that's full, when they're more full, they weigh more. They go deeper. They need a deeper draft. I think the largest one that can come to the U.S. is more like 16 ,000. The U.S. is not invested in our port infrastructure, and it's very dilapidated. And that is a sad fact here in the United States is that we have a pretty antiquated port. Nonetheless, yeah, the ships are enormous. You put that next to it, they're bigger than like a U.S. limits class super carrier, aircraft carrier. They dwarf their size. Yeah. So they're moving around at the 16 ,000 TEU equivalent coming to the US.

7:47And there is this powerful relationship between, you can use TEU as a sort of leading indicator of where GDP is going to go, right? There's this multiplier effect of if GDP goes up 1%, TEU volumes go up 2 % to 2.5 % because this trade has been such an important anchor in how countries have got rid. Yeah, you've seen global trade's percent of GDP go up and up and up. I think it's around 50 % now. The only interesting fact of all of this is as the tariffs have hit China, a lot of what's happened is vinyl assembly manufacturing has moved to places like Vietnam and other parts of Southeast Asia. But a lot of the components are still made in China.

8:26So you have to, if you want to declare something that's made in Vietnam, you have to undergo what's called a substantial transformation. And there's specific customs rules about that. We got teams that people have exported total experts on this, but I don't want to try to oversimplify it. But there are rules for what has to happen. And it's really about the value add, both in materials and labor costs that has to take place to then say that, yeah, this is our product of Vietnam. But a lot of the components, a lot of the parts of the products are still made in China. And so you end up actually from a logistics standpoint, moving the same goods twice.

8:58You move it once from China to Vietnam and then once from Vietnam to the US. So ironically, like some of this stuff might increase the demand for global shipping. I saw it like fully got my head around it and modeled it in the right way. But that's something that didn't occur to me at first. You're like, oh, trade's going to go down. You're like, actually, trade might go up. Yeah, I mean, actually, you're bringing to the fore the complexity of these global value chains that we now have. You know, they're not really supply chains. And the reality of the complexity, so is that what's happening amongst your customers and your teams?

9:30That they're sitting there thinking, okay, we still have to serve our customers. what are the parameters that were allowed by global trade rules to now declare that this has been manufactured in Vietnam or Mexico? And they're trying to figure out where they can reconfigure and how quickly they can do that. Absolutely. And as you mentioned at the outset of your audience, and you guys cover AI a fair amount. And so one of the interesting things here is the GPU, the semiconductors are duty free under Trump's new trade. Now, with the reciprocal tariffs, this was all pods, but when reciprocal tariffs were coming down the pipe a week ago, this was one of the hot topics, and it may come back in 90 days when this thing comes back around, is that semiconductors are duty-free, but graphics cards are not.

10:14And so if you take a GPU, and the GPU is obviously the most expensive part of the graphics card, and you transform it into a graphics card by adding it, you know, I don't know. Well, I stick it on the PCB, and you put the edge bolts and all that stuff. You do a couple more things. Now you've got a very high-duty product you import. So it might actually lead to some American manufacturing because we're going to import the semiconductor separately from the PCB and the other components, assemble it in the U.S., and then send it back to wherever in the world to turn it into a computer and send it back over.

10:48And you've now said, hey, the portion of this product that's made in America I get to deduct from the final value. I mean, you're going to generate all kinds of stupid inefficiencies at the end of the day. I mean, by the way, like you're flying these things around the world, generating carbon and costs and all this idiocy just to save some kind of regulatory hack. But that will happen for sure. That already happens on all kinds of cases where people are trying to save money on duties. Right. I want to dig into that later in our conversation when we talk about what comes next. But I'm curious about Flexport because Flexport sees a large number of customers, right?

11:24I think you see 3 % to 5 % of U.S. trade across your platform. Is that right? Just 1 % of global trade, roughly, that you see across the platform? No, it's more like 1 % of U.S. trade, a little bit smaller on some other markets. But yeah, we're still pretty significant. What have you sort of numerically seen? How many of your customers have said, we're just going to pause what's coming out of China right now until we understand what's going on. Yeah, we're still taking survey of it all. A week ago, when the reciprocal terrorists were still live, or proposed rather, and pending for all of the world effectively, we did a kind of a call down last Friday.

12:08A week ago, we called all of our customers, as many customers we get a hold of. And that time, 28 % of them told us they were going to pause their bookings after this hit. and we're still kind of recalibrating what does that mean for the ones who are just china oriented and uh presumably the other ones with the 10 duty aren't aren't changing a lot of business plans although part of what that story is there it's not just that these companies are totally screwed and and going you know to pause all operations a lot of what happened is this date was known liberation day has been known since trump took office effectively or maybe since he got elected you know this date until i think on january 21st or something so you've had two months to prepare And so people front-loaded and imported a lot of inventory and are pretty well-stared.

12:48But it has to get here, of course, right? I mean, it doesn't matter if you ordered the only... Actually, the way they made it was it just has to depart. The vessel has to depart at origin. Right. Had to depart. Now it's in the past. By the 9th of April, it had to depart to avoid the higher duties. So there was a mad scramble last week to get everything loaded. And then now people have said they were going to take a pause. our bookings are down for sure this week as people go through this math and figure out what they want to do and realize they have stock. A lot of people believed like I did. And I told all our customers, Hey, I think a deal is going to get done on these countries.

13:23And we were right. And they were right. The ones who thought that was going to happen. China, I do believe a deal is going to get done. I just think it's a lot harder to negotiate. Both sides need to save face. Both sides have made this a big part of what they're all about. They end up showing that they're strong. They have very different negotiating styles. The Chinese don't want to ever risk their leader. This isn't specific to Xi. This is about Chinese culture. You don't want to risk the leader ever looking bad. That's not uncommon, to be fair. Yeah, totally fine. Maybe it's not just the Chinese thing, but they want to negotiate this at the lower level, make sure it's really done.

14:01The two leaders meeting is a formality. Trump doesn't care, he looks bad. He wants to make, you know, he's going to go in there and yell at some people and try to, you know, try to work out a deal man to man. So there's very different negotiating styles that'll be hard to overcome. American interests and Chinese interests have obviously many points of divergence and there's real substantive issues here that have nothing to do with tariffs. But I just think it's, you can't go through with this and just devastate the American small business, especially. That's probably something that parties all around the world understand.

14:32But what you've just described is the number of moving parts, complexities, bits that are completely inscrutable to us because we sit and even in your case, we are close to the customers. You're reading what's coming and learning things through the news. But just give us a sense of what's the mindset that you've seen in your customers, these American businesses who are ordering a lot of merchandise from China, whose mindset is working well at this moment? i mean they're pretty pissed off they're um people have built businesses over a decade playing under the rules of the game as it was defined and you know that's the job of the government define the rules and then the business people got to find a way to make money um whatever those rules might be but having those rules changed out from one of you with no notice overnight i mean you had some notice people knew that some things were going to happen here but yeah it takes time to shift the supply chain to make decisions etc and so um yeah people are pretty pissed off uh some despair some realizing hey you know you built your whole life built your whole career around this company and now all of a sudden you know maybe your business model doesn't work and what are you gonna do it's pretty pretty terrible yeah i mean i i think it is pretty terrible i think we'll hear more than individual stories over the coming weeks right as the the reality bites and people are able to sort of try to take stock of where they are because Yeah, people are not running with 200 % profit margins by and large.

15:58So, you know, you have a 100 % import tariff. It's pretty tough. But what I'd like to do maybe is just step back a little bit to this whole overarching question of globalization. So, you know, we have seen a tremendous growth in global trade really since year dot. I mean, it is something that humans like to do. You know, you find Viking coins in parts of Central Asia, right? And they date from 1000 AD. and people like to travel, they like to trade, and trade is very, very helpful to improving the quality of life. It's actually an exponential, right, in a sense. I mean, it's not a Moore's Law exponential of 60 % a year, but it's 4 % to 5 % a year over centuries.

16:41That really, really does compound. I'm just curious about whether when you look at this, you see anything that changes that path, Or is this a blip of the type that we say saw in the 1920s or the 1890s when there was a period of retrenchment? I look at it that way as a blip. You know, you look at that long run of trade. It has grown 4 % annually since the Mongol invasions, at least. So you've got 800 years of this compounding. And that 4 % doesn't sound like much. But when you do it for that long, it looks like a Silicon Valley straight line vertical at that point. And on that graph, World War II barely shows up.

17:24You know, the black death doesn't show up. There's some terrible things that happen that don't compare to this. Right. What does show up is the 1890s process of deglobalization that took place and also the 1920s or late 1920s. Those were very real events. But the growth has been so much that, you know, it just looks really tiny now. Because what shows up actually is COVID hit, the great financial crisis, because we're so big that all of a sudden the drop of 20 % on this huge number looks like a real thing. Whereas even if you drop 30%, the numbers were so small back then that it looks like a little tiny thing.

18:04Because 4 % of what we're doing now is way bigger than a drop of 30 % in the Great Depression. So that's just the nature of exponential math. So yeah, I think you'll see trade Be bigger 10 years from now than it is now There's too much benefit to both parties That's why you're doing it Governments will try to rein it in Many reasons why people in power Want to preserve their power, exercise their power But human beings have an innate desire To find a customer or a supplier That helps them make their life better And make them make more money So generally those forces tend to overcome and if a certain government tries to rein it in, guess what?

18:44The main line of trade will move elsewhere and civilization will advance and there's many cases where cities that were once great and once hubs of global trade got left behind because of policies that they enacted or the geography shifted. New trade routes were discovered. You can think of places like Venice or even Brune. many other places around the world that were at one point thriving hubs of civilization and then just got left behind because of sometimes policy, sometimes geography, sometimes new technologies. There are many reasons, but trade moved on. So you have to be careful as a government trying to regulate too much on these things and essentially plan your economy.

19:30I mean, they can do some stuff that might lead to some more American jobs, but at the cost of making every American worse off. It's a really, it's a complex picture. I mean, what you've painted, of course, is this consistent element of the world over the past thousand years that we, a bit like the internet, but it's much more important in a sense, don't see, right? We don't notice that there is this whirling ecosystem of infrastructure, of 40-foot containers, of automated ports, of automated loading. We live with the benefits, but they've had quite a tough 10 years, logistics professionals, haven't they?

20:09Yeah, it's been nothing but chaos, really, for the last decade between tariffs, between terrorists, all sorts of obstacles to trade. War in Ukraine has been pretty, I mean, obviously, humanitarian crisis on the ground, but it also has had a big impact on all the air cargo can't fly over Russia anymore. pretty inconvenient and costly. And yet the world finds a way. I mean, the world finds a way to do more trade. Trade has grown. Trade with China has grown even since the tariffs started. Even since tariffs, right, in 2016 to 18. But there is something that's going on that is about, and I'm not sure whether this is a story of fragility or it's a story of resilience, right?

20:52I think it's really a mix of both. So going around the Red Sea and through the Suez Canal has been a thing that's been important. It's been really important since the Suez Canal was there. It's been important for the last 30 or 40 years. So much so that, you know, you think of those Nimitz supercarriers that you talked about and they existed in that area to keep those sea lanes open. And yet they've not been able to keep them open, right? They've not been able to keep them open by what is barely a fully-fledged nation in terms of the Houthi rebels. So there's a point of fragility. And a point of resilience is how we bounced back from COVID.

21:36And then we get to the point of fragility, which was a single tanker, the ever-green, ever-given, ever-given gets stuck and billions of dollars of damage are done. So how do we understand that? Is this a fragile system? Is it a resilient system? Is it one that will ultimately reconfigure if there's enough of an impetus on it? It's quite resilient because it's decentralized and lots of actors who are making decisions on their own part. And there's not really, there are definitely some choke points and we see that with the Red Sea, Panama Canal, Straits of Malacca, you know, South China Sea. There are some choke points in the world that create some fragility, but in general, it's a relatively robust system.

22:22And it has been, the global order has been of free trade and globalization. It's something we've basically taken for granted, but it's a post-World War II phenomenon. Before World War II, the countries basically did trade with their colonies. Right. And a lot of the ships were, you know, you had to put cannons on your ship if you wanted to do trade. And it's sort of a newer concept that the United States Navy is going to be out here. I mean, the British Navy did a lot of this before, but the United States Navy since World War II has been the guarantor of freedom of navigation and free trade. And now anybody can go anywhere as long as you play by the rules.

22:58And the WTO really accelerated that. But it is a big challenge to the global order. The Houthis is the story that I think is the biggest story in the world, the most underrated story in the world, that this small rebel group can cut off global trade and all the ships are having to rout around it. route around Africa and take a much longer journey. And the United States Navy, who's supposed to be the guarantor of freedom of navigation, hasn't been able to stop it. Trump is up to attacks. And so maybe there's some progress to be had. But if that's the case, and we go back to a prior world, it's, yeah, a lot of the prosperity the modern world's built off of that freedom of navigation that we do take for granted.

23:39And the United States doesn't care that much, it seems. And not just under Trump, right? Biden didn't do much about it in general. The United States trades the least of any major country as a percentage of the economy. I mean, we're the biggest, us and China are the two biggest countries in terms of trade. But as a percentage of our economy, it's pretty small. The U.S. is a big country with so much great natural resources and we're independent on food and energy. And so we're just less inclined. We need it less than other people. Do you think it was a reasonable deal for the U.S. Navy to, I mean, it cost a lot.

24:14It cost a lot to run those supercarriers, right? They used to cost$5 billion. They probably cost$10 billion now. They've got 70, used to have 90 aircraft on them. They used to have 6 ,000 sailors and airmen. They now have 3 ,000. Things are more efficient. Was the U.S. getting a good deal out of that? We got to become the reserve currency of the world. And I think that's a big part of why we're the reserve currency because we're seen as the security guarantor. And being the reserve currency kind of makes you rich without doing that much. Everybody wants your currency. You can use that to buy whatever you want around the world.

24:43And so in general, it's created a set of problems. The problems are easy to see. The benefits are less obvious. You take them for granted more. But the fact that, you know, you can just, when I, as an American, you travel abroad, you're like, man, this place is cheap. Wherever you go, it means you're rich. Right, of course. Yeah, when I travel to the US, I really do notice that American GDP growth has been, you know, 2 % or 3 % higher than the UK's for the last 20 years. And, you know, you notice that when you go into the local coffee shop, right, America is rich and it's connected to the reserve currency.

25:21It's connected to the infrastructure that has enabled this, you know, this globalization. I want to come to the Houthis because they are underrated in all of this. How damaging has it really been for cost, right? I mean, it's clearly more expensive to go around the Cape than to whip through the Suez Canal. and takes a lot more time. Is it really significant or is it, again, one of those blips on the graph? I think it'll turn into a blip because last year, it was very expensive last year. It raised, especially for Europeans, it raised the price of shipping a container from Asia to Europe by three to four times, depending on the exact route.

26:00But let's put some numbers on that. That's like a few thousand dollars. That's from like a couple of thousand to maybe$8 ,000 a container. Yeah, something like that. And it raised the price of freight on all lanes, even Trans-Pacific. Like that has nothing to do with the Red Sea. The price went up two to three times. So we're kind of calling from long run average of$2 ,000 to ship a container to more like$5 ,000,$6 ,000 almost to ship a container. But it does look like that'll be temporary. Even though the Hootie's, it's unclear if it'll be hopefully temporary in the long run of history. But I'm not making any prediction that that's going to open up anytime soon.