This CEO Says Global Trade Is Broken. What Comes Next?

0:00Okay, Mims, we got a good one. you are the author of probably the definitive book on supply chains. And today's guest is probably the definitive guest on this topic. What's the big takeaway? The big takeaway this week is that it feels like we're out of the woods because there's been a tariff pause, but things remain a mess. And he is going to get into all the gnarly details about why that is and why our world has changed fundamentally. We just don't know it yet. That's next.

0:33There are only a handful of companies in the world that have a truly global view of the world's supply chains. Not to mention how they've been disrupted by the current trade war between the U.S. and pretty much everybody. Today, we've got Evan Smith, the co-founder and CEO of one of those companies called Altana. It's kind of like LinkedIn, but instead of resumes and grind set posts, it gives its customers insights into the details of their supply chains. And Smith has a pointed message for anyone who thinks that global trade is going back to normal anytime soon or ever. I had one board member of a Fortune 50 company tell me that this is economic Pearl Harbor and the world will never be the same.

1:16Smith can talk with such confidence because his company has a unique view into global supply chains. His customers share data with him in a way that he says is privacy protected. That means Altana can trace the supply chains for even the most complicated objects, like cars and phones, all the way back to the point at which raw materials are pulled out of the ground. And for the foreseeable future, he says those supply chains are a mess. We're going to live through what's called a bullwhip effect in the world economy, in the global supply chain, for the next 9 or 12 months. It's this massive shock to the system that's going to reverberate for the rest of the year easily.

1:59From The Wall Street Journal, I'm Christopher Mims. And I'm Tim Higgins. This is Bold Names, where you'll hear from the leaders of the bold name companies featured in the pages of The Wall Street Journal. Today we ask, is the era of global free trade over for good? And if so, what's going to take its place?

2:21Evan Smith, welcome to Bold Names. A lot of CEOs have an animating thesis about the world and what their company should do, why it should exist. But you have a grand theory of history. You actually call it a manifesto. Could you briefly lay that theory out for us and why it led you to start Altana? Yeah, our point of view is that globalization broke and that our opportunity at Altana and our mission for the company is to help fix it. So how did globalization broke? So you really have, you know, from the World War II to the last couple of years, you had this period of more and more free trade, more and more outsourcing and efficiency seeking across that global landscape.

3:08You had a security umbrella provided by the United States to engage in free trade and to engage in global commerce. And then you had the financialization of formerly industrialized economies, right? So the massive accumulation of debt, financialization of industry and production. Right. And the rise of like Japan, South Korea, China, South Asia. Exactly. So those happen along the way. And then, you know, the big sort of tectonic moment is admitting China into the World Trade Organization. And I got an economics degree from Yale in 2007. So like at the very apex of the sort of triumphal, you know, golden arches theory of the world, like end of history, the neoliberal story is the last one that will ever be written, capitalism and free trade, democracy, right?

3:59So I came out dyed in the wool with that worldview. And since then, I've really seen the breakdown of that thesis. So I think it starts with China. right like this this whole free trade paradigm uh works as long as people kind of play by the same set of rules and everyone kind of cheats and tries to favor their own economies but china has unabashedly and um without pause just double down double down double down they're building this massive mercantilist engine that has completely distorted the whole global economic fabric and so your prediction was that this was going to lead to the end of this global order and decoupling and countries are going to go their own way.

4:43Yeah, we see a bunch of things converging all at once and they all kind of take place in the supply chain. You have climate dislocation. It's not favorable to talk about these days, but it's still happening and it's getting worse. And these are playing out across these economic systems. You have the rise of China as a pure competitor, as the strategic chokehold on some of the most important technologies and supply chains that exist. You have this massive financialization and debt accumulation that is coming home to roost and it's going to play out over the next 10, 15, 20 years in pretty unpredictable ways, but it's going to be a big deal.

5:26And now we're seeing artificial intelligence and automation and the promise of robotics. And I think all these things intersect in how do we make our stuff? Who do we buy and sell from? and what's that fabric of the world's physical production. And we're recording this on May 14th, just after the weekend deal between the U.S. and China that pauses higher tariffs between these countries. Evercore, ISI, calculates the effective U.S. tariffs on China will be 39%, the highest on any major country, and dramatically more than the effective rate of 8 % on the U.K. after a deal announced earlier. A floor and a ceiling, if you will, as our colleague Greg Epp wrote the other day, at least temporarily.

6:11And so much confusion, I think. Since Liberation Day, April 2nd, when President Trump announced all of these different tariffs that really, in some ways, surprised people at kind of the scope of it all. So much confusion. You, at your perch, have this kind of insight into what CEOs are talking about. has your phone just been ringing off the hook? What have those conversations been like? Probably half of our business is actually selling to government agencies, and the other half is selling to the private sector. And we help both parties to understand and navigate these big supply chain network-shaped problems like tariffs and trade disruption and the rest.

6:54So since then, and to some extent in the run-up to it, the phones have been ringing off the hook. And from a policy design and enforcement standpoint, you really have to know that whole fabric of production, right? And so to understand the impacts of tariffs and, you know, if I say that, you know, these metals or these semiconductors or these pharmaceutical ingredients are going to be tariffed at this level, well, then you have to be able to answer the question, what in America breaks when I push that button? And we're actually in a position to answer that question with our platform. And then from a compliance standpoint, it's all the obvious questions, but they're urgent.

7:37And these are now board level and C-suite level consuming issues. So tariffs are the burning hot thing, but the even bigger concept is that the entire global trading system is fundamentally breaking down. So is that a conversation you're having with CEOs? They're like, we think the entire global trading system is breaking down? Every single conversation with the board member or a CEO or a CFO is precisely that. So I had one board member of a Fortune 50 company tell me that this is economic Pearl Harbor and the world will never be the same. This being the current tariff regime? Yeah, so Liberation Day as the event, but the event as the expression of, okay, this whole paradigm of the last 50 years is done.

8:26Other than that, how was the play, Mrs. Lincoln? I mean, economic Pearl Harbor. How so? And then what comes next? That implies that we're about to have economic World War II. I think so. Yeah, we're clearly in a second Cold War right now, right? And who are the players? Is this the US versus China? Is this US versus China and Russia? How do you see the board? It kind of depends on some of the moves this administration makes, but you can clearly see the blocks forming, right? You've got an economic block and a security block led by China, with Russia, with Iran, with some of the former Soviet states.

9:10And we'll see, you know, how these next dominoes fall over the ensuing months. You know, does the Trump administration really want to try to be as self-sufficient as possible? And we're going to play by our own rules and people are, you know, the power of our own economic and military might is going to just draw people to us? Or are we going to actively be in the business of coalition building? I think there's arguments on both sides playing out. We'll see how the cards turn over in the coming months and years. So something like a US-led and Chinese-led order, where the competition is in the supply chain, it's in cyberspace, and then, of course, there's a military component and everyone's rapidly building up new capabilities.

9:56They're reconfiguring their assets and their positions on the board and getting ready for a potential event in Taiwan. That's the 2020s and into the 2030s. That's the board I see. Are you saying that there is evidence in the data that you have that there's a realignment that anticipates this cold economic war turning hot? That's a little harder to say and it depends on humans making decisions at the end of the day. What we are seeing unambiguously is that both parties are making moves to become economically decoupled, especially on aerospace, pharmaceuticals, military industrial complex, the things that you kind of need to sustain yourself in the event of a war or a conflict.

10:43And then what you're seeing is this massive buildup and mobilization of both troops and material and assets and bases in anticipation of a Pacific conflict. Our platform tells some of the story in terms of the supply chain angle there. You see the new companies being formed. You see the new autonomous systems getting built. We can see what China is doing to react to and protect against some of those vulnerabilities that they have in their own networks. So you can kind of see the whole network being refactored along these dimensions. But at the end of the day, you know, does a war become hot? That's not something we can say.

11:24Decoupling that term almost sounds like something Gwyneth Paltrow and Chris Martin did a few years ago. But in the serious terms, this is the idea, I think the basis of what the Trump administration is trying to do with all of these different tariffs that really seem the bigger picture is to kind of unentangle the U.S. kind of key industries from the China supply chain, right? And that's where your company has interesting insight, right? I think of your company almost like Facebook for supply chain or LinkedIn for supply chain, right? It connects the dots on how, let's say I'm Nike and where I'm getting my shoelaces from or the rubber in my soles or the cool swoosh, right?

12:13That's the information you have, right? And it seems simple, right? I'm getting the shoelaces from wherever, right? But the way that these supply chains, these value chains have come up over the last 20, 30 years is super complex. And what have you found? What do you see in the data there? So what we're seeing in the data is the strategic separation or decoupling and disentangling of those supply chain networks. Like where do the raw materials come from? How are those transformed into intermediate components? How are those then assembled into an iPhone or a garment or whatever? The hard part is you've got these component parts where China's amassed incredible scale and incredible expertise.

13:06And in a number of cases, they've amassed monopoly power. So, you know, a lot of people have heard of the term critical minerals or rare earths. So these matter a lot. This matters for artificial intelligence. We can't make a missile without rare earths. We can't make an automotive product. So you kind of go down the list and it's like all the things that really, really matter. China now has between a 60 and 99 % market position on all of those critical minerals and magnets. Yeah. Can you say a few of them? I love hearing people pronounce them because everybody does it different. Yeah. Gallium, germanium.

13:49You picked the easy ones. I know I did. Antimony, that's my favorite. That's the deep cut. Not so many people know you need those to make ammo. So think about that. You know, in the event of great power competition, your competitor controls your ability to explode something. A spokesperson for the Chinese embassy in Washington, D.C. told us that China will continue to honor the commitments it made when it joined the World Trade Organization and that its partnership with Russia and Iran are not directed against any third party. Taiwan's Ministry of Foreign Affairs did not respond to our request for comment.

14:25We just heard why President Trump's Liberation Day was an economic Pearl Harbor, according to one board member at a Fortune 50 company. Next up, Evan Smith will take us into the meat of the conversations he's having with members of the Trump administration, such as what do they plan to do in the coming months. It's going to be more of this, you know, big swing here, big announcement there, maybe a precision strike here. And we're in a big negotiation phase where I think the administration is hopeful that enough countries are going to come to the table willing to make enough sweeping changes that, you know, it starts to snowball.

15:04Stay with us.

15:16So now it seems like we're getting a little break from the Liberation Day tariffs. Break, I'm putting in scare quotes. So they've been paused on nearly 100 nations. Are things back to normal? Can we all go home now? Can we end this podcast right here? Look, even if we, you know, got to a place tomorrow where it was like, okay, we're done. Let's go back to the way it was, which that won't happen. But let's just imagine the scenario. So we're going to live through what's called a bullwhip effect in the world economy, in the global supply chain for the next nine or 12 months. It was such a big shock to the system.

15:56So the logistics providers themselves, where do the containers go? Where are the ships? The distortion to inventories, the distortion to orders, it's this massive shock to the system that's going to reverberate for the rest of the year easily. So even if we just magically kind of went back to the way things were, we'd still be living through that shock. I think the other thing that this did, back to my comment about economic Pearl Harbor, was this really rubbed every board and C-suite nose in the fact that geopolitics are now primary in governing and steering global businesses. So it's not just like the market rationale, who's growing what, where, what products do I need to get where, at what cost, with what distribution networks and supply chain.

16:50It's it's geopolitics front and center. And that's not going to change. Right. Like we the the rules of the game just changed. And what we saw China do in response is they put this gun to our head and said, you know, if you're going to cut off our trade, we're going to cut off your ability to access these critical minerals and magnets. we're going to shut down the most important production chains in your country. Because those magnets are in motors and all sorts of high value production. Weapons, motors, semiconductors, advanced electronics, autonomous systems, all of our information, telecommunication infrastructure.

17:30Short of selling our bonds, that was the biggest lever they could pull. And what do you hear? Half of your business comes from government, presuming a lot of it is the federal government, presuming you're talking with the Trump administration. What are you hearing from the Trump administration? Yeah, I don't want to be super specific, but yeah, we're - We like specific here. Sure. Please relay your last conversation with Scott Bessent. I will not. So I'm very confident that the effort to refactor the entire global trading system is in the first or second inning, not the ninth. First or second inning.

18:15So it just escalates here, more chaos ahead? It's going to be more of this big swing here, big announcement there, maybe a precision strike here. And we're in a big negotiation phase where I think the administration is hopeful that enough countries are going to come to the table willing to make enough sweeping changes that it starts to snowball. That's the hopeful scenario. And then you can see it going in other ways too, potentially. To put a fine point on it, you think there's going to be more big swings as these negotiations play out? I am 100 % convicted. We like specifics here. Let's talk about some industries.

18:56One of the concerns in the automotive industry is the underlying risk for potential supply chain disruption. We heard just the other day from Ford Motor as it was suspending its annual guidance that part of the reason they did that was because of worries over the industry-wide disruption that could impact production. I'm curious if your data shows any signs of distress or interruption in the supply chain for autos that we should be worried about, or is it still too early? The short answer is yes, and the details then really matter. We do a lot of work with the automotive OEMs and their large tier one and tier two suppliers.

19:37There's 10 ,000 parts in a car at minimum, usually. So I think the auto industry has been learning since the first Trump administration and from COVID that they have this kind of structural vulnerability to these kinds of issues, geopolitical and just general trade disruption. So there's been a lot of progress in that industry in building up inventory buffers and dual source capabilities, not everywhere and not enough, but better than, say, eight years ago, right? So we are seeing the kind of obvious things you would expect from this. So like semiconductors, memory chips, critical minerals, anything that was coming from China into the North American value chain fell off a cliff, right?

20:24And then you're seeing the reciprocal tariff that was a big thing and then it came down, but the tariffs persist. The Trump administration has rolled out a number of these, the most painful of which for the automotive industry is the steel and aluminum 232 tariffs. And those were not repealed. So anything with steel or aluminum that isn't made in the United States is subject, right? And then there's one coming soon on semiconductors. So you're seeing drawdown of inventory everywhere. You're seeing a scramble to find new things that are more easily substitutable, like memory chips away from China.

21:07And you're seeing an inevitable, pretty substantial shock to the spend profile of those supply chains at just about every level. Like everything in the automotive supply chain is getting more expensive. And even though we've kind of gone off the 145 % total tariffs with China, there's still going to be tremendous pain in the automotive sector. So in the practical sense for the consumer, does this mean fewer choices and higher prices at the car dealer lots here? Certainly in the near and medium term, no doubt about it. I mean, I think, not to pick on Ford, but just listening to that call the other day, I mean, they're predicting, I think, 1, 1.5 % increase in pricing.

21:52You're thinking maybe higher? Depends on how long this is sustained. But based on what we see in our own platform about automotive companies and their supply chains, I think, you know, one to one and a half percent is a very optimistic forecast. So Tim got to ask you about his favorite hobby horse, autos. I want to ask you about mine, which is, of course, AI data centers. Not as sexy. Yeah. Yeah. I mean, Tim has a garage full of autos and I have a binder full of AI data centers. You have an AI data center? I just flipped through it, sigh, longingly. Oh, okay. So, you know, my favorite thing, it seems like it's threatened by these tariffs.

22:40You know, frankly, I cover this and I don't understand it. So I really want to hear your insights. Your team did an analysis where you said tariffs are going to add billions to construction costs of AI data centers. But, you know, it's not like we're taxing concrete. Why is that? Well, I don't know the bill of materials for an AI data center off the top of my head, but I know enough to know that there's a tremendous amount of copper, steel, aluminum, photonics, memory chips. We all talk about the GPUs as the star of the show, but there's chips throughout a data center that are involved in memory and orchestration of those entire arrays.

23:27In any case, this is kind of the tough thing to grasp in all this tariff conversation. They accumulate like plaque, right? So it's not just about what the United States is doing with respect to the import of a finished iPhone or pick your product. It's anytime the goods in the value chain cross a border at any level of production, right? It's from raw materials to the intermediates to the finished products. They're going to be accumulating tariffs. And as the EU retaliates, as China retaliated, that just kind of stacks and stacks and stacks. And then we have these special tariffs that adds more and more and more.

24:09It's not merely about the finished product coming into the United States for say a toy or a garment at the store, right? Especially in these big, complicated value chains, like an automotive value chain or a data center value chain. Those goods are crossing lots and lots and lots of borders. And every time they do that, they're building up this base of tariffs. We reached out to Ford and the U.S. Commerce Department. Neither responded. We just heard how tariffs will wallop both the automotive and the AI industries, but that's just the beginning. Evan Smith believes that Golden Arches diplomacy is dead and we're entering a completely new and tumultuous age.

24:50But who will be the winners and losers? Now you have Russia asserting itself, Iran asserting itself, and most of all, China asserting itself. And guess what? Now you're seeing the breakdown of the free trading system as those geopolitical interests become primary over the economic interests. That's next.

25:20Let's go back to where we almost began this conversation, the Golden Arches diplomacy that you kind of referenced. It's almost 30 years ago, globalization was very in vogue, and Thomas Friedman had his Big Mac diplomacy theory, the idea that no two countries that both have a McDonald's have ever fought a war against each other. Kind of the idea that free trade would interconnect the world in a way that would prevent armed conflict. Well, in hindsight, that seems maybe idealistic. Why was Thomas Friedman wrong? Why were so many people wrong about this idea that free trade was this kind of ushering in kind of a utopia for the world?

26:01They got it exactly wrong, meaning they confused the causality. Look, the point is that we really came out with this very triumphalist, optimistic, cheerful view that globalization, free trade was the end state. Right. And then what I've unlearned since then, what I've come to realize is that it's literally the opposite. Free trade does not create peace. Peace creates free trade. Peace gives rise to free trade. And we all sort of came of age in an era where we had a unipolar security umbrella provided by the United States policing all of the waters, right? Maritime security, free trade. That era is over.

26:59And now you have Russia asserting itself, Iran asserting itself, and most of all, China asserting itself. And guess what? Now you're seeing the breakdown of the free trading system as those geopolitical interests become primary over the economic interests. You call it the end of globalization 1.0, I believe. I do. You have a date even. That was Thursday, February 24th, 2022. That was the day that Russia invaded Ukraine. And then I think the debate was over. That was a McDonald's having nation invading another McDonald's having nation, right? If there ends up being a rival supply chain, like this Western-centric one that you're talking about and a China-centric one, what does that change, materially speaking?

27:44Are we going to start having, is Mexico the big winner? Or how do you see the world, how do you see the pieces of the puzzle being reorganized? A very long Mexico. I think that's a pretty good bet. You have Mexico. So tell us more. Why? They've got a lot going for it. The demographics are stellar. So young population rising into the working age, increasingly well-educated. They have obviously proximity to the largest importing economy on earth, the largest market on earth. They have a free trade agreement that persisted through all the thrash. I think a lot of the point of the thrash was to migrate more and more of global businesses into the USMCA, the North American Free Trade Agreement qualification.