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Big Technology Podcast
Trade War Scorecard: What's Changing, Who's Winning, What's Next — With Ryan Petersen
01:05:01
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- [00:00]
Host
Has Trump's wave of tariffs or the threat of them changed the global supply chain at all? And are big tech companies like Amazon and Apple in any different position today than they were before the inauguration? We're joined today to talk about it all by Ryan Peterson. He's the CEO of Flexport and he's here with us in studio to cover this all once again. It's great to have you on the show, Ryan.
- [00:22]
Ryan Peterson
My pleasure.
- [00:23]
Host
So talk a little bit about what's happened. We're months past Liberation Day. It's kind of funny to even be talking about it because it's one of those news events that started with this big promise of massive tariffs and then subsequent pauses. You have an unbelievable view as the CEO of Flexport because you can see how cargo and shipping is moving around the globe. Is anything fundamentally different today than it was before Liberation Day?
- [00:54]
Ryan Peterson
Yeah, well, if you're a brand that's importing goods, especially from China, your tariffs are higher. We've had 30%. Tariffs are currently 30% plus whatever was pre existing. So that's a pretty big deal. I mean the cost went up 30%, but it's way better than immediately after Liberation Day. Remember, they ratcheted up to 145% and it stayed at 145. This is on Chinese made goods coming to the U.S. it was at 145 for five weeks. And so during that five week period, the, the volume of cargo from China to the US dropped by 60%. Just a massive decline. And that's a big part of, likely a big part of why they ratcheted back to 30 was this was a decoupling rate. That was a rate at which these economies would decouple in a very non graceful, unplanned, kind of potentially catastrophic way. Now since the tariffs got relaxed back down to 30%, we've had an 80% increase in volume from China to the US above the pre tariff levels. That's like the classic bullwhip effect. You had a huge decline and now this surge. Now it's starting to come back down a little bit, regression to the mean. But we're still well above the original volume levels because we've got that five week period where it was down so much that needs to be made up for by more cargo coming in. Some of these things, their net result has been much higher freight prices. There's not enough ships to move that, all those, all that cargo. So price gets bid up. Very similar to Covid, a little bit similar. It's kind of like a microcom, Micro Covid. The difference, I think the big difference with COVID is that people were buying way more stuff. Whereas in this period because they were at home, there was a lot of stimulus. There was a shift from goods onto services back in or sorry, from services onto goods back in Covid that we're not. There's none of that. So it's like yeah, your costs went up, your supply chain disruption is there without the silver lining of like, well at least people are buying more stuff. So if you're in a brands position, it doesn't feel like Covid really I guess the other big thing.
- [02:57]
Host
So you get the higher cost without the higher interest before you move to the other thing. During COVID actually right after Covid or maybe mid, it was about $20,000 to bring a container in from China to the United States. It went back down to around 1.5 2000 when things normalized. What is it now?
- [03:20]
Ryan Peterson
I didn't check this week. I've been traveling but it's probably 5,000 or so from China.
- [03:23]
Host
So not something that we're going to immediately see in higher consumer prices.
- [03:27]
Ryan Peterson
It was at two a couple months ago before the tariffs hit two and a half times. It has gone up quite a bit. But yeah, I think that the tariffs and the shortages, if any, from that five week period of no shipping be more likely to contribute to inflation than the tariffs themselves or than the freight prices. But I think all of this gets relatively smoothed out. 30% from China, it's set to go back to 54% on August 18th. I want to say 18 is the 90 day because it's just a pause on the China stuff. You had a pause of 90 days from April 8th. For rest of China you had 90 day pause till July 8th and then a 90 day pause for China that ends in August 18th and that's when the tariffs will go back up. If no deal is worked out by those dates, those things could be very disruptive and lead to inflation. But current level 30%. It feels like brands will mostly absorb that and not pass it. They'll pass it through a little bit. But remember, this is 30% on the cost, right?
- [04:41]
Host
What they pay for the goods, not what we pay. I think that typically a company will mark up what they get from China by what, three times?
- [04:49]
Ryan Peterson
Three times is a reasonable assumption that math says you might see a 10% increase in your price. Some things from China, it's not nothing. You probably feel that some of that will get absorbed, likely with factories discounting things in order to Stay competitive. Possible currency move. I think this is what the Trump administration would like to have happen. Well, they'll spend no matter what happens, they'll make it seem like that's what they wanted. If you listen to that, accomplished. Yeah, yeah. So if you know the currency, if China devalues their currency, they go, cool, we didn't hurt inflation. But of course, if they devalue their currency, it makes our exports even less competitive. It'll be harder for them to buy our stuff. So it makes it easy for them either way. They can spin it and say, well, if they devalue, great, no inflation. If they let their currency appreciate, then we'll say, hey, look, now they're buying more stuff.
- [05:43]
Host
Do you think we were at a good equilibrium beforehand or do you think that some action was needed to be taken?
- [05:50]
Ryan Peterson
I think the problem is very real that the Trump administration is addressing of imbalanced trade.
- [05:57]
Host
So talk through that. Explain exactly why they were upset.
- [06:00]
Ryan Peterson
Well, I think you want. I try to operate from this principle. I forget where I heard this. I think Charlie Munger perhaps was the first person to share this was like, you don't want to get in any argument with anybody unless you feel like you can make their point of view better than they can. So I try to avoid arguments unless I feel reasonably like I can make their argument. So from steel, manning it or taking their side, the Trump administration's position on this is they've got three or four very valid points. I think, first off, the United States manufacturing base. If we don't manufacture. Right Now, China produces 40% of the world's manufacturing output. U.S. post World War II, we were at 47%. They're close to the level of economic, from a production standpoint, dominance that the United States enjoyed when we were basically the hegemonic superpower.
- [06:51]
Host
What's the US's percentage of manufacturing?
- [06:53]
Ryan Peterson
I think we're down to like 16 or something. I forget that exact stat. But it's falling really fast. So that's valid. From a national security standpoint, if you can't produce things, you can't produce cars, you can't produce tanks. In a war, your car factories become your tank factories. And on down the line for a huge range of things. Pharmaceuticals, healthcare, a lot of stuff. If we're dependent, then we're less secure. I think that's valid. Two is if you look at currency and leaving aside China, just look at Vietnam, for example, where Vietnam has had this manufacturing boom for the last five years of 20, 30% growth annually each year Their currency is the Vietnamese dong, and it's pegged to the dollar. It hasn't appreciated at all. And in any kind of a free market economic system, that many more dollars flowing into the economy, that much foreign direct investment and purchasing of their goods, you would have an appreciation of the dong, it would go up and that would help to self regulate the trade between these countries. And it would make. So they're clearly, they are literally pegging their currency to the dollar, which means they're manipulating their currency to give them their manufacturers in advantage.
- [08:09]
Host
So can you outline that? So if it's kept artificially low, makes.
- [08:13]
Ryan Peterson
Their stuff cheap and so we buy more of it, and it makes them buy less of our stuff because they can't afford our stuff. So that's reasonable. I think that's valid. Then at the end of the day, it's industrial policy. These are government policies designed to help their manufacturers and at the expense of our manufacturers. Another one would be sort of environmental regulations are way more lax in these countries than ours. We're putting all kinds of environmental controls on our manufacturing and permitting and whether it's carbon emissions, especially in Europe, all sorts of environmental regulations that they don't have. And so that's hurting ourselves. They can point to suppression of organized labor movements or even just like cultural things. I mean, China, you work six days a week. It's cultural. And is it government? I don't know. In Korea, it used to be the national law. You had to work six days a week. That's putting them at a real advantage from a production standpoint. Then you can also look at, my mom is actually a biochemist that helps companies with food safety regulations. So she's duped super deep in this. In Europe, they don't allow genetically modified foods for scientific health and safety reasons. But the Trump administration, the US Government stance has always been, well, these are kind of pseudo science, fake science. Our argument from our scientists is, hey, these foods are safe and you're just doing it actually to protect your farmers, to protect your production processes, etc. I mean, I'm a fan of that. I don't really want to go to France and just see all these nice farms wiped out. I want to go there on vacation, enjoy the scenery of the quaint little farming village. But I get the point. So you can make a long list of things. Now the question is now from a, from the Trump administration's perspective, tariffs are the best, easiest weapon, maybe that's too strong of a word, but easiest tool in the toolkit to use to combat this. So it's not necessarily. Yes, it is also true that their tariff rates on US Goods are higher than our tariffs on theirs. But it's actually all these non tariff barriers to trade that make it, that give their manufacturers an advantage over US manufacturers. And tariffs just happen to be the easiest way to respond to that because it's simple and straightforward. So then the question is this effective? You have to judge outcomes not by their intentions. The problem is real. I can state those things. Question is, do tariffs putting up tariff barriers actually increase American manufacturing or leave it the same or decrease it? And what we've seen over the last few weeks is it's going to decrease American manufacturing.
- [10:56]
Host
Wait, why?
- [10:59]
Ryan Peterson
Because you have a huge number. Because these supply chains are very globally interconnected. For example, US if you're manufacturing for export, you have to import the goods and pay duties on the components. And then your products is now more expensive to produce. And if you instead produce those goods in Mexico that didn't have the tariffs on Chinese goods, you wouldn't, your cost would be lower, not just your labor costs, but you wouldn't have to pay the tariffs. So anybody who's exporting this is really hurting them. You're adding a lot of complexity. People are moving goods all around. So you're actually, you know, at the end of the day, United States labor cost is just not going to be competitive for a large range of products. And so, yeah, okay, maybe it's hard to read the Trump administration's intentions, but the result is we're not giving the market enough clarity of what the tariffs will be when, if you did want to move back to the U.S. you're kind of paralyzed right now because the environment's changing so fast. Latin America's got a 10% duty rate. Is that going to go up or down? We don't know if you thought it was going to stay. Probably, you know, you want to just set up in Mexico for your plant, but if it's going to go up a lot, then maybe you set it in the US but we don't know what's going. It could change any day now, any week. And so you don't have the certainty that you need to make investments in the United States. And you'd follow that up with like, maybe it's just inherent in the US System that's difficult to give people such, such certainty. Because will Trump win them? Will the Republicans win the midterm? There's this Supreme Court case that's going to get worked through. Does he even have the power.
- [12:44]
Host
The tariffs legal?
- [12:45]
Ryan Peterson
Are the tariffs legal? The Constitution makes very clear that the tariffs are in control of the Congress, not the presidency.
- [12:52]
Host
And he was able to implement them because he has emergency powers to tackle fentanyl. Is that sort of the argument that they have?
- [12:58]
Ryan Peterson
They use that for some of the tariffs. So they use that fentanyl emergency for China. For China, for Mexico, Canada.
- [13:05]
Host
Okay. And the rest.
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Ryan Peterson
That one's not being challenged, actually. Okay. That's not the lawsuit that they lost. The rest they used just a national security argument in general that trade deficits were a national emergency.
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Host
Okay.
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Ryan Peterson
And therefore they could just apply a blanket on everyone. That's the one that they lost the court case. And it's going to work its way to the Supreme Court over the next six months or so or some timeline.
- [13:26]
Host
So it's very interesting, what you're saying is that there are companies that manufacture in the U.S. maybe U.S. producers, but they have to import some of their components from abroad and they can't. There's no American manufacturer that's going to produce, let's say, some certain type of nut for a air conditioner. Right. Let's talk about an industry we do. Well, we love air conditioning. Maybe that's one of the great American industries. So you could end up seeing those air conditioner manufacturers move to Mexico because they won't have to pay the import duties on those nuts and bolts that they use for their unit.
- [14:00]
Ryan Peterson
Yeah. And especially if they're selling that, if they're exporting it to the rest of the world because they're, you know, if they were just for the US you'd now you'd have to import it from Mexico and still pay the duties. So it doesn't save you much. But if you're selling to Latin America, you're selling to Europe. You don't want to bring stuff to the US because you'll have to pay this duty on the components and jack your price up. There's also a lot of exemptions in the system. So, like, I work with a customer. One of our customers makes bicycles in the US and under the current setup, bicycles can be imported duty free, but bicycle components cannot. So they've decided after a decade of manufacturing the US that they now have to produce overseas because they can import the finished goods and not pay duty. But if they import the components, they have to pay duty. So, I mean, I've seen a dozen examples in the last few months of companies that were producing in the US and decided to stop.
- [14:54]
Host
That's crazy.
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Ryan Peterson
I see nobody who said, oh, okay, as a result of this, I'm gonna set up a plant in the U.S. there's some headlines. He gets people to come to the White House and talk about it. I'm not saying those people aren't real, but I haven't met with them. And all the ones I'm meeting with are like, this is totally derailing my business.
- [15:09]
Host
I would think that it would lead more to come to the United States because you talk about uncertainty. Well, the certainty is that if you manufacture in the United States and you sell the United States, you have zero.
- [15:20]
Ryan Peterson
In terms of getting all of your subcomponents made in the U.S. that's true. It's just that these manufacturers are all ecosystem driven. There's like sub components and very hard to replace them. You know, it's very sticky. And electronics in southern China, it's like you drive down the street, you can find every component you want. You don't have to make everything yourself. You're assembling things. But yeah, I mean, we have to judge policies by their outcome, not their intention. I think that's the thing that everybody seems to get wrong in D.C. all the time. They got good intentions and then actually they screw things up. Economies are not really meant to be centrally planned. That said, I made the case why there's some very legitimate problems in the US trading system that need to be addressed. Kudos to trying to solve them. But I just think the way that it's being done is just very abrupt and not giving companies enough time to plan. If you were to instead go, hey, this is where tariffs are going to go on a multi year time horizon and it's going to go up every quarter by this much, start moving and give people just more clarity of where things are going to go. I think businesses could adapt to that way better and set things up in the right direction.
- [16:34]
Host
I was going to ask you, have you seen actual movement of capital, one country to the other? I'm actually surprised to hear you not say that there's any that's come into the US at least from among your.
- [16:45]
Ryan Peterson
Customers, not amongst our customers. I haven't seen any flow into the US But I'm seeing a ton of movement out of China. That's the one thing that was very clear in all the directives is like, hey, tariffs on China are here to stay. They're much higher than the rest of the world. That's a long term trend. Also just on labor costs, like Chinese labor, you're not in China anymore for cheap labor. You're there because they're the best at manufacturing things, which is a really interesting story. Over the last 20 years, they became the highest quality manufacturer. They're not the cheap labor anymore. But brands are now exploring rapidly. Okay, I need to set up in Southeast Asia. Vietnam's growing like crazy. Thailand, big winner. Malaysia, India. But it's hard for them to pull the trigger on long term investments. I think crazy to pull the trigger on a long term investment until you have more clarity of like, what where do duty rates land on rest of world? Can they get some longer term view? Can they settle down and just be like, yep, this is the new normal. Instead of at least give me two, three years until the end of the Trump administration so we can plan what that looks like. If it's changing every couple of weeks, it's a little crazy to absorb the pain. And then if you have to move your supply chain twice, it will be a nightmare.
- [18:03]
Host
That's right. In these other countries in Southeast Asia, you mentioned Thailand, Vietnam. Is it local manufacturers that these companies are working with or is it Chinese manufacturers?
- [18:17]
Ryan Peterson
Mostly Chinese manufacturers?
- [18:18]
Host
So talk about that. This is a very important point.
- [18:20]
Ryan Peterson
Yeah, it's mostly Chinese companies setting up an entity in the country, hiring, many cases actually getting the workers have to learn Chinese. Vietnamese workers, really Chinese managers, they give them some period of time to learn Chinese if they want to keep their job. And Chinese companies have been setting up factories all over the world to do this.
- [18:43]
Host
Can I just say that if your goal is to have this national security side of this, which is you don't want your manufacturing to be controlled by a single country, AKA China, and so therefore you put up this big trade barrier with China, but you still have Chinese companies running your operations in Vietnam or Thailand. Aren't you just as susceptible to those national security risks?
- [19:08]
Ryan Peterson
For sure. And it's, you know, our legal systems are difficult to work around that because customs has a legal definition of what's made in Vietnam and it doesn't, you know, the company's Vietnamese. As a Vietnamese entity, the work is done in Vietnam. We have this thing called substantial transformation. Because actually it's not just that, it's that all the subcomponents are made in China too. They're shipping them down to Vietnam and applying enough value through other components that are made in Vietnam, plus the labor costs. It's called substantial transformation. So there's like a legal definition of what means what makes made in Vietnam on a product they're doing the bare minimum. It's still largely a Chinese product being Assembled in Vietnam. So, yeah, I think that's very, very valid if you really solved your problem. Not really.
- [19:54]
Host
I've had this Galaxy Brain idea that maybe Apple to sort of deal with some of the blowback they're getting from the Trump administration for moving their production from China to India and not the US that they would just send the boxes to the US for like some final assembled in the US stamp. But it has to be more than that. By hearing what you're saying, it has.
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Ryan Peterson
To be set as value.
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Host
Right. Can't they argue that it's valuable, it's a branding value for them to say, this is finished in America and therefore.
- [20:25]
Ryan Peterson
I'm not a customs expert, but our team has many customs experts on it that explain it. And it's a relatively high threshold to clear to become made in. But even the Indian iPhones and whatever, most of the components are coming from China.
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Host
Okay.
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Ryan Peterson
Of course. Right. The semiconductors coming from Taiwan, these are very global. There's parts that are made in America. I think this and the IP and the ownership. Some of these rules are really like antiquated relative to the complexity of the modern global economy. And you look at even the customs, it's called the harmonized schedule. This is how class goods are classified to determine their duty rate. Every good has one and only one HS code, harmonized schedule code. And that says, okay, your shoes has a different code. If it's like rubber sole versus leather, all the different things. Well, there's like 80. If you actually go look at this code, you can see how old it is. I mean, it's going back to the 1800s or whatever. I mean, it really got formalized with the World Trade organization and the 60s and 70s and 80s. But there's like the electronics code is like this thin. And the clothing code is like that thick, maybe that needs smoking, that this was invented. Like clothing. You have every type of variation. And then all of electronics is like tiny little set of variations. It creates, I don't know, oversimplifications that go into it. And also really interesting opportunities, like people trying to claim that this is. Computers are exempted right now.
- [22:04]
Host
Right.
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Ryan Peterson
There's a computer and everything. So everybody in the world.
- [22:07]
Host
Yeah, your watch is a computer.
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Ryan Peterson
This is actually a computer. It's not a watch, it's a computer. And then you get, you know, how do you get. I've seen a lot of different people trying to play these games and for good reason. You know, if you can get 0%.
- [22:18]
Host
Duty instead of 30% and do customs agents Go along with that. Like that watch is a computer.
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Ryan Peterson
You have to go through like a.
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Host
Garmin has to be a computer. Right.
- [22:26]
Ryan Peterson
There's a process that you go through to get what's called a binding ruling from customs so you can get them to rule on your product and say, yes, it is this. So, yeah, that's what. Actually Flexport has a business that's completely backlogged right now to trade advisory, where we have consultants that are experts in all these things. I mean, I'm really at the chauffeur knowledge level here, just showing you what I. I'm the chauffeur driving the experts around and listening to what I hear them say. I'm not an expert on all the ins and outs of customs regs, but I know enough to be dangerous.
- [22:59]
Host
There's another component to this, another game that companies are playing where they're faking the cost of the goods that come in and trying to enter some other arrangement with the factory. Let's say you have $1,000 air conditioner just to keep going. It's an expensive one. That's what you're paying. That's your cost of the unit. Now some companies are playing games like sell it to me for $100, the actual machine, but I'll pay you a $900 per unit service fee or consulting fee.
- [23:37]
Ryan Peterson
It is a felony to break customs law and you should really work with.
- [23:41]
Host
I'm not doing this.
- [23:42]
Ryan Peterson
I know it's not you, but this is a message. Although you should be careful what you do. There's a lot of games you can play and it's not a good idea. Make sure you have good legal advice about these types of things because customers will come after you. It's a felony.
- [23:57]
Host
And are there a lot of people sitting in US prisons for customs felonies?
- [24:02]
Ryan Peterson
The DOJ has said it's their number two area of white collar crime that they are investigating. Their number two priority. Number one is health care fraud and number two is customs fraud. Wow. And that's an announcement they made a couple months ago that this is their. So expect it. Enforcement's at an all time high. They're ratcheting it up and yeah, I think you don't want to want to mess around. These guys have guns.
- [24:24]
Host
Yeah. So this is something that happened alongside the tariff levies is they knew it was going to happen.
- [24:32]
Ryan Peterson
And there are legal ways to reduce your valuation of your goods.
- [24:37]
Host
What are the legal ways?
- [24:38]
Ryan Peterson
Well, you can get. If there's US goods that are inside of that you can Deduct that portion. You have to go through all the right paperwork processes and show it you can. What's it called? An assist. If you do capex into the factory or you've gotten some of the R and D for it. Again, I'm not an expert, but our Flexport team has a lot of expertise in this. This general practice is called trade advisory. So Flexport has a trade advisory group that helps people with this, but there are other lawyers and some of it's in law firms. Other logistics companies and customs brokers have this practice that can help brands do this. You want to make sure you partner with somebody good who can make some case that it's a lot like representing yourself in a court of law. Yeah, you could do that. But maybe it's good to get a lawyer if there's any kind of gray area in what you're involved in. And it's kind of like that.
- [25:30]
Host
Totally. All right, folks, in case it's not clear Ryan runs Flexport, we should have done a deeper introduction, but you bet. This is, I think your fourth or fifth time on the show. It's tech enabled freight forwarding. You believe in the global system because. Well, I guess maybe philosophically, but also that's your business. Just by definition, you're into that idea. I want to ask you, just like we've talked about this a couple of times, but again, it gets to this question of if you do the design, the US does a lot of the design of products at home and the manufacturing abroad and then they ship it globally. Are you getting a good deal if that is your economy?
- [26:10]
Ryan Peterson
General? Yeah. I mean it's done really well for us. And if you look at the profit pools like Nike designs their stuff in America, markets, it, brands it, it's produced I think largely in Vietnam and other parts of southeast, other parts of Asia, probably all over the world these days. But the amount that they pay for the shoes, I don't have any inside knowledge on Nike, but there's public reports on this stuff. The vast majority of the profit in the shoe is actually accumulating to the brand, to the design, to the shareholders. Just pretty clear a system that's led to a lot of prosperity in the United States and globally. Frankly, I think my big problem with the way that this is all addressed is it's a lot of zero sum, negative sum mindset conversation where in trade both sides win by definition. That's why we're doing trade. It's like we shouldn't lose sight of that. The fact that both Parties are made better off when you do a trade in free market economics. Now where it becomes complex is when you go, wait, but if their government is intervening in the market, then shouldn't our government intervene in the market? That's kind of the Trump administration's perspective here is like, hey, I listed all those ways that their governments may be intervening. So it's not a free market. And therefore do we want our government to come and be free market or come and be put our thumb on the scale and help American companies win more? I just think it's a bit naive. The reality is, let's say what we want is cheap stuff. Like as a buyer, as a human being, you want to have more things that are cheap and affordable. It really pissed me off when Trump said you only need two dolls instead of 20 dolls or whatever. Easy for you to say, but my daughter, she wants more dolls, I promise you. And if you have to spend more stuff on that because it's made in America, if the dolls are made in America and I got to spend, I can only buy two of them and I got to spend more of my income on that, I have less money to spend on other stuff which will go to other people in America. I'm going to be buying other now I'm buying less things. It's a very simplistic, it's very hard. It's a complex adaptive system, the economy. It's a very complex ecosystem of moving parts and second order effects that are really hard for a central planner to ever figure out. The Austrian school of economics is correct. We should not screw with this that much.
- [28:56]
Host
I just want to do one quick follow up to that, then we'll go to break. We've talked about capital, factories, manufacturers, we've talked about shipping, we've talked about trade and stock. But the other side of that is labor, our system's capitalism. I'm pro capitalism. I'm sure you are as well. And, but I think like part of that is 2 of the gains will go to thethe gains will go to the people who own the capital. But the other side of that is they also needed a labor force in some way to help make the things. And when you've separated in some ways the capital becomes less about the factory, more about the idea, and the labor is elsewhere. Then that divide leads to some unhealthy dynamics in a society. What do you think about that?
- [29:41]
Ryan Peterson
That's what Karl Marx said.
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Host
Well, I mean, I'm not suggesting communism is the right way to solve it.
- [29:46]
Ryan Peterson
Capitalism itself is a Marxian term. It comes from Karl Marx as the inventor of the term capitalism. You talk about free markets where people are free to buy and sell what they want because it makes them better off if they do that. That's like labor. What is labor? I mean, we're all part of labor. This idea that, I don't know, I've never met a capitalist. All the people I know who have a lot of money also work really hard. They're also involved in labor. This very odd distinction, like what am I a capitalist or am I a worker? Because I work harder than anybody I know. Am I a capitalist?
- [30:21]
Host
I think.
- [30:21]
Ryan Peterson
Well, I think I don't have much money.
- [30:23]
Host
You're probably going to beat me in this argument. It's a reasonable partner to just talk it through. I think, look, I think you can work really hard, but if you own the capital, then you're gonna end up getting much further ahead than somebody that comes in for a paycheck and is pure labor. Like, of course, if you own the capital, you're also working. But yeah, I don't know.
- [30:48]
Ryan Peterson
I don't know. I think we also take the first people who own the company. They're the last ones to get paid too. I mean, when companies lose money.
- [30:57]
Host
The bigger the risk, the bigger the employees.
- [30:59]
Ryan Peterson
Will get paid and the owner doesn't get anything right. And so there's some degree of like, well, you get paid last, not first. And yeah, you take more risk now. So yeah, I think, personally I just think that we'll be better off if the government intervenes less in the economy. Now, there are certain reasons why there's good reasons for the government to intervene and provide sense of justice or like real justice, enforcing laws, safety, defense. There's a lot of public goods that are under provided by a free market. These are all valid reasons we need a government. I'm not some anarchist by any means, but it really is very, very tempting to ask the government to come and make our lives better. And they almost always screw it up.
- [31:54]
Host
Right.
- [31:55]
Ryan Peterson
And like, it's very funny to see now the Republicans are the ones.
- [31:58]
Host
That's a different position for them.
- [32:00]
Ryan Peterson
It's very different.
- [32:01]
Host
And by the way, my suggestion is not like government has to fix this. It's more just like we're in a very. You are somebody who sees this more than most is that we're in a very unique system where you. I think that Marx's. I haven't read Marx in detail, but I think his argument was capital takes advantage of the labor. What I'm saying is we, we now have this global system and you're talking about how it's advancing. Right. Where you have capital in one area, labor in one area. So I mean, where does. And labor will always be the thing that gives the employment to the masses.
- [32:35]
Ryan Peterson
You would think, by definition, if you want to use that. Yes.
- [32:38]
Host
So then what happens to the people? I don't think this is like an accusatory question. It's just like something that's kind of fun to explore with you because you have a position.
- [32:49]
Ryan Peterson
I don't know. I just think the economy is so much more complex than people want to give a simple answer that we know.
- [32:54]
Host
I mean, we know that for sure now. The tariffs have illuminated that. Yeah.
- [32:58]
Ryan Peterson
And that's the problem with all attempts to intervene is that you usually make it worse.
- [33:03]
Host
Okay. All right. We're going to talk about some intervention on the other side of this break, which starts with the closing of the de minimis loophole and maybe the end or the dissolution of the power of TEMU and Shein and how Amazon is going to handle all that. We'll be back right after this. We're back here on big Technology podcast with Ryan Peterson, CEO of Flexport. Ryan, we've talked for quite some time about trade and global regulation and some fun stuff about capitalism and labor before the break, which I don't regret. I'm glad we did that. But I want to talk to you now about some of the real bread and butter tech issues, which is that this de minimis loophole, which allowed Shein and TEMU to ship to US Customers a sizable amount of merchandise without duties, that loophole is gone. I'm curious if you can share a little bit about how that has changed things in terms of the way that Americans buy.
- [34:03]
Ryan Peterson
Yeah. So the de minimis loophole said. I don't like calling it a loophole. It was just part of the. It was just in the.
- [34:10]
Host
A law.
- [34:10]
Ryan Peterson
It's in law. It's in the regulations. It was passed by Congress. It said that Goods less than $800 are not subject to customs duties. And it can be done with a very informal customs entry where you don't need to provide as much data about who made the goods and a few other data points that aren't required. But the main thing was the duties that is now going away. Now, what happened, the way that companies took advantage of that program was they shipped either direct from China or other countries into the US So you'd order from the big famous brands on this are temu And Shein. But Amazon, Walmart, a bunch of other companies were doing this at scale. You'd buy the goods, they would fly them over in bulk. You're doing air freight in bulk, clear the goods through customs one at a time so there's no duty and each individual item is less than $800 and then deliver it to your house. You'd get slightly slower shipping than if it was coming from an Amazon FC fulfillment center, but much lower cost because of the duty avoidance. That's like the famous case with shipping from China. But actually what a lot of people don't realize is a huge percentage of the world's apparel of the American Apparel brands had set up fulfillment in Mexico and Canada to do the same thing. Only they would do ocean freight from wherever the goods are made, deliver to Mexico, deliver to Canada and then fulfill one item at a time from Mexico and Canada. So that's gone away for Chinese made goods. Effective on May 2, they shut that down. It is imminently. We don't know when going to go away for goods from everywhere else in the world. And the immediate result is a huge surge of needing to put fulfillment. Wanting to put fulfillment back in the United States. There's no reason to fulfill from Tijuana. Pretty far you're shipping to New York from Tijuana. You're better off having a fulfillment center in the middle of the country or have one on each coast. That's been a big drive that is resulting in more jobs in the United States.
- [36:17]
Host
Aha. We found them.
- [36:18]
Ryan Peterson
Good job. If you're measuring a policy based on its actual outcome instead of its intention, that was a good one for its own intentions. I'm anti tariff in all their forms. Anti taxes. So I think I like the old.
- [36:31]
Host
You want to ship.
- [36:32]
Ryan Peterson
I like the old exemption. Hey, less taxes. I'm not celebrating more taxes but. And a lot of our customers were using this are now put in a bad place with companies. Cost them like 10 million more per year.
- [36:44]
Host
How?
- [36:44]
Ryan Peterson
Well now they have to pay duties.
- [36:46]
Host
They weren't before, but they were doing 10 million of. How is it going to cost them 10 million more?
- [36:52]
Ryan Peterson
Well, because it's 30% duty versus zero.
- [36:54]
Host
Right.
- [36:55]
Ryan Peterson
Easily. And a reasonable sized company easily gets you to $10 million.
- [36:58]
Host
Okay.
- [36:59]
Ryan Peterson
And it's fine level playing field. It was kind of a crazy weird.
- [37:04]
Host
Rule that you almost said loophole.
- [37:06]
Ryan Peterson
Yeah, it's all tempted to call it a loophole. It was a strange setup that like on some level it's like creating. It's actually a very good illustration of like, the market will find a way. People are creative. It's my lesson for all of our customers too. It's like, hey, you're in the same level playing field. The rules are changing, but they're changing for you and all of your competitors at the same time. And so you got whoever's the most creative, makes the best decisions, can find a way to win when there's a lot of change. Like what we're seeing right now in tariffs. And like the de minimis thing is an example of that. Like 10 years it went from, see if I can remember my stats on this, it went from 100,000 packages a day to 4 million packages a day in the last decade, clearing under de minimis now to 70% of that was China. Now we've eliminated 70% of that in the last month.
- [38:05]
Host
Do Xi' An Intimu survive?
- [38:08]
Ryan Peterson
Well, they're very big global companies first off, so yes, and they're already finding ways they have to pay duties, but they're just back to being a level playing field. So I think you're going to see them, one, produce in other countries and two, just pay the duty and continue to compete. Their goods are not that expensive. They have a low cost of production. So they're going to be well positioned, actually, because they're better at producing things in Asia than American brands are.
- [38:38]
Host
What about Amazon? I heard you recently say that 60% of Amazon sellers are in China.
- [38:43]
Ryan Peterson
Yeah.
- [38:44]
Host
Is that. Is Amazon exposed?
- [38:47]
Ryan Peterson
Very much so.
- [38:47]
Host
So talk about that.
- [38:50]
Ryan Peterson
Yeah, it's. You know, I lived in China 20 years ago and sold things and I was actually an early Amazon seller.
- [38:56]
Host
Oh, third party.
- [38:58]
Ryan Peterson
Yeah, I was one of the first. Because I remember the day that they announced the very beginning with the day that they allowed third party sellers. I was like, I thought it was the most amazing thing in the world. I could go add products to the Amazon catalog and it would just show.
- [39:07]
Host
Up as were you selling your motorcycles.
- [39:09]
Ryan Peterson
Through it and furniture, actually.
- [39:11]
Host
Okay.
- [39:13]
Ryan Peterson
I don't think we sold motorcycles on the furniture. We've sold a lot of on ebay motors for the motorcycles. I think that's still bigger than Amazon for that category. But I remember thinking even back then, these Chinese factories, they make all the products. They don't really need me, except they don't know how to do marketing and especially not online marketing. The moment they figure that out, I'm making all this margin and they don't need me anymore. And fast forward, there's a famous email in 2015, I don't know how famous it is, but it's an email, internal Amazon email, that surfaced recently, probably through a lawsuit or something. I'm not sure why this email's public about how incredible the growth of their Chinese seller ecosystem is and that they're going to lean hard into allowing Chinese sellers to reach. The Chinese sellers have realized that Amazon is the conduit to reach the American consumer with no middleman, and that Amazon needs to go all in on making that possible back in 2015, and it's just dramatically accelerated since then. So they've got some exposure, one from terrorists, but two just like political exposure. So kind of a bad look if you're in the Trump administration, to see these guys who are just, like, really helping Chinese sellers at the expense of their American sellers. And they were very explicit, like, hey, our American sellers are not going to like this, so let's keep the. Let's not make a big scene about it. But we're definitely going to help the Chinese sellers compete. It's become very difficult for a US Brand to compete on there because the Chinese are going to be better at producing stuff in China than you are. And if they're just as good at selling online, they win. You don't have a great competitive position.
- [40:59]
Host
But Trump hasn't said anything about Andy Jassy or Bezos. He's been focusing on Tim Cook. So you think there's, like, a real political vulnerability there?
- [41:05]
Ryan Peterson
I mean, remember they put the tariffs in. Oh, Amazon said they were going to list the tariffs as part of the prize. And he called them. Oh, he used a really bad word. We should pull it up. But it was like. I think he called him an unpatriotic company or something like that.
- [41:20]
Host
He did attack.
- [41:21]
Ryan Peterson
Treasonous. I think he called him treasonous.
- [41:24]
Host
I'm gonna get this up.
- [41:25]
Ryan Peterson
Was it treasonous? It was harsh. I wouldn't want him to call me a treasonous.
- [41:33]
Host
Person. Yeah, I don't. I don't have the actual. It was something along the language here.
- [41:37]
Ryan Peterson
Don't quote me. It was something like that. It wasn't.
- [41:40]
Host
We're recording you on audio and video, so we're gonna quote you to something.
- [41:43]
Ryan Peterson
Undid it. Amazon undid the decision, which, by the way, I thought was a mistake. They should have said, yeah, we're showing you the tariffs so that, you know, you should buy goods made in America. Then you'll have no tariff on those goods. They could have framed it, they could have spun it a lot better, but instead they just backed off immediately.
- [41:56]
Host
Yeah, well, apparently it was something I spoke to the company as something that was like floated internally but was never gonna. But that could just be spin. I don't know. It was serious enough that it made its way out to the press, so.
- [42:09]
Ryan Peterson
But they have exposure here, I think. I don't know, political exposure, economic exposure? Probably some of both. But they also just on the flip side, for the De Minimis thing in particular, I think Amazon's better off with De Minimis not existing because De Minimis is shipping direct from China to the US consumer. It skips their fulfillment network which is where they put all the capex and huge competitive differentiator. The fact that you can ship, they have fulfillment centers everywhere and ship so fast and so cheaply and so it takes away. If you're shipping from China, I mean that's what let timu get to 25% of Amazon scale in five years is that they skip all that fulfillment center infrastructure. De Minimis going away is probably good for Amazon and Walmart.
- [42:55]
Host
Where's the vulnerability then?
- [42:57]
Ryan Peterson
Just in broader tariffs concepts and broader. If the US is going to crack down on the one that is getting circulated right now is a crackdown. We'll see if that's how this comes through. I'm not familiar enough with how the sausage gets made in Washington, but there's some bills circulating to ban foreign importers of record. So a foreign importer of record is what these Chinese sellers are that are selling on Amazon. They don't have a U.S. legal entity. You don't have to be an American company or even a foreign owned company with an LLC in the United States to import goods into the United States. You can import goods as a foreign company with no legal status in the United States other than what's called a foreign importer of record or a non resident importer. There's a wide. There's a huge demand amongst the Amazon seller community, the American companies, to ban this practice because what ends up happening, the reason they really hate it, is that one of these companies, if it's a Chinese company or it doesn't have to be Chinese, it could be from anywhere in the world that can do this. You import goods into the US if you declare the valuation instead of, let's say it's $100,000 worth of goods, but you say it's only worth 10,000, you've cut your duty by 90%, gives you a huge competitive advantage in selling it.
- [44:19]
Host
And you can't go to trade prison.
- [44:21]
Ryan Peterson
And when you get caught. CBP Customs Border Protection is not sending agents to China to arrest the People and in fact, it's probably going to be one of the things that's going to be demanded in a good, well crafted deal with China and other countries is you must extradite people who commit customs fraud in the United States. Well, one is there's this bill and I don't know if it can be done by executive order or not, but I know it could be done by Congress. And there's a bill circulating, probably several bills to shut this down. It's bipartisan support, I think, to not allow foreign importers of record. But likely also it's, hey, you have to allow US Customs some kind of jurisdiction or an extradition program to get. When people commit customs fraud in the United States from your country, you've got to turn them over to us. And so if they were to shut that down and 60% of all Amazon sellers are in that program. Yeah, that would be painful for them.
- [45:17]
Host
That would be rough. Yeah, yeah. So probably just like Apple, they've over leveraged on China, Amazon, potentially.
- [45:24]
Ryan Peterson
I don't know, I'm like, I think China is incredible place to do business.
- [45:30]
Host
I wasn't saying, I wasn't arguing with that. It was more just like politically, politically, economically, you have to be careful that you don't put your whole business in a politically or economic vulnerable area.
- [45:40]
Ryan Peterson
I think that's fair to say.
- [45:42]
Host
A couple of wild ones to ask you as we close. I have some, let's say off the beaten path questions. You bought Shopify Logistics. I just want to know how soon you think logistics and fulfillment will be done with like 100% robots.
- [46:00]
Ryan Peterson
Oh, yeah. You know, I'm not close enough to the thing. It's a ways out. The current technologies that I've seen aren't there.
- [46:11]
Host
Okay.
- [46:14]
Ryan Peterson
Humans are just so dexterous and intelligent and not that expensive that like, you know, it's a very high bar to clear for these robots because humans are really good at the job. And if you were to, let's just say, invert the problem and say, okay, I have made you this humanoid robot that has all the characteristics of a human. His IQ is 100. Problem solving abilities of a human, dexterity of a human. It can run around and use its brain and pick anything and bring it, and it's only $20 an hour. You don't have to buy the robot. I'll just rent it to you for 20 bucks an hour. You'd be like, I'll take 500 of them and run a fulfillment center.
- [46:54]
Host
That's true.
- [46:55]
Ryan Peterson
You're like, oh, that's what we have right now. So it's a very high bar to clear for these fulfillment center robots. In fact, the big case for them is less on the humanoid side. It's more density. Humanoid actually doesn't solve a lot of problems because you don't get more density out of your warehouse. You want real estate density. You want to be able to stack the goods all the way to the ceiling, jam them in. So it's more. The form factor is not going to be humanoid. Most likely in a fulfillment environment. It's what already exists is like auto store is a leader in this and Symbotic is a really interesting company, public company. It's really about generating more density and lowering the error rate. Humans make more mistakes than these systems in theory. So some of that's here now. But I think before there's no. At least at Flexport we're so we have minimal robots in our fulfillment centers. We're mostly people okay doing the job. And I don't want to spend the capex. And the other problem is if the technology is improving as fast as they say, then I definitely don't want to buy it. I'll wait till next year and the year after and the year after. And so that becomes an interesting problem of like how do you figure out when's the right moment? I don't want to spend it. So probably it's a financial. There's also financial engineering and financial models that have to be developed here where you're renting me the robot. Maybe that's the benefit of Humanoid though by the way is like upgrade cycles could be easier just replace one at a time instead of having to. I don't want to buy $100 million system for my building.
- [48:24]
Host
Right. I mean maybe you have a Humanoid that has these baked in stilts so it can go up to 50ft and then just come back down and you can stack things. What do you say?
- [48:36]
Ryan Peterson
Yeah, robot forklifts. There's a lot of vacuum tubes. I don't know. There's a million. The symbiotic one. If you can go to symbotic.com and check out. I think they have some of the stuff on their website. So something really cool. That's a public company. SoftBank is making a lot of investments in robotic systems for warehouses with a big investor of ours. I'm kind of close to some of this stuff and seeing it.
- [48:59]
Host
SoftBank is.
- [49:00]
Ryan Peterson
SoftBank is a big investor in it and they're on my board so they show me stuff all the time. But they haven't yet sold me a system, so we'll see.
- [49:05]
Host
I see. Maybe one day. Do you believe in their investment in OpenAI?
- [49:11]
Ryan Peterson
I don't know. I don't know the economics of it, the terms, what valuation and stuff. But I do believe in OpenAI. I mean, it's incredible. Okay, doctors funds, a big investor. Well, small investor by OpenAI scale in that as well.
- [49:23]
Host
You also, you're using AI to help smooth out the fulfillment process within Flexport. We spoke about it briefly a couple times ago. But your teams are using AI systems to take in a lot of the documents and shipping which come in unstructured. Make sense of the data, put them in your system.
- [49:43]
Ryan Peterson
I mean, we use huge amounts of it and increasing. We have a big advantage. I think if you look at what's required to win in AI to apply AI, we don't have any advantage in developing the AI. There's smarter people in AI by far that don't work at Flexport than that do. But in terms of distribution, deployment, training of models, understanding where to apply, what problems can you solve, and then being practical to apply those, I think we just have a huge advantage. If you look at freight logistics end to end, from factory to your customer's door and all the steps that have to take place to move the cargo and get it delivered, we're the only company in the top hundred by volume that was founded after the web browser was invented. Okay, the scale matters because it gives you data to train your models, the domain experience to figure out what problems actually I need to solve. There's some real nuance here that if you're just an AI person, you would never know that this problem exists because you don't experience it. Then third is the distribution. When we solve a problem the next day, it's available for thousands of enterprise customers to use. I don't have to beg people for contracts to get access to their data or to beg them to give me money to use my model. It's just like constant rapid pace of deployment. So we have a big advantage over our competition in forwarding and then similarly a big advantage over AI driven startups. Because I'm paranoid that like, okay, I can sit here and go, yeah, we're the only one in the top hundred freight forwarders in the world founded after Netscape was invented in 94. But I'm paranoid that there's some kid out there going, yeah, we're the only freight Forwarder founded after ChatGPT was invented in November of 2022. But that person that small startup of which there are several many perhaps they don't have our data to fine tune the models or our distribution to go live. They're having to make AI in a vacuum and then beg people to use it and sign a license, security contract. All this stuff that needs to happen. We just launched product and it goes live the next day. For our customer base this might be.
- [51:59]
Host
Two in the weeds, but are you buying off the shelf or open source and customizing it?
- [52:02]
Ryan Peterson
Some of everything. I mean we've got partnerships with OpenAI anthropic Google we've used for many years. Google's still the best in a lot of things. Google has a product called OR Tools. It's not generative AI, it's just like deep learning, machine learning, but it's OR stands for operations research. So it's the best for routing algorithms, planning systems, for logistics. It's like really amazing. So we use that. Some startups that are really cutting edge on voice.
- [52:34]
Host
What do you use the voice for?
- [52:35]
Ryan Peterson
We use voice to call truck drivers.
- [52:38]
Host
Oh right, right. This is experimental or this is out the door.
- [52:41]
Ryan Peterson
Now we're making four or five thousand phone calls a day and this is.
- [52:44]
Host
What assigns truck drivers to certain things.
- [52:45]
Ryan Peterson
And gives them opportunities. So we have 400,000 truck drivers on the mobile app.
- [52:49]
Host
Right.
- [52:49]
Ryan Peterson
But we only have 200,000 loads a year. Okay, I've got too many truck drivers.
- [52:53]
Host
Okay.
- [52:54]
Ryan Peterson
You're not going to open the app if there's only a load every two years. Right. The simple math, they won't engage. And so what we'll do is call if we think we have a load that they would like. We call them AI Voice.
- [53:05]
Host
Yeah, and it understands and assigns, it.
- [53:07]
Ryan Peterson
Has a full on conversation explaining all kinds. I mean it's really good and it gets better every few months and cheaper. The price of that's come down about 90% in the last year and it's becoming quite commodified. So we use vendor but there's two or three other vendors that are 95% as good and there's an arms race there that we're benefiting from and a lot of this stuff. So AI voice, we're also going to use it for more and more things. Calling to make appointments at terminals or warehouses, calling to check statuses, collect data, email data collection. A lot of what we do a lot of. In fact the core Flexport technology engine for workflow is workflow engine. It's for moving freight around the world. You need taking unstructured data like this is done by Humans at our competitors. And even in parts of Flexport where you're like, smart person, understands the process, you give them an unstructured problem, you say, hey, move this from here to here. They know what to do. They figure it out. And what Flexport's done over the last decade is break that into simple tasks that are so simple that anybody could break that apart into a simple form, a web form. You could argue that maybe we've spent a decade building simple tasks that we didn't need to, that you could just give to AI, Give it to AI and let it do the complexity. What we're finding right now is that it can't, but it can do the simple tasks. So we've set ourselves up beautifully for it. But as the AI keeps compounding acceleration, you may get to escape velocity, where you're like, I don't need the workflow engine at all. I can just run. Go do it all on its own. So we'll see. We're staying paranoid about it. Stay as close as we can so that when those breakthroughs happen, we're the first ones to benefit.
- [54:46]
Host
That's wild. Okay, I just want to keep in mind time. We're at the top of the hour. Do I have time for two more questions?
- [54:51]
Ryan Peterson
Yeah.
- [54:51]
Host
Okay. All right. So I want to ask you about your trip to the Panama Canal. You went down there. Apparently there's been a drought impacting the canal's ability to process loads. But talk a little bit about what you saw and the impact of this drought on the canal's ability to operate.
- [55:07]
Ryan Peterson
Yeah, the drought. The thing is that droughts are pretty regular occurrence. With the El Nino phenomenon, you'll have rainy years and then dry years. So 2023 was quite a dry year. And that led to 2024 not having enough water in the canal to operate at full capacity. So that led to only about two thirds the number of ships transiting the canal as were theoretically capable of transiting, which led to huge bottlenecks and delays. One point, you had a 21 delay, 21 day delay.
- [55:40]
Host
That's crazy.
- [55:41]
Ryan Peterson
Ships waiting to clear the canal. It only takes 22 days to go around. What a coincidence. By the way, how did you manage to keep your delay?
- [55:48]
Host
Well, probably under the wire.
- [55:51]
Ryan Peterson
No, it's probably just people. I say, oh, you have to make me wait 23 days. I'll go around. So it's a national natural governing effect there.
- [55:57]
Host
The market's working things out, probably.
- [56:00]
Ryan Peterson
So, yeah, there was drought. The Panama Canal. I mean, if you're ever. I Meet people in Panama who went to Panama and didn't go to the canal. I'm like, what are you doing? I went all the way there just to see the canal and I would do it again. Fascinating. One of the most amazing engineering feats in human history, which is not really easily appreciated until you see it because it's not a sea level canal. That's the reason rainwater matters. It's a freshwater canal. The Suez is a seawater canal. The Suez came first. The same guy who built the Suez tried to build a sea level canal through Panama, failed. And it's an impossible task because it's a rainforest and it's a mountainous rainforest. So at a sea level canal, you're going to get whitewater rivers and waterfalls and mudslides, all the waters flowing into your canal and then turning into a whitewater river racing to the sea. The geology, the. It would be. We just don't have the energy levels, the resource levels to make a sea level canal through Panama. And they certainly did in the 1800s and they were tempting this. So what they did instead, the Americans came over about 10 years after that failed. And instead of trying to build a sea level canal, we just dammed the biggest river in Central America called the Chagres river and made a huge lake. And the canal is actually just an enormous lake. And then a very short canal that takes you up to the lake level with locks.
- [57:29]
Host
I had no idea.
- [57:30]
Ryan Peterson
And you actually just sail right across the top of the country on this lake.
- [57:33]
Host
That's crazy.
- [57:34]
Ryan Peterson
It's really crazy. You see it, you're like, oh my goodness. How did they. We would never attempt such a thing today. Like we're just going to. First of all, they had to overthrow. It was part of Columbia. Columbia didn't want. They were negotiating too hard. And Teddy Roosevelt just said, no, we're taking this away and creating a new country. And sent battleships down there to take it from them.
- [57:51]
Host
Okay. Legitimately crazy.
- [57:53]
Ryan Peterson
Yeah. We just wouldn't do this kind of stuff anymore at all. Much less like put a giant dam on top of your country.
- [58:00]
Host
I hope not. We never say never. Given the way things are tracking.
- [58:04]
Ryan Peterson
It was good for the world, the Panama Canal. But yeah, incredible place to go visit and see it firsthand. But that drought, what's interesting is that there was a drought, but the droughts are relatively common. You can look at the rainfall pattern and every six to eight to 10 years there's a year with like very low rainfall. El Nino or La Nina, I forget the difference between the two. But it's all part of the same effect on the Pacific, the warming and cooling of the Pacific Ocean. And so the 2023 drought was real, but it was entirely predictable. And what happened is in 2016, they expanded the canal. They were very worried that China was going to build a canal through Nicaragua and their monopoly on transiting between the Atlantic and the Pacific. The Panamanian government was very worried about this. And so they raced through to make a wider canal so that bigger, wider ships could make it through. Well, if you make a wider canal in a freshwater canal, more fresh water is going to flow out of your lake and the lake levels are going to drop, and you need more rain to operate it. And so when the drought hit, the system just didn't have enough water in it. But it's relatively predictable. It's entirely predictable because actually, 2014, you had lower rain than 2023. There have been many instances of lower rain. So if you're doing your engineering, you go, oh, okay, let's look at the lowest rain that we've had in the last. I don't know what you want, 50 years, 100 years. But building it up to that level may have just been prohibitively expensive. And so we might just live in a world where every six years, your canal is not operating at full capacity.
- [59:43]
Host
Wow, that's crazy. What a cool visit. I have to go down there.
- [59:46]
Ryan Peterson
I recommend. It is also just a great country, a lot of history, some cool beaches, nature.
- [59:52]
Host
Yeah. My wife has been. She loved it. So I have to make my way down. Okay, last, last thing for you. Tom Lee was on recently, the investment strategist, and was talking through, like, the Black Swan events we've had over the past five years. He's been like, there's been one every year for the past five years. And then he listed off a bunch, including Covid, the bullwhip that we had to the shipping fees that we talked about earlier. That it became. There was so much demand and so little supply of ships that all of a sudden you had inflation because it was $20,000 a container. And then we talked about Liberation Day as another one. I was like, tom, it's interesting that supply chain is a constant through all of this.
- [60:33]
Ryan Peterson
Yeah. When. Don't forget. I'm sure you guys talked about it, but Ukraine, war and the planes couldn't fly over Russia anymore. That's been a huge logistics impact.
- [60:40]
Host
We were talking also Gaza and the Houthis shooting.
- [60:42]
Ryan Peterson
Houthis have cut off container ships are not going through the Red Sea for the last 18 months, right? Yep. And you can go. Trump himself was kind of a black swan the first time around and put all these tariffs in. In fact, you go Further back in 2016, we had the cheapest ocean freight in human history. It was actually a glut of capacity. It was the opposite. Problem is now. But one of the Korean Ocean carrier Hanjin went bankrupt that year. Since I started Flexport, it's been one of these black swans. Just like crazy. We like it. I mean, our customers. It sucks for the customers, but it's part of why we like working in logistics. It's like never the same thing. Always learning, always on your toes. I can read the newspaper every day and have some perspective of like, oh, actually, yeah.
- [61:25]
Host
I mean, it's why it's always fun. Our conversations are always fun because you just have this visibility into the global economy that a few do. Because of what you do.
- [61:31]
Ryan Peterson
Yeah. Someone asked me recently if I was stressed out and I was like, yeah, that's how I like it. I want to be stressed.
- [61:36]
Host
Yeah, okay. And then the last thing is I was with Dwarkesh Patel a couple weeks ago.
- [61:44]
Ryan Peterson
I love him.
- [61:45]
Host
He's great. And we were talking about him.
- [61:47]
Ryan Peterson
I love his podcast.
- [61:48]
Host
Oh, he's awesome. Yeah, we were talking about what. Oh, he actually made this point about. I was talking to him about which models are going to be better. He goes, well, you have electronics. Some electronics are better than others. Sometimes there are companies that are both making TVs, but one will just be better at it. He goes, I don't know why. I said, I think it's probably supply chain. I'm curious if you think that's the case, that companies that do a better job managing the supply chain, getting the right parts, are the ones that are going to be outperforming the others.
- [62:18]
Ryan Peterson
Yeah, I think definitely. I mean, it was. Supply chain is a pretty broad definition. I mean, it's ultimately going to encompass designing your product, producing the product, making the product. So kind of almost by definition. But even in the logistics piece, definitely see companies that have too many people can't get out of each other's way too many silos between departments and fighting of like, there's just a lot of people have to come together to run a supply chain. You have the designer of the product, the merchandiser who's like, figuring out how many of each product to buy and how they're going to sell it and position it. You've got your production sourcing. Which factories are we going to work with the production quality assurance you have logistics, you have trade compliance, you have finance. I just listed six or seven marketing. A lot of departments. Some companies get, I think, too big, where there's too many people and can't get along. A lot of problems with data sharing that we try to address our goal at Flex, where we get all these users to use our platform. So we're not just for the logistics team. All those other people have some skin in the game of figuring out what's happening and want access to the data and want to see what's going on. But even figuring out what price should you charge, a lot of companies will not have good enough data about their cost down to the individual item level because there's all these, like the freight costs, the customs costs. The freight cost is very different. If it's ocean versus air, you'll see a lot of decisions made without good data about this stuff. So those can make the product too expensive. You're doing so much air, freight should be doing ocean. All of this goes into the equation of what makes a good business. And then if you're profitable, you can reinvest the profits and make your products even better. And if you're not, you can't reinvest operational competence. That's what it comes down to 100%.
- [64:13]
Host
Ryan, always great to have you on the show. Thank you so much for coming on.
- [64:15]
Ryan Peterson
Yeah, my pleasure.
- [64:16]
Host
Super fun. And folks who want to learn more about Flexport, the website is flexport.com it.
- [64:20]
Ryan Peterson
Is flexport.com, check us out if you want to learn more about trade and everything that's keep on top of the tariffs. We run a free series of webinars every two weeks.
- [64:29]
Host
Great, great webinar.
- [64:30]
Ryan Peterson
Stay with the latest stuff. What's going on? Try to stay on top of this for you.
- [64:34]
Host
And folks, Ryan's a great follow on X. You can follow him at types. Fast. T, Y, P, E, S, F, A, S, T. Apparently you are very fast typer.
- [64:43]
Ryan Peterson
The domain was. The handle was available. I don't know if I'm that fast.
- [64:47]
Host
There was one moment where I think you demonstrated your fast typing skills. But anyway, we'll save that to the next show. All right, Ryan, thanks again for coming on. Thanks, everybody for listening. We'll be back on Friday to break down the week's news. Until then, we'll see you next time on big Technology Podcast.