← Azeem Azhar's Exponential View
Azeem Azhar's Exponential View
What it’s like on the frontlines of Trump’s tariff’s war
00:43:19
In this episode, Azeem Azhar speaks with Ryan Petersen, CEO and founder of logistics platform Flexport, about the current state of global trade amidst escalating tariffs, geopolitical tensions, and technological disruption. Ryan offers unique insights from the frontlines of the US-China trade war and explores how businesses are adapting to a rapidly changing landscape.
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- [00:00]
A
Global 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?
- [00:10]
B
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.
- [00:20]
A
They're sitting there thinking, okay, we still have to serve our customers. They're trying to figure out where they can reconfigure and how quickly they can do that.
- [00:28]
B
Ironically, like, some of this stuff might increase the demand for Global Shipp. A lot of what's happened is manufacturing is moved, final assembly, manufacturing is moved to places like Vietnam, but a lot of the components are still made in China. You're like, oh, trade's going to go down. Like, actually trade might go up.
- [00:42]
A
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.
- [00:51]
B
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 and 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.
- [01:12]
A
I am 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, crazy time for you. So thank you very much for being here.
- [01:37]
B
Yeah, it's great.
- [01:38]
A
Now, let's start with the biggest headline. Global trade is under immense pressure from many angles. Every angle, potentially. 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?
- [02:02]
B
Well, the importers from China, people shipping from China to the US are basically a state of distress right now 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 Biden 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. So 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. Right.
- [02:45]
A
So when the containers arrive in one of the big ports in the US they're slapped with an additional unplanned.
- [02:53]
B
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, you know, take a huge loss. And I think that kind of conversation is happening in businesses all across the United States today. And so it's, it's very ugly. There will be bankruptcies from this. And so my, my personal prediction. You didn't ask me my prediction, but I'll go ahead and say it is. I just think there's gonna, there's gonna be a trade deal between the US And China. That's my prediction. I have no, no firm evidence for this. But I can't imagine that Donald Trump wants his legacy to be like in his first quarter in office, bankrupting thousands and thousands of businesses and jacking up the unemployment rate. And you know, I mean, consumers are one thing, they'll be upset they can't get their stuff, but they can buy other stuff instead of that.
- [03:41]
A
Let's dig into that a little bit because, you know, for many of us, what we see of globalization is that we can buy a billion things on, on Amazon. 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, well, 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?
- [04:14]
B
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. I mean, that's the beauty of the container. It's standardized and you can just put anything that fits inside the rectangle can, 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 that 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. And 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 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 got, you know, no one company makes all of the things. You're like buying little components from other companies. And so therefore you have an ecosystem. And that basically is in southern China.
- [05:36]
A
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. Who's not good. Which is why it's not a simple case of lifting. 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. 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 what's in a ship. Like in dollar terms.
- [06:11]
B
Well, by the way, this is the first opportunity we have to just say how dumb the industry can be. Sometimes it's 24,000 TEUs, but that's only 12,000 containers. It's 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% when they.
- [06:29]
A
Because you got the 40 foot.
- [06:30]
B
But they're selling TEUs, but they may not have TE. He's like, we can't keep doing this.
- [06:34]
A
Okay, so let's just clarify that. The TEU is the standard packet size of a container, but actually containers are 40. TE is 20, containers are 40 foot long. So a TEU is half of the container we see on the back of the.
- [06:47]
B
It's like measuring your revenue in 50 set pieces. It's pretty crazy. Anyways. Yeah, the Ships are enormous. The ships, 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 Felixstowe. I have to check the European networks. But US cannot. The US ports 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, they go deeper. They need a deeper draft. I think the largest one that can come to the US is more like 16,000. US 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 us, the mid class super carrier, aircraft carrier. They dwarf their size. Yeah.
- [07:42]
A
So they're moving around at the 16,000 TEU equivalent coming to the US and 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 rich.
- [08:08]
B
Yeah. You've seen global trades, percent of GDP go up and up and up. I think it's around 50% now. One 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. So 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. And we got teams that people have flexboarded, 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, yep, this is now a 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. You move it once from China to Vietnam and then once from Vietnam to the U.S. so ironically, like some of this stuff might increase the demand for global shipping. I still haven't 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. Like actually trade might go up.
- [09:15]
A
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, they're not really supply chains. And this the reality of the complexity. So that's what happening amongst your customers and your teams that 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.
- [09:47]
B
Absolutely. And as you know, you mentioned at the outset, 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 paused. But when reciprocal tariffs were coming down the pipe, you know, a week ago this was one of the hot topics, and it may come back in 90 days when, when this thing comes back around is that semiconductors are duty free, but graphics cards are not. And so if you take a GPU and you have 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, stick it on the.
- [10:26]
A
PCB and you put the edge ports and all that stuff.
- [10:28]
B
Do a couple more things. Now you' got a very high duty product you import. So it might actually lead to some American manufacturing because we're going to import the, the semiconductor separately from the PCB and the other components, assemble it in the US and then send it back to wherever in the world to turn it into a computer and send it back over. And you've now said that, 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, just to save on 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.
- [11:15]
A
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. I think you, you see 3 to 5% of us trade across your, your platform. Is that, is that right? Just 1% of global trade, roughly, that you see across the platform?
- [11:35]
B
No, it's more like 1% of us trade a little bit smaller on some other markets. But yeah, we're pretty, it's still pretty significant.
- [11:41]
A
What have you sort of numerically seen? Have you 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?
- [11:51]
B
Yeah, it's still, 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. A week ago we called all of our, 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 so we're still kind of recalibrating. What does that mean for the ones who are just China oriented and presumably the other ones with the 10% duty 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 going to pause all operations. A lot of what happened is this date was known, liberation date has been known since Trump took office effectively or maybe since he got elected. You didn't 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 stocked.
- [12:49]
A
But it has to get here, of course, right? I mean, it doesn't matter if you order.
- [12:52]
B
No, no, actually the way they made it was it just has to depart. The vessel has to depart at origin. I had to depart and now it's in the past on the, by the 9th of April, it had to depart to avoid the entire duties. So there was a mad scramble last week to get everything loaded and then now people are, 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. And 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. Stand being, showing that they're strong. And 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. You know, it's not uncommon, to be fair, but yeah, totally, 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. And then the two leaders meeting is a formality. Right? Trump doesn't care if 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.
- [14:30]
A
That's probably something that parties all around the world understand. But 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, when you're 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.
- [15:02]
B
Mean, they're pretty pissed off. People have built businesses over a decade playing under the rules of the game, as it was defined as the job of the government. Define the rules, and then the business people got to find a way to make money, whatever those rules might be. But having those rules changed out from under you with no notice overnight, I mean, you had some notice. People knew that some things were going to happen here. But, you know, it takes time to shift a supply chain, to make decisions, et cetera. So, yeah, people are pretty pissed off, 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, maybe your business model doesn't work and what are you going to do? Seem pretty, pretty terrible.
- [15:43]
A
Yeah, I mean, I think it is pretty terrible. I think we'll hear more than individual stories over the coming weeks, right. As the reality bites and people are able to sort of try to take stock of where they are because people are not running with 200% profit margins, by and large. So, you know, you have a hundred percent 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 a thousand A.D. and you know, people like to travel, they like to trade, and trade is, is, is very, very helpful to improving the quality of life. It's actually an exponential, right, In a sense. I mean, it's, it's not the, it's not a Moore's law exponential of 60% a year, but it's 4 to 5% over centuries that 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.
- [17:00]
B
I look at it that way as a blip. You look at that long run of trade, it has grown 4% annually since, 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. You know, the Black Death doesn't show up. There's some terrible things that happen that don't compare to this.
- [17:30]
A
Right. What does show UP is the 1890s process of de globalization that took place. And also the 1920s or late 1990s.
- [17:42]
B
Those were very real events. But the growth has been so much that the, you know, just looks really tiny now because, you know, 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 because 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? The 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 know, you can think of places like Venice or even Brug, 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. I mean, they can do some stuff that might lead to some more American jobs, but at the cost of making every American worse off.
- [19:37]
A
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 just, we live with the benefits. But they've had Quite a tough 10 years, logistics professionals, haven't they?
- [20:10]
B
Yeah, 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, 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.
- [20:39]
A
Even, even, even since tariffs right. In 20, 20, 16 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? I 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.
- [21:22]
B
Right.
- [21:22]
A
They've not been able to keep them open by a what is barely a fully fledged nation. Right. In terms of the Houthi rebels. Right. So there's a point of fragility on a point of resilience is how we bounced back from COVID And then we get to the point of fragility, which was a single tanker. The ever green. Ever given. The ever given. Ever given might get 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?
- [22:00]
B
I think it's quite resilient because it's decentralized and full of lots of actors who are making decisions on their own part. And there's not. There's not really. There are some. Definitely some choke points, and we see that with the Red Sea, the Panama Canal, Straits of Malacca, you know, South China Sea there. There's some choke points in the world that create some fragility, but in general, it's a relatively robust system. And it has been the. 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, 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. And 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 route 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 the 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 of the modern world's built off of that freedom of navigation that we do, we do take for granted. And 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. Yeah. The us, 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.
- [24:09]
A
Do you think it was a reasonable deal for the US Navy to. I mean, it cost a lot. It cost a lot to run those super carriers, right? They. They cost. 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. Because things are more efficient. Was the US getting a good deal out of that?
- [24:30]
B
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 is 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. And so, in general, it's created a set of problems. The problems are easy to see. The benefits are less obvious to you, take it for granted more. But the fact that, you know, you can just. When I travel, as an American, you travel abroad, you're like, man, this place is cheap. Wherever you go, it means you're rich.
- [25:03]
A
Right? Of course.
- [25:04]
B
Yeah.
- [25:04]
A
And 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 it when you go into the local coffee Shop. Right. America is rich and it's connected to the reserve currency. It's connected to the infrastructure that, that has enabled this, you know, this globalization. I want to come to the Houthis because they are, they are underrated in, in all of this. How damaging is, has it really been for cost? Right. I mean, it's, 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?
- [25:47]
B
I think it'll turn into a blip because last year it was very expensive. Last year you raised, especially for Europeans, it raised the price of shipping a container from Asia to Europe by 4. 4 times. 3 to 4 times, depending on the exact route.
- [26:01]
A
But 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.
- [26:07]
B
Yeah, something like that. And it raised the price of freight on all lanes, even Trans Pacific. That has nothing to do with the Red Sea. The price went up two to three times. You know, so. Or kind of call it from long run average of 2000 bucks to ship a container to more like 5000, 6000 almost to ship a container. But it does look like that'll be temporary, even even though the Houthis. 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. And nonetheless, the price is going to come back down. Has already come back down, largely because if it's a supply and demand thing, and the carriers, the ocean carriers who operate these container ships made a lot of money, sort of famously during COVID the price went so expensive, they made a lot of money and they reinvested it in more ships. And it's how, you know, you have a functioning market. Some people allege that there's some kind of a cartel and they were taking advantage and jacking the price up. But they immediately went all. And went crazy, buying more ships, probably more ships than they need. And we're about to head into a world, especially with these tariffs of massive overcapacity, where you have too many container ships relative to the volume of cargo that needs to get moved and the price of freight's going to be cheap again. And if now the Red Sea were to open up, the price of freight's going to collapse.
- [27:21]
A
Collapse, right. Yeah, because it would be a good strategy by the Houthis. If they want to create some upset in the global economy. Let me ask you a question that I want us to think about, this long run that you've talked about. And one of the things that's happened is that the cost of shipping has been on one of those inverted exponential curves. It's just fallen so far over a hundred years just to move something across. This sounds a bit absurd, but does a temporary tripling of the cost of a, to ship a container that's full of LCD TVs against the long run of where prices were 5 years ago or 10 years ago, is that really an upward pricing pressure for the consumer or is that just something that we could actually manage and absorb? Right. Because the curve is kind of doing that. Right. It's just coming down year after year, decade after decade.
- [28:16]
B
Yeah. Well, I just mentioned the price of ocean freight, but it's obviously taking a lot longer. So that's a lot more inventory on the water, a lot more working capital. So there's, there's definitely economic impacts here and then more so as a symbolic and potentially strategic change of the environment where if the Houthis can do it, then why not somebody in the Strait of Malacca and you know, Myanmar is an unstable regime. Maybe they decided to go a little crazy down there. And maybe somebody, you know, now Trump is going down and saying, we're going to take back the Panama Canal. And, but you never know. I mean, the world can become very unstable very quickly. It takes much longer to build things than to destroy them. And so it's, it's more of a longer term. What are the longer term implications of the US Navy no longer providing that security guarantee? And what will happen then? It's, and you know, the world is. Before the United States started doing that, we lived in a pretty crazy world. There were, There are six different times when private American citizens conquered foreign countries and turned and started their own country. Six different times that's happened. Wow. Without the government's involvement. So.
- [29:20]
A
Oh, let's have the six go on.
- [29:23]
B
Well, the United States itself, number one. Number two, the Kingdom of Hawaii. Now we, The Kingdom of Hawaii didn't exist. There was no kingdom of Hawaii. When James Cook got there, there were 40 different tribes and an American guy and a Brit. Together, they, they met some Hawaiian princesses and decided that they would help their uncle conquer all the islands. They got 10,000 rifles and they went island hopping and conquered it all and created the Kingdom of Hawaii.
- [29:51]
A
Yeah. Okay, we don't, we, we don't want to be doing that. You're right, right. That's that we live.
- [29:57]
B
We take it for granted. The US police, the US Global police that prevents some of this stuff from happening. And by the way, maybe they're reining in the US citizens ourselves. We got 400 million guns over here and there are currently 21 countries without an army. So that's a, that's kind of an ugly ratio if you're just saying, hey, let's get the United States military to back off. Like you don't know what's going to happen next. I mean I'm sort of, are you saying in jest here? But you don't really want a world of just pure chaos.
- [30:25]
A
No. So in the case of your business, flexible, right, you see large amounts of trade, you understand who wants to move what where you are working to. I mean of course one of the costs of trade is moving the goods in these efficient containers. There's also all the paperwork which is another substantial cost. And you've taken aim at that within, within Flexport. But what are the changes that you have seen in the dynamics and structure of how trade operates in the decade or so that you've been running this business? You know and I think it's particularly interesting because I would guess that Flexport customers are quite forward leaning.
- [31:06]
B
Right.
- [31:06]
A
Because they're working with a young startup rather than, you know, paper ledgers. So what, what is that change? Is that, is there a sort of structural theme that is common?
- [31:16]
B
Yeah, I mean, well, the biggest one obviously is the rise of technology. And when, when we started Flexport, the reason I started Flexport was I just was very frustrated by the freight forwarders. I used to run a business, an E commerce company and we was pre Shopify. So we built all of our tech for online checkout, shopping, inventory management, invoicing customers and logistics. And we had a lot of logistics tech and we tried to interact with the freight forwarding international side of things. Everybody treated me like I was an idiot and they made me like call them and email them and there was no web portal. And it was those two things, it was tech and the culture of customer obsession that was missing on the tech front, you know, in the last decade. First off, Flexport driving this, giving people visibility, control, where's my stuff, when is it going to arrive? Accurate data connectivity between all the different parties in the chain and now with AI just doing incredible things. So that's, we're proud to say we take a leadership. I think anybody in the industry will say we influence the industry. A lot of customers a Lot of companies have started to invest because they have to. They may have made those investments anyways, but definitely it was a sort of a survival thing if you don't invest in technology. It became very clear that Flexport was going to hit your launch. And so, yeah, you've seen a big rise of technology. And I would argue no industry needs tech more. I mean, it was kind of crazy that 10 years ago, in 2015, there was no technology software to manage this. No, I mean, how are you going to run a globally connected network for trade without the Internet? It's insane.
- [32:46]
A
Well, I think of the container network a little bit like the Internet. You know, you have Internet packets and a container of the box. Right. Mark Levinson's phrase for it is like an Internet packet that gets moved around and you don't know necessarily what's in your Internet packet unless you inspect it. And likewise of your container. And then you have things like the Port of Shanghai, which is, I guess it's like three guys and a dog. And it's like millions of containers going through there in a kind of completely automated way. It's a world away from the Steve Doors of West side Story.
- [33:21]
B
Yeah, I think there's a lot of analogies from Internet packet switching networks, but it's not on the Internet. Stuff just works. Or the electrical grid is another good analogy. You flip the light switch over there and you're controlling a power plant in real time. But when you buy something on an online e commerce site, there's not. That's what we're building towards. Our vision is that then it'll kick off this replenishment chain, that the order will get submitted to the factory. That's how we've built our system. You place orders through your factories, through our system. Those factories become users, create bookings to go replenish and ship the cargo back with algorithms to optimize the loading of that container. Route it correctly on the cheapest way that'll get there on time, determine where to ship it, all of those things. That's not how it's worked. It's a bunch of dudes on telephones. I call it freight. It's freight forwarding. I often call it freight email forwarding. People just passing PDFs and attachments and it's all unstructured data. So, yeah, that's a big change. I think you're. It's also. It's like, I don't really worry if there's more. I have a conviction that there will be more trade in 10 years. I'm not certain a bit, but I believe it. If there's not, it won't. We do know that the world will want more technology to manage these things that will want lower transaction costs, better user experience, better data to make decisions about your supply chain. They're going to want AI to make more of those decisions and execute more of the transactions on their behalf. So like we, we have conviction that we, you know, one of our core values play the long game and it doesn't really matter if trade goes up or down for Flexport's health. We obviously want that for the world.
- [34:55]
A
Well, let's bring these two themes together.
- [34:57]
B
Right.
- [34:57]
A
So we started talking about the trade war that is emerging, the volatility of the messaging that's coming from different places, the arrival of tariffs and the pause. And on the other hand, we've talked about the technology's role in enabling and affecting trade in a sense in the last few minutes we'll talk about maybe what comes next. But there is a sense of once bitten, twice shy.
- [35:23]
B
Right.
- [35:23]
A
So at a national level and amongst customers and manufacturers and retailers, they've been exposed to a vulnerability. Right, that they didn't know they had. And the last time probably that happened was with COVID and people moved to China +1 or China +N and reshoring or friends shoring or close by shoring. How do you think they will respond? Right. Is it a sense of there will be more regional trade blocks, there will be more regional sourcing, people will not just gradient descent to the cheapest possible supply and say we need to bake in some resilience into our business model. Is that the pattern of increasing interconnection and complexity that you think might happen or is there just a hysteresis effect? It was working really well. Apart from these things that are bigger than the trade disagreement between America and China. And that's a configuration that makes sense.
- [36:20]
B
Well, I think it was working well for company, whether it was working well for populations, for countries. Is it debate? That's like largely not the thing that most business people are concerned about. You know, buying cheap stuff from other countries and selling it to the American consumer was working quite well if you're the, if you're the CEO of a company.
- [36:38]
A
Right.
- [36:39]
B
So the big change here is. Yeah. Now all of a sudden you realize, oh wow, things can change in an instant. Politics is more important in your business than you than it ever was before. And you're all of a sudden have to figure out, be very agile to respond because government can be really unpredictable. And now we're learning government can move really fast or used to a world where government, you know, they, they make an announcement and a year later customs would implement that and you'd have some time. So to me, I think like the biggest thing that businesses need to do and the, the ones that we live in a Darwinian world. And so the ones that are good at this will be the ones that survive. God, they have to learn how to be incredibly adaptive and run what John Boyd coined the UDA loop of observe, orient, decide and act and figure out, you know, who's the best at running those loops of observing what's happening in the world. Figuring out orienting means figuring out what it means for you. Who needs to know, go make some decisions and take action. And so you're going to see nimble companies survive as always. You're going to see the adaptable one. That's Darwin. And. But Darwin's going to be much meaner than he's been in the last decade, it sounds like. And right. Some, some companies will thrive in this environment because it is a competition. At the end of the day, it's always competition in business. And so there will be winners and losers and some people are going to figure out how to, you know, you see this with some of our customers in the first trade war. It's too early in this new one to say what would the winners and losers look like. But in the first time around, you have a company that just set up their supply chain in China. Few the young company and they just, when it happened, like, cool. Yeah, we're just shifting to Korea and you know, and the company's been around for 50 years buying from China. They don't know what to do. No one in the building remembers how they did this in the first place. So it's going to be that new competitive dynamic that's more important than ever. Is, I guess the key word is agility.
- [38:27]
A
Yes, it is. It is agility. And I love the OODA loop. Right. The sense that that drives your agility. If you're able to get the data, read the room, make the decision, orient yourself, evaluate your decision more quickly than your competitor. You can adapt in the right kind of way. And I can imagine there are so many different classes of companies and if it's lower value consumer electronics, perhaps those can come elsewhere. But if you're building something sophisticated like the iPhone, where it is an ecosystem of extremely complex capabilities that has evolved over two decades, it's quite hard to imagine that you can move Any large portion of it in anything less than five to 10 years. I think the shift to India, which is less than 10% of iPhone production, took three to four years and cost tens of billions, maybe more. So that there is this quite a complex pattern that emerges, which I think also mirrors the complexity of the economy. It's very hard to imagine a world where there's any alternative to specialization. As products get more complex. Right. That the advanced productive capabilities, they enable more diverse exports which feed back into advanced productive capabilities. And can you really break that cycle? And I'm not sure you can. I don't know what you think consumer.
- [39:52]
B
Behavior is going to shift. It always does. But it's not just though, that it shifts to like, oh, now we're going to buy stuff that's made in America. Like, we have customers that import pizza ovens and for your backyard.
- [40:02]
A
Oh, yeah, I love those. I have one.
- [40:03]
B
Yeah. Yeah. Cool. They're great. Well, the price of those in the United States is gonna. I think they're not 100. If they're made in China. It's like 100 something percent duty that just went on it. And you know, you might not prefer to just go buy pizza in a restaurant, which is duty free made in America pizza. So it could shift to whole new categories of things and not. And that's like kind of almost a perfect replacement, even though the different product. But in my tip today, I'm gonna go to Hawaii and take a vacation, like, instead of buying the new iPhone. I mean, so they're going to be ugliness. There's going to be losers in these things. Just like, you know, it's. Again, Darwin is a good analogy. You have some massive shift in the environment and the climate or something else. And it's not just that finches get replaced with another finch. It could be all of a sudden all the finches go extinct and there's now some, you know, swimming iguana on there. There's a million different ways that this could play out. And that's the nature of business. There's nothing new. But centrally planned economies have been proven to just be disastrous. And so I think that's the biggest fear that I have in all this. It's not like no business should ever go out of business or that it's all sacrosanct and you can't touch an importer's business model or something. It's much more that like centrally planned economies, we just know that they throw off poor results over the long arc of history.
- [41:15]
A
And this has been such an exogenous shock that has come, even if it was telegraphed a little bit. Thank you so much for spending this time with us. I'm going to come back to you with one final question. That question is, you said, well, you think there'll be an agreement, and an agreement will emerge between the two key players, China in Beijing and the US through the White House. What do you think that will look like and when do you think we could expect it?
- [41:43]
B
I do think that, but my confidence level is probably like 60% or 70% or something. So you're betting your company on it? Maybe not a great deal. I think it has to involve currency. I think there's going to have to be something around the Chinese allowing their currency to appreciate. If you want to actually address the underlying structural issues that the administration says they want to address is you have to allow somehow that currency to appreciate. It also sounds like dollar devaluation. Looks like the market's taking care of that on our own. The US dollar is down 9% this year, year to date. So I don't know if that's by design or, you know, some people are looking at that and Trump's policies, disaster. But, like, kind of what he wants is to make it cheaper to buy US Exports, so our manufacturers are more competitive. So there may be some element of that, you know, they're not going to be able to get to the same page on Taiwan. So I don't think that that has to be on the table. There's. It's not, I'm not saying these countries are just going to reconcile all the issues that they'll have between them, But I can't imagine that the duty rates stay at this level because trade, you effectively have got a trade embargo between the US And China. And that's maybe, alas, you know, I mean, Trump's kind of a hardcore dude in some ways, but it's, if this, if this sticks, he's going to have a massive legacy of creating huge amounts of unemployment in the United States. And it doesn't seem like what he's actually trying to achieve, so.
- [42:58]
A
And he likes doing deals with, with that. Ryan, thank you so much for being generous with your time today and joining me on, on my show. I will say to our viewers there won't be an, an episode next week because it's a public holiday where I am, but we'll be back in a couple of weeks. Ryan, thank you very much.
- [43:18]
B
My pleasure. Thanks for having me on.