0:00

trade is under immense pressure from many

0:02

angles. What's the mindset that you've seen

0:04

in your customers, these American businesses who

0:06

are ordering from China? It's very ugly.

0:08

There will be bankruptcies from this. People

0:10

are pretty pissed off realizing, hey, know,

0:12

you built your whole life, built your

0:14

whole career around this. And now all

0:16

of a sudden, you know, maybe your

0:18

business model doesn't work. They're sitting there

0:20

thinking, okay, we still have to set

0:22

up our customers. They're trying to figure

0:25

out where they can reconfigure and how

0:27

quickly they can do that. Ironically, like...

0:29

of this stuff might increase the demand for

0:31

global shipping. A lot of what's happened is

0:33

manufacturing has moved. Final assembly manufacturing has

0:35

moved to places like Vietnam. But a lot

0:37

of the components are still made in

0:39

China. If you're like, oh, trade's going to

0:41

go down. You're like, actually, trade might

0:43

go up. We have seen a tremendous growth

0:45

in global trade really since year dot.

0:47

When you look at this, you see anything

0:49

that changes that path. Human beings have

0:51

an innate desire to find a customer or

0:54

a supplier that helps them make their

0:56

life better. And if a certain government tries

0:58

to reign... guess what? The main line of

1:00

trade will move elsewhere and civilization will

1:02

advance. And there's many cases where cities that

1:04

were once great got left behind. My

1:06

personal prediction, you didn't ask me my prediction,

1:08

but I'll go ahead and say it. I'm

1:12

here with a man who is

1:14

really at the center of this

1:16

tariff storm and the impact of

1:19

these trade wars, Ryan Peterson, the

1:21

CEO of the very, very fast

1:23

growing logistics platform Flexport. And we're

1:25

going to talk about geoeconomics

1:27

and trade, but also software and

1:29

AI and the future of

1:31

globalization. So Ryan, crazy

1:34

time for you. So thank you very much for being

1:36

here. Yeah, that's great. Now, let's

1:38

start with the biggest headline. Global

1:40

trade is under immense pressure

1:42

from many angles, every angle

1:45

potentially. US tariffs

1:47

on Chinese goods are

1:49

currently 145%, I think,

1:51

and China has responded with 125 %

1:53

saying they won't go any

1:55

higher. You are seeing the fallout

1:57

in real time across your

2:00

platform. What's breaking first? Well,

2:03

the importers from China, people shipping from China

2:05

to the U .S. are basically a state

2:07

of distress right now. Because that 125%,

2:09

remember, is added to the previous tariff. And

2:11

Trump, in his first term, put in

2:13

25 % tariffs on most Chinese goods. Not

2:15

most, but a lot of Chinese goods. And

2:17

then Biden continued those and increased them

2:19

in some places. That's 170%. And

2:22

then, you know, there was already tariffs before

2:24

Trump ever took office of a few

2:26

percent on average. So that breaks most business

2:28

models. I think you're going to see

2:30

trade and people are in a really difficult,

2:32

I talked to a customer yesterday at

2:34

103 containers worth of furniture shipping from China.

2:36

So 170 % duty, I think is their

2:39

duty rate. And that is 145 of

2:41

which they didn't know when they placed these

2:43

orders. Right. So when the

2:45

containers arrive in one of the

2:47

big ports in the US. they're

2:49

slapped with an additional

2:51

unplanned. Yeah. And when they're

2:53

deciding right now, whether they even ship

2:55

them or call the factory and tell them

2:58

sorry and ruin their reputation with their

3:00

factory or do they import them and just

3:02

take, you know, take a huge loss. And

3:05

I think that kind of conversation is

3:07

happening in businesses all across the United States

3:09

today. And so it's very ugly. There

3:11

will be bankruptcies from this. And so my

3:13

personal prediction, you didn't ask me my

3:15

prediction, but I'll go ahead and say it,

3:17

is I just think there's going to

3:19

be a trade deal between the U .S.

3:21

and China. That's my prediction. I have no

3:23

firm evidence for this, but I can't

3:25

imagine that Donald Trump wants his legacy to

3:27

be like in his first quarter in

3:29

office, bankrupting thousands and thousands of businesses and

3:31

jacking up the unemployment rate. And, you

3:33

know, I mean, consumers are one thing. They'll

3:36

be upset. They can't get their stuff. They

3:38

can buy other stuff instead of that.

3:40

Let's dig into that a little bit because,

3:42

you know, for many of us, what

3:44

we see of globalization is that we can

3:46

buy a billion things on Amazon. So

3:49

if we go a layer at

3:51

a time, know, we talk about

3:53

containers, we talk about containers on

3:55

ships. You know, it's been

3:57

60 years, I guess, nearly, well, 66

4:00

years, I think, since the IDLX and

4:02

the first containers were put together. But

4:04

just help somebody who hasn't been inside

4:06

one of these. 20 foot long things

4:08

understand what goes in there because it's

4:10

not all iPhones, is it? The iPhone

4:12

probably ships by air most of the

4:14

time. It's a very valuable product. So

4:16

it's, yeah, but most of the things

4:19

that you see are shipped by ocean

4:21

freight, anything really. I mean, that's the

4:23

beauty of the container. It's standardized and

4:25

you can just put anything that fits

4:27

inside a rectangle can go in there.

4:29

But from China specifically, a lot of

4:31

consumer electronics, although also, yeah, some of

4:33

that flies by air. furniture,

4:37

apparel, you name

4:39

it. Now, a lot of

4:41

it, it's low complexity goods. So

4:44

things like apparel that are relatively easy

4:46

to produce and it's just about an

4:48

intensive labor operation. A lot of that

4:50

work has already left China over the

4:52

last decade for cheaper countries with cheaper

4:54

labor. China's done a great job of

4:56

increasing its standard of living. And with

4:59

that, the labor value, the dollars per

5:01

hour, it's gone way up. And so

5:03

if it's just cheap labor between the

5:05

tariffs that Trump put in in his

5:07

first term and just the rising inflation

5:09

of labor costs in China, a lot

5:11

of that moved to Southeast Asia, Bangladesh,

5:14

Sri Lanka, Cambodia, many other countries around

5:16

the world over the last decade. So

5:18

it tends to be higher complexity things

5:20

where there's an ecosystem of subcomponents. That's

5:22

why electronics is the hardest thing to

5:24

move out because you've got. You know,

5:26

no one company makes all of the

5:29

things. You're like buying little components from

5:31

other companies. And so therefore you have

5:33

an ecosystem. And that basically is in

5:35

Southern China. Yeah. And that ecosystem, of

5:37

course, has all of its codes and

5:39

clues, how they pass information, how you

5:42

understand, how you have the vibes of

5:44

what people want, what people need, who's

5:46

good, who's not good, which is why

5:48

it's not a simple case of lifting

5:50

and shifting. And we'll talk about that

5:52

a little bit later in our conversation.

5:54

But if we just come back to

5:57

the container and the ship, I mean,

5:59

the scale is staggering, right? Some of

6:01

the biggest ships have, what, 24 ,000

6:03

containers on them? So give us a

6:05

sense of what's in a container and

6:07

therefore what's in a ship, like in

6:09

dollar terms. Well, by the way, this

6:12

is the first opportunity we have to

6:14

just say how dumb the industry can

6:16

be sometimes. 24 ,000 TEUs, but that's only

6:18

12 ,000 containers. And TEU is half

6:20

container, which I think just frustrates me

6:22

to no end because at least once a

6:24

week, I hear somebody get a metric completely

6:26

off by 50%. Right, because you've

6:29

got the 40 -foot, but the right? They're

6:31

setting TUs, but they may not have the

6:33

TUs. He's like, yeah, we can't keep doing

6:35

this. Okay, so let's just clarify that. The

6:37

TU is the standard packet size of a

6:39

container, but actually containers are 40. TU is

6:41

20. Containers are 40 -foot long,

6:43

so a TU is half of the container

6:45

we see on the back. It's like measuring

6:48

your revenue in 50 set pieces. It's pretty

6:50

crazy. Anyways, yeah, the ships are

6:52

enormous. The ships, however, those mega, mega ships,

6:54

the 24 ,000 TEU ones, basically there's not

6:56

that many ports in the world that

6:58

can handle a ship of that size.

7:00

They're in China, they're in Singapore, and

7:02

they're in Rotterdam. Maybe Felix, though. I

7:04

have to check the European networks. But

7:06

the U .S. ports are not capable of

7:08

handling a ship that large. I think the

7:11

largest ship that's full, when they're more

7:13

full, they weigh more. They go deeper.

7:15

They need a deeper draft. I think

7:17

the largest one that can come to

7:19

the U .S. is more like 16 ,000.

7:21

U .S. is not invested in our port

7:23

infrastructure and it's very dilapidated. And that is

7:25

a sad fact here in the United

7:27

States is that we have a pretty

7:29

antiquated port. Nonetheless, yeah, the ships are

7:31

enormous. You put that next to it, they're

7:33

bigger than like a U .S. limits

7:36

class super carrier, aircraft

7:38

carrier. They dwarf their

7:40

sizes. So they're moving

7:42

around. The 16 ,000 TEU equivalent coming

7:44

to... to the u .s and there

7:46

is this powerful relationship between you can

7:48

use tu as a sort of

7:50

leading indicator of where gdp is going

7:52

to go right there's this multiplier

7:54

effect of if gdp goes up one

7:57

percent tu volumes go up two

7:59

to two and a half percent because

8:01

this trade has been such an

8:03

important anchor in how countries have got

8:05

rid yeah you've seen um global

8:07

trades percent of gdp go up and

8:09

up and up i think it's

8:11

around 50 now the only interesting fact

8:13

of all of this is As

8:15

the tariffs have hit China, a

8:17

lot of what's happened is vinyl assembly

8:19

manufacturing has moved to places like Vietnam

8:21

and other parts of Southeast Asia. But

8:24

a lot of the components are still made

8:26

in China. So you have to, if you want

8:28

to declare something that's made in Vietnam, you

8:30

have to undergo what's called a substantial transformation. And

8:32

there's specific customs rules about that. And we

8:34

got teams that people have exported total exports on

8:36

this, but I don't want to try to

8:38

oversimplify it. But there are rules for what has

8:40

to happen. And it's really about the value

8:43

add. both in materials and labor costs that has

8:45

to take place to then say that, yeah,

8:47

this is our product of Vietnam. But a lot

8:49

of the components, a lot of the parts

8:51

of the products are still made in China. And

8:53

so you end up actually from a logistics

8:55

standpoint, moving the same goods twice. You move

8:57

it once from China to Vietnam and then

8:59

once from Vietnam to the US. So ironically,

9:02

like some of this stuff might increase the

9:04

demand for global shipping. I sort of like

9:06

fully got my head around it and modeled

9:08

it in the right way. That's

9:10

something that didn't occur to me at

9:12

first. You're like, oh, trade's going to

9:14

go down. You're like, actually, trade might

9:16

go up. Yeah, I mean, actually, you're

9:18

bringing to the fore the complexity of

9:20

these global value chains that we now

9:22

have. They're not really supply chains. And

9:25

the reality of the complexity, so is

9:27

that what's happening amongst your customers and

9:29

your teams, that they're sitting there thinking,

9:31

okay, we still have to serve our

9:33

customers. What are the parameters that were

9:35

allowed by global trade rules to now

9:37

declare that this has been manufactured

9:39

in Vietnam or Mexico. And they're trying

9:42

to figure out where they can reconfigure

9:44

and how quickly they can do that.

9:46

Absolutely. And as you mentioned at the

9:48

outset of your audience and you guys

9:50

cover AI a fair amount. And so

9:52

one of the interesting things here is

9:55

the GPU, the semiconductors are duty free

9:57

under Trump's new trade. Now, with the

9:59

reciprocal tariffs, this was all pods. But

10:01

when reciprocal tariffs were coming down the

10:03

pipe a week ago, this was one

10:05

of the hot topics. And it may

10:07

come back in 90 days when this

10:09

thing comes back around. is that semiconductors

10:11

are duty -free, but graphics cards are not.

10:14

And so if you take a GPU, and

10:16

the GPU is obviously the most expensive

10:18

part of the graphics card, and you transform

10:20

it into a graphics card by adding

10:22

it, you know, I don't know. Stick it

10:24

on the PCB and you put the

10:26

edge ports and all that stuff. do a

10:28

couple more things. Now you've got a

10:30

very high -duty product you import. It

10:32

might actually lead to some American

10:34

manufacturing because we're going to import

10:36

the semiconductor separately from the PCB

10:38

and the other components, assemble

10:41

it in the U .S., and then send

10:43

it back to wherever in the world to

10:45

turn it into a computer and send it

10:47

back over. And you've now said, hey, the

10:49

portion of this product that's made in America,

10:51

I get to deduct from the final value.

10:53

I mean, you're going to generate all kinds

10:55

of... stupid inefficiencies at the

10:57

end of the day. I mean, by

10:59

the way, you're flying these things around

11:01

the world, generating carbon and costs and

11:03

all this idiocy just to save some

11:06

kind of regulatory hack. But that will

11:08

happen for sure. That already

11:10

happens on all kinds of cases where

11:12

people are trying to save money on duties.

11:15

Right. I want to dig into that later in

11:17

our conversation when we talk about what comes next.

11:19

But I'm curious about... Flexport, because

11:21

Flexport sees a large number of

11:23

customers, right? I think you see

11:25

3 % to 5 % of U .S.

11:27

trade across your platform. Is that

11:29

right? Just 1 % of global

11:31

trade, roughly, that you see across

11:33

the platform? No, it's more like

11:35

1 % of U .S. trade, a little

11:37

bit smaller on some other markets. But

11:39

yeah, it's still pretty significant. What have

11:42

you numerically seen? How many of your

11:44

customers have said, We're just going to

11:46

pause what's coming out of China right

11:48

now until we understand what's going on.

11:51

Yeah, we're still taking survey

11:53

of it all. A

11:55

week ago, when the reciprocal

11:57

tariffs were still live,

11:59

or proposed rather, and pending

12:01

for all of the

12:03

world effectively, we did kind of

12:05

a call down last Friday. A week ago,

12:07

we called as many customers as we get

12:09

a hold of. And that time, 28 %

12:11

of them told us they were going to

12:13

pause their bookings after this hit. And

12:16

so we're still kind of recalibrating. What does

12:18

that mean for the ones who are just

12:20

China oriented? And presumably the other ones with

12:22

a 10 % duty aren't changing a lot

12:24

of business plans. Although part of what that

12:26

story is there, it's not just that these

12:28

companies are totally screwed and going to pause

12:30

all operations. A lot of what happened is...

12:32

This date was known. Liberation date has been

12:34

known since Trump took office, effectively, or maybe

12:36

since he got elected. You know this date

12:38

until, I think, on January 21st or something.

12:40

So you've had two months to prepare. And

12:42

so people front -loaded and imported a lot of

12:44

inventory and are pretty well started. it has

12:46

to get here, of course, right? I mean,

12:48

it doesn't matter if you ordered it. no.

12:50

Actually, the way they made it was it

12:52

just has to depart. The vessel has to

12:54

depart at origin. It had to depart. Now

12:56

it's in the past. By

12:58

the 9th of April, it had

13:00

to depart to avoid the higher

13:02

duties. There was a mad

13:04

scramble last week to get everything loaded, and now

13:07

people have said they were going to take

13:09

a pause. Our bookings are down for sure this

13:11

week as people go through this math and

13:13

figure out what they want to do and realize

13:15

they have stock. A lot of people believed,

13:17

like I did, and I told all our customers,

13:19

hey, I think a deal is going to

13:21

get done on these countries. And we were right,

13:23

and they were right, the ones who thought

13:25

that was going to happen. China,

13:27

I do believe a deal is going to

13:29

get done. I just think it's a lot harder.

13:32

to negotiate both sides need to save face

13:34

both sides have made this a big

13:36

part of what they're um all about and

13:38

being showing that they're strong um and

13:41

they have very different negotiating styles the chinese

13:43

don't want to ever risk their leader

13:45

this isn't specific to xi this is about

13:47

chinese culture you don't want to risk

13:49

the leader ever looking bad you know so

13:51

that's not uncommon to be fair but

13:53

yeah totally totally fine uh maybe it's not

13:55

just the chinese thing but they want

13:57

to negotiate this at the lower level make

13:59

sure it's really done and then The

14:01

two leaders meeting is a formality. Trump

14:04

doesn't care if he looks bad. He wants

14:06

to make, you know, he's going to go in

14:08

there and yell at some people and try

14:10

to, you know, try to work out a deal

14:12

man to man. So there's very different negotiating

14:14

styles that'll be hard to overcome. American interests and

14:16

Chinese interests have obviously many points of divergence

14:18

and there's real substantive issues here that have nothing

14:20

to do with tariffs. But

14:23

I just think it's, you can't

14:25

go through with this and just devastate

14:27

the American small business, especially. That's

14:29

probably something that parties all around

14:31

the world understand. But what you've

14:34

just described is the number of

14:36

moving parts, complexities, bits that are

14:38

completely inscrutable to us because we

14:40

sit and, you know, even in

14:42

your case, we are close to

14:44

the customers. You're reading what's coming

14:46

and learning things through the news.

14:48

But just give us a sense

14:50

of what's the mindset that you've

14:52

seen in your customers, these American

14:54

businesses who are ordering a lot

14:57

of merchandise from China. mindset

14:59

is working well at this moment? I

15:02

mean, they're pretty pissed off. People

15:04

have built businesses over a decade playing under the

15:06

rules of the game, as it was defined. I

15:09

mean, you know, that is the job of the

15:11

government, to find the rules. And then the business

15:13

people got to find a way to make money,

15:15

whatever those rules might be. But having those rules

15:17

changed out from one of you with no notice

15:19

overnight. I mean, you had some notice. People knew

15:21

that some things were going to happen here. But,

15:23

you know, it takes time to shift the supply

15:25

chain, to make decisions, et cetera. Yeah,

15:28

people are pretty pissed off.

15:30

Some despair, some realizing, hey, know,

15:32

you built your whole life,

15:34

built your whole career around this

15:36

company. And now all of a

15:38

sudden, you know, maybe your business model doesn't work.

15:40

And yeah, it's pretty terrible. Yeah,

15:42

I mean, I think it is pretty

15:44

terrible. I think we'll hear more than

15:47

individual stories over the coming weeks, right?

15:49

As the reality bites and people are

15:51

able to sort of try to take

15:53

stock of where they are. Yeah,

15:55

people are not running with 200 % profit

15:57

margins by and large. So, you know,

15:59

you have a 100 % import tariff. It's

16:01

pretty tough. But what I'd like to do

16:03

maybe is just step back a little

16:05

bit to this whole overarching question of globalization.

16:07

So, know, we have seen

16:10

a tremendous growth in global trade

16:12

really since year dot. I mean,

16:14

it is something that humans like

16:16

to do. You know, you find

16:18

Viking coins in parts of Central

16:20

Asia, right? And they date from

16:23

1000 AD. People like

16:25

to travel, they like to trade,

16:27

and trade is very, very helpful

16:29

to improving the quality of life.

16:31

It's actually an exponential, right, in

16:33

a sense. I mean, it's not

16:35

a Moore's Law exponential of 60 %

16:38

a year, but it's 4 %

16:40

to 5 % a year over centuries.

16:42

That really, really does compound. I'm

16:44

just curious about whether when you

16:46

look at this, you... see anything

16:48

that changes that path? Or is

16:50

this a blip of the type

16:52

that we say saw in the

16:55

1920s or the 1890s when there

16:57

was a period of retrenchment? I

16:59

look at it that way as

17:01

a blip. You look at that

17:03

long run of trade, it has

17:05

grown 4 % annually since the

17:07

Mongol invasions at least. So you've

17:10

got 800 years of this compounding. 4

17:13

% doesn't sound like much, but when you

17:15

do it for that long, it looks like a

17:17

Silicon Valley straight line vertical at that point.

17:20

And on that graph, World War II

17:22

barely shows up. You know, the

17:24

Black Death doesn't show up. There's some

17:26

terrible things that happen that don't

17:28

compare to this. Right. What

17:30

does show up is

17:32

the 1890s process of

17:34

deglobalization that took place

17:36

and also the 1920s.

17:41

Those were very real events, but

17:43

the growth has been so much

17:45

that it just looks really tiny

17:47

now. What shows up actually

17:49

is COVID hit, the great financial crisis,

17:51

because we're so big that all of

17:53

a sudden the drop of 20 % on

17:56

this huge number looks like a real

17:58

thing. Whereas even if you drop 30%,

18:00

the numbers were so small back then

18:02

that it looks like a little tiny

18:04

thing because 4 % of what we're

18:06

doing now... is way bigger than a

18:08

drop of 30 % in the Great Depression.

18:10

So that's just the nature of exponential

18:12

math. So yeah, I

18:14

think you'll see trade be bigger 10

18:16

years from now than it is now. There's

18:18

too much benefit to both parties. That's

18:20

why you're doing it. Governments will try to

18:22

rein it in. Many reasons why people

18:24

in power want to preserve their power, exercise

18:26

their power. But human

18:28

beings have an innate desire

18:31

to find a customer or a

18:33

supplier that helps them make

18:35

their life better. make them make

18:37

more money. So generally those

18:39

forces tend to overcome. And

18:41

if a certain government tries to

18:43

rein it in, guess what? The

18:45

main line of trade will move

18:47

elsewhere and civilization will advance. And

18:49

there's many cases where cities that

18:52

were once great and once hugs

18:54

of global trade got left behind

18:56

because of policies that they enacted

18:58

or the geography shifted. New

19:01

trade routes were discovered.

19:03

You know, you can think

19:05

of places like Venice

19:07

or even Brewery. Yeah. Many

19:09

other places around the world that

19:11

were at one point thriving hubs

19:13

of civilization and then just got

19:16

left behind because of sometimes policy,

19:18

sometimes geography, sometimes new technologies. There

19:20

are many reasons, but trade moved on. You

19:23

have to be careful as

19:25

a government trying to regulate too

19:27

much on these things and

19:29

essentially plan your economy. I mean,

19:31

they can do some stuff

19:33

that might lead to similar American

19:35

jobs, but at the cost

19:37

of making every American worse off.

19:39

It's a complex picture. I

19:41

mean, what you've painted, of course,

19:43

is this consistent element of

19:45

the world over the past thousand

19:47

years that we, a bit

19:49

like the internet, but it's much

19:51

more important in a sense,

19:53

don't... don't see right we don't

19:55

notice that there is this

19:57

whirling ecosystem of infrastructure uh of

20:00

40 -foot containers of automated ports

20:02

of automated loading we we

20:04

just we live with the benefits

20:06

but they've had quite a

20:08

tough 10 years logistics professionals haven't

20:10

they yeah it's been nothing

20:12

but chaos really for the last

20:14

decade uh between tariffs between All

20:18

sorts of obstacles to trade. War

20:20

in Ukraine has been pretty... I mean,

20:22

obviously, humanitarian crisis on the ground,

20:24

but it also has had a big

20:26

impact on all the air cargo

20:28

can't fly over Russia anymore. Pretty inconvenient

20:30

and costly. And yet, the world

20:32

finds a way. I mean, the world

20:34

finds a way to do more

20:36

trade. Trade has grown. Trade with China

20:38

has grown, even since the tariffs

20:40

started. Even since tariffs, right? In 2016

20:42

to 18. But there is something

20:44

that's going on that is about... And

20:46

I'm not sure whether this is

20:48

a story of fragility or it's a

20:50

story of resilience, right? I

20:52

think it's really a mix of

20:54

both. So going around the Red

20:56

Sea and through the Suez Canal

20:58

has been a thing that's been

21:00

important. It's been really important since

21:02

the Suez Canal was there. It's

21:05

been important for the last 30

21:07

or 40 years. So much so

21:09

that, you know, you think of

21:11

those Nimitz supercarriers that you talked

21:13

about. They existed in

21:15

that area to keep those sea

21:17

lanes open. And yet they've not

21:19

been able to keep them open,

21:21

right? They've not been able to

21:23

keep them open by a, what

21:26

is barely a fully fledged nation,

21:28

right? In terms of the Houthi

21:30

rebels, right? So there's a point

21:32

of fragility. And a point of

21:34

resilience is how we bounced back

21:36

from COVID. And then we get

21:38

to the point of fragility, which

21:40

was a single tanker, the ever

21:42

green, ever given. The ever given

21:44

gets stuck and billions of dollars

21:47

of damage are done. So how

21:49

do we understand that? Is this

21:51

a fragile system? Is it a

21:53

resilient system? Is it one that

21:55

will ultimately reconfigure if there's enough

21:57

of an impetus on it? It's

22:00

quite resilient because it's decentralized

22:02

and lots of actors who are

22:04

making decisions on their own

22:06

part. There are definitely some

22:08

choke points and we see that

22:10

with the Red Sea. Panama

22:12

Canal, Straits of Malacca, you know, South

22:14

China Sea. There are some choke

22:17

points in the world that create some

22:19

fragility, but in general, it's a

22:21

relatively robust system. And it has been,

22:23

the global order has been of

22:25

free trade and globalization. It's something we've

22:27

basically taken for granted, but it's

22:29

a post -World War II phenomenon. Before

22:31

World War II, the countries

22:34

basically did trade with their colonies.

22:36

Right. And a lot of the ships were,

22:38

you know, you had to put cannons

22:40

on your ship. if you wanted to do

22:43

trade. And it's sort of a newer

22:45

concept that the United States Navy is going

22:47

to be out here. I mean, the

22:49

British Navy did a lot of this before,

22:51

but the United States Navy since World

22:53

War II has been the guarantor of freedom

22:55

of navigation and free trade. And now

22:57

anybody can go anywhere as long as you

22:59

play by the rules. And the WTO

23:01

really accelerated that. But it is a big

23:03

challenge to the global order. The Houthis

23:05

is the story that I think is the

23:07

biggest story in the world, the most

23:10

underrated story in the world. um that this

23:12

small rebel group can cut off global

23:14

trade and all the ships are having to

23:16

route around it uh route around africa

23:18

and take a much longer journey and the

23:20

united states navy who's supposed to be

23:22

the guarantor of freedom of navigation hasn't been

23:24

able to stop it trump is up

23:26

the attacks and so maybe there's some progress

23:28

to be had but if that's the

23:30

case and we go back to a prior

23:32

world it's um Yeah, a lot

23:35

of the prosperity that modern world is built off

23:37

of that freedom of navigation that we do

23:39

take for granted. And the United States doesn't care

23:41

that much, it seems. And not just under

23:43

Trump, right? Biden didn't do much

23:45

about it in general. The United States trades

23:47

the least of any major country as a

23:49

percentage of the economy. I mean, we're the

23:51

biggest, us and China are the two biggest

23:53

countries in terms of trade. But as a

23:55

percentage of our economy, it's pretty small. The

23:59

U .S. is a big country with so

24:01

much great natural resources and we're independent

24:03

on food and energy. And so we're just

24:05

less inclined. We need it less than

24:07

other people. Do you think it was a

24:09

reasonable deal for the U .S. Navy to,

24:11

I mean, it cost a lot. It

24:13

cost a lot to run those supercarriers, right?

24:15

They used to cost $5 billion. They

24:17

probably cost $10 billion now. They've got 70,

24:19

used to have 90 aircraft on them.

24:21

They used to have 6 ,000 sailors and

24:23

airmen. They now have 3 ,000. Things are

24:25

more efficient. Was the U .S. getting a

24:27

good deal out of that? We got to

24:29

become the reserve currency of the world.

24:32

And I think that's a big part of

24:34

why we're the reserve currency, because we're

24:36

seen as the security guarantor. And being the

24:38

reserve currency kind of makes you rich

24:40

without doing that much. Everybody wants your currency.

24:42

You can use that to buy whatever

24:44

you want around the world. And so in

24:46

general, it's created a set of problems.

24:48

The problems are easy to see. The benefits

24:50

are less obvious. You take them for

24:52

granted more. But the fact that,

24:54

you know, you can just... When I was

24:56

American, you travel abroad, you're like, man, this

24:58

place is cheap. Wherever you go,

25:00

it means you're rich. Right,

25:02

of course. When I travel

25:05

to the US, I really do

25:07

notice that American GDP growth

25:09

has been 2 % or 3 %

25:11

higher than the UK's for

25:13

the last 20 years. And you

25:15

notice it when you go

25:17

into the local coffee shop, right?

25:19

America is rich and it's

25:21

connected to the reserve currency. It's

25:23

connected to the infrastructure that...

25:25

has enabled this globalization. I

25:28

want to come to the Houthis because

25:30

they are underrated in all of this.

25:32

How damaging has it really been for

25:34

cost, right? I mean, it's clearly more

25:36

expensive to go around the Cape than

25:38

to whip through the Suez Canal and

25:40

takes a lot more time. Is it

25:42

really significant or is it, again, one

25:44

of those blips on the graph? I

25:46

think it'll turn into a blip because

25:48

last year, It

25:50

was very expensive last year. Especially for Europeans,

25:53

it raised the price of shipping a

25:55

container from Asia to Europe by three to

25:57

four times, depending on the exact route.

25:59

But let's put some numbers on that. That's

26:01

like a few thousand dollars. That's from

26:03

a couple of thousand to maybe $8 ,000

26:05

a container. Yeah, something like that. And it

26:07

raised the price of freight on all

26:09

lanes, even Trans -Pacific. It has nothing to

26:11

do with the Red Sea. The price went

26:13

up two to three times. Call

26:18

it from long -run average of $2 ,000

26:20

to ship a container to more like

26:22

$5 ,000, $6 ,000 almost to ship a

26:24

container. But it does look like that'll

26:26

be temporary, even though the hoot easy

26:28

is unclear if it'll be hopefully temporary

26:30

in the long run of history. But

26:33

I'm not making any prediction that that's

26:35

going to open up anytime soon. And

26:37

nonetheless, the price is going to come back

26:39

down, has already come back down, largely because

26:41

it's a supply and demand thing. And the

26:43

carriers, the ocean carriers who operate these container

26:45

ships made a lot of money, sort of

26:47

famously during COVID, the price went so expensive,

26:49

they made a lot of money. And they

26:51

reinvested it in more ships. And it's how

26:54

you know you have a functioning market. Some

26:56

people allege that there's some kind of a

26:58

cartel and they're taking advantage and jacking the

27:00

price up. They immediately went all

27:02

and went crazy buying more ships, probably

27:04

more ships than they need. And we're about

27:06

to head into a world, especially with

27:08

these tariffs of massive overcapacity where you have

27:10

too many container ships relative to the

27:12

volume of cargo that needs to get moved.

27:14

And the price of freight is going

27:16

to be cheap again. And if now the

27:18

Red Sea were to open up, the

27:20

price of freight is going to collapse. Collapse.

27:22

Right. That might be good strategy by

27:24

the Houthis if they want to create some

27:26

upset in the global economy. Let me

27:28

ask you a question. I want

27:30

us to think about this long

27:32

run that you've talked about. And

27:34

one of the things that's happened

27:36

is that the cost of shipping

27:38

has been on one of those

27:41

inverted exponential curves, right? It's just

27:43

fallen so far over 100 years

27:45

just to move something across. This

27:47

sounds a bit absurd, but does

27:49

a temporary tripling of the cost

27:51

to ship a container that's full

27:53

of LCD TVs against the long

27:56

run of where prices were five

27:58

years ago or 10 years ago,

28:00

Is really an upward pricing pressure

28:02

for the consumer? Or is that

28:04

just something that we could actually

28:06

manage and absorb, right? Because the

28:08

curve is kind of doing that,

28:11

right? It's just coming down year

28:13

after year, decade after decade. Yeah,

28:15

well, I just mentioned the price of

28:17

ocean freight, but it's obviously taking a

28:19

lot longer. So that's a lot more

28:21

inventory on the water, a lot more

28:23

working capital. So there's definitely economic impacts

28:25

here. And then more so, it's symbolic

28:27

and potentially strategic. change of the environment

28:30

where if the Houthis can do it,

28:32

then why not somebody in the Strait

28:34

of Malacca? You know, Myanmar

28:36

is an unstable regime. Maybe they decided to

28:38

go a little crazy down there and

28:40

maybe somebody, you know, now Trump is going

28:42

down and saying we're going to take

28:44

back the Panama Canal. But you

28:46

never know. I mean, the world can become very

28:48

unstable very quickly. It takes much longer to

28:50

build things than to destroy them. And

28:52

so it's more of

28:55

a... are the longer -term

28:57

implications of the U .S. Navy no longer providing

28:59

that security guarantee and what will happen then?

29:03

Before the United States started doing

29:05

that, we lived in a

29:07

pretty crazy world. There are six

29:09

different times when private American

29:12

citizens conquered foreign countries and started

29:14

their own country. Six different

29:16

times that's happened without the government's

29:18

involvement. Oh, let's have the

29:20

six. Go on. Well, the

29:22

United States itself. Number one.

29:25

Number two, the kingdom of Hawaii.

29:27

Now, the kingdom of Hawaii

29:29

didn't exist. There was no kingdom

29:31

of Hawaii. When James Cook

29:33

got there, there were 40 different

29:35

tribes. And an American guy

29:37

and a Brit together, they met

29:39

some Hawaiian princesses and decided that they

29:41

would help their uncle conquer all

29:43

the islands. They got 10 ,000 rifles

29:45

and they went island hopping and conquered

29:47

it all and created the kingdom

29:49

of Hawaii. Yeah, okay, we don't

29:51

want to be doing that. You're right,

29:53

right? We live a lot in the same

29:56

world. We take it for granted, the

29:58

U .S. police, the U .S. global police

30:00

that prevents some of this stuff from happening.

30:02

And by way, maybe they're reigning in

30:04

the U .S. citizens ourselves. We've got 400

30:06

million guns over here, and there are

30:08

currently 21 countries without an army. So

30:10

that's kind of an ugly ratio if

30:12

you're just saying, hey, let's get the United

30:14

States military to back off. You don't

30:16

know what's going to happen next. I

30:18

mean, I'm sort of saying in jest

30:20

here, but you don't really want a world

30:23

of just pure chaos. No.

30:25

So in the case of

30:27

your business, Flexport, right, you see

30:29

large amounts of trade. You

30:31

understand who wants to move where

30:33

you are working to. I

30:35

mean, of course, one of the

30:37

costs of trade is moving

30:39

the goods in these. efficient containers.

30:41

There's also all the paperwork,

30:43

which is another substantial cost. And

30:45

you've taken aim at that

30:47

within Flexport. But what are the

30:50

changes that you have seen

30:52

in the dynamics and structure of

30:54

how trade operates in the

30:56

decade or so that you've been

30:58

running this business? I think

31:00

it's particularly interesting because I would

31:02

guess that Flexport customers are

31:04

quite forward -leaning, right? Because they're

31:06

working with a young startup rather

31:08

than paper ledgers. So what

31:10

is that? Is there a

31:12

sort of structural theme that is

31:14

common? Yeah, I mean, well,

31:16

the biggest one, obviously, is the rise

31:19

of technology. And when we started Flexport, the

31:21

reason I started Flexport was I just

31:23

was very frustrated by the freight forwarders. I

31:25

used to run a business and e -commerce

31:27

company, and it was pre -Shopify. So we

31:29

built all of our tech for online

31:31

checkout, shopping, inventory management, invoicing customers,

31:33

and logistics. And we had a lot

31:35

of logistics tech. We tried to interact

31:37

with the freight forwarding international side of

31:39

things. And everybody treated me like I

31:41

was an idiot. And they made me

31:43

like call them and email them. And

31:45

there was no web portal. And it

31:48

was those two things. It was tech

31:50

and the culture of customer obsession that

31:52

was missing. On the tech front,

31:54

know, in the last decade, we

31:56

saw Flexport driving this, giving people visibility, control.

31:58

Where's my stuff? When is it going

32:00

to arrive? Accurate data connectivity

32:02

between all the different parties in

32:04

the chain. And now

32:06

with AI, just doing incredible things. So we're proud

32:08

to have said we take a leadership. I

32:10

think anybody in the industry will say Flexport influenced

32:12

the industry a lot. A lot of companies

32:14

have started to invest because they have to. They

32:17

may have made those investments anyway,

32:19

but definitely it was a sort of

32:21

a survival thing. If you don't

32:23

invest in technology, it became very clear

32:25

that Flexport was going to eat

32:27

your lunch. And so, yeah, you've seen

32:29

a big rise of technology. And

32:31

I would argue no industry needs tech

32:33

more. I mean, it's kind of

32:35

crazy that 10 years ago in 2015,

32:37

there was no software to manage

32:39

this. I mean, how are you going

32:42

to run a globally connected network

32:44

for trade without the internet? It's insane.

32:46

Well, I think of the container

32:48

network a little bit like the internet.

32:50

You know, you have internet packets

32:52

and the container is of the box,

32:54

right? Mark Levinson's phrase for it

32:56

is like an internet packet that gets

32:58

moved around and you... don't know

33:00

necessarily what's in your internet packet unless

33:02

you inspect it and likewise in

33:04

your container. And then you have things

33:06

like the Port of Shanghai, which

33:08

is, I guess it's like three guys

33:10

and a dog and it's like

33:12

millions of containers going through there in

33:14

a kind of completely automated way.

33:16

It's a world away from the Steve

33:18

Doors of West Side Story. Yeah, there's

33:21

a lot of analogies from internet

33:23

packet switching networks, but it's not, you

33:25

know, in the internet. stuff

33:27

just works or the electrical grid is another

33:29

good analogy. You flip the light switch over

33:31

there and you're controlling a power plant in

33:33

real time. But when you

33:36

buy something on an online e -commerce site,

33:38

there's not, that's what we're building towards our

33:40

vision is that it'll kick off this

33:42

replenishment chain that the order will get submitted

33:44

to the factory. That's how we've built

33:46

our system. You place orders through your factories,

33:48

through our system. Those factories can become

33:50

users, create bookings to go

33:53

replenish and ship the cargo back

33:55

with algorithms to optimize the loading of

33:57

that container, route it correctly on

33:59

the cheapest way that'll get there on

34:01

time, determine where to ship

34:03

it, all of those things. That's

34:06

not how it's worked. It's a bunch of

34:08

dudes on telephones. I call it freight forwarding.

34:10

I often call it freight email forwarding. People

34:12

just passing PDFs and attachments and it's all

34:14

unstructured data. So yeah, that's a big change.

34:16

I think it's also, it's like, I don't

34:18

really worry if there's more, I have a

34:20

conviction that there will be more trade in

34:22

10 years. I'm not certain of it, but

34:24

I believe it. We

34:27

do know that the world will

34:29

want more technology to manage these things.

34:31

They will want lower transaction costs,

34:33

better user experience, better data to make

34:35

decisions about your supply chain. They're

34:37

going to want AI to make more

34:39

of those decisions and execute more

34:41

of the transactions on their behalf. We

34:43

have conviction that one of our

34:45

core values to play the long game.

34:47

It doesn't really matter if trade

34:49

goes up or down for Flexport's health.

34:51

We obviously want that for the

34:53

world. Well, let's bring these

34:55

two themes together, right? So

34:57

we started talking about the trade

34:59

war that is emerging, the

35:01

volatility of the messaging that's coming

35:04

from different places, the arrival

35:06

of tariffs and the pause. And

35:08

on the other hand, we've

35:10

talked about the technology's role in

35:12

enabling and affecting trade. In

35:14

a sense, in the last few

35:16

minutes, we'll talk about maybe

35:18

what comes next, but there is

35:20

a sense of once bitten,

35:22

twice shy, right? at

35:24

a national level and amongst customers

35:26

and manufacturers and retailers, they've

35:28

been exposed to a vulnerability, right,

35:30

that they didn't know they

35:32

had. And the last time probably

35:34

that happened was with COVID

35:36

and people moved to China plus

35:38

one or China plus N

35:40

and reshoring or friendshoring or close

35:42

by shoring. How do you

35:44

think they will respond, right? Is

35:46

it a sense of... will

35:48

be more regional trade blocks. There

35:50

will be more regional sourcing.

35:52

People will not just, you know,

35:54

gradient descent to the cheapest

35:56

possible supply and say, we need

35:58

to bake in some resilience

36:00

into our business model. Is that

36:02

the pattern of increasing interconnection

36:04

and complexity that you think might

36:06

happen? Or is there just

36:08

a historicist effect? It was working

36:10

really well, apart from these

36:12

things that are bigger than the

36:14

trade disagreement between America and

36:17

China. And that's a configuration that

36:19

makes sense. Well, I think

36:21

it was working well for a

36:23

company. Whether it was working well for

36:25

populations, for countries, is a debate

36:27

that's largely not the thing that most

36:29

business people are concerned about. Buying

36:31

cheap stuff from other countries and selling it

36:33

to the American consumer was working quite well

36:35

if you're the CEO of a company. So

36:38

the big change here is, yeah, now all

36:40

of a sudden you realize, oh, wow. Things

36:42

can change in an instant. Politics is more

36:44

important in your business than it ever was

36:46

before. And you all of a sudden have

36:48

to figure out to be very agile to

36:50

respond because government can be really unpredictable. And

36:52

now we're learning government can move really fast.

36:54

We're used to a world where government, they

36:56

make an announcement and a year later, customs

36:59

would implement that and you'd have some time.

37:01

So to me, I think the biggest thing

37:03

that businesses need to do, and the ones

37:06

that we live in a Darwinian world, and

37:08

so the ones that are good at this

37:10

will be the ones that survive. They

37:12

have to learn how to be

37:14

incredibly adaptive and run what John Boyd

37:16

coined the OODA loop of observe,

37:18

orient, decide, and act and figure out

37:20

who's the best at running those

37:22

loops of observing what's happening in the

37:25

world. Orienting means figuring

37:27

out what it means for you, who

37:29

needs to know, go make some decisions and

37:31

take action. So you're going to see

37:33

nimble companies survive as always. You're going to

37:35

see the adaptable one. That's Darwin. But

37:38

Darwin's going to be much meaner than he's

37:40

been. in the last decade, it

37:42

sounds like. Right. Some companies will thrive in

37:44

this environment because it is a competition at

37:46

the end of the day. It's always competition

37:48

in business. And so there will be winners

37:50

and losers and some people are going to

37:52

figure out how to... You see this with

37:54

some of our customers in the first trade

37:56

war. It's too early in this new one

37:58

to say what would the winners and losers

38:00

look like. But in the first time around,

38:02

you'd have a company that just set up

38:04

their supply chain in China, a young company. they

38:08

just when it happened like cool yeah

38:10

we're just shifting to korea and you know

38:12

and the company's been around for 50

38:14

years buying from china they don't know what

38:16

to do no one in the building

38:18

remembers how they did this in the first

38:20

place so um it's it's going to

38:22

be a that new competitive dynamic uh that's

38:25

more important than ever is i guess

38:27

the key word is agility yes it is

38:29

it is agility and i love the

38:31

the ooda loop right the the sense that

38:33

that drives your But your agility, if

38:35

you're able to get the data, read the

38:37

room, make the decision, orient

38:39

yourself, evaluate your decision more

38:41

quickly than your competitor, you

38:43

can adapt in the right

38:45

kind of way. And I

38:48

can imagine there are so

38:50

many different classes of companies.

38:52

And if it's lower value

38:54

consumer electronics, perhaps those can

38:56

come elsewhere. extremely

39:04

complex capabilities that has

39:06

evolved over two decades. It's

39:09

quite hard to imagine that you

39:11

can move any large portion of

39:13

it in anything less than five

39:15

to 10 years. I think the

39:17

shift to India, which is less

39:19

than 10 % of iPhone production,

39:21

took three to four years and

39:23

cost tens of billions, maybe more.

39:25

So there is this quite a

39:27

complex pattern that emerges, which I

39:29

think also mirrors the complexity of

39:32

the economy. It's very hard to

39:34

imagine a world where there's any

39:36

alternative to specialization as products get

39:38

more complex, right? The advanced productive

39:40

capabilities, they enable more diverse exports,

39:42

which feed back into advanced productive

39:44

capabilities. And can you really break

39:46

that cycle? And I'm not sure

39:48

you can. I don't know what

39:50

you think. Consumer behavior is going

39:52

to shift. It always does. But it's not just, though,

39:54

that it shifts to like, oh, now we're going

39:56

to buy stuff that's made in America. Like we have

39:58

customers that import pizza ovens and for your backyard. Oh,

40:01

yeah, I love those. I have one, yeah.

40:03

Yeah, cool. They're great. Well, the price of those

40:05

in the United States is good. I think

40:07

if they're made in China, it's like 100 -something

40:09

percent duty that just went on it. And you

40:11

might now prefer to just go buy pizza

40:13

in the restaurant, which is duty -free, made in

40:16

America pizza. So it could shift

40:18

to whole new categories of things. And

40:20

that's kind of almost a perfect replacement,

40:22

even though they're different products. But

40:24

it might shift today. I'm going to go.

40:26

to Hawaii and take a vacation, like instead of

40:28

buying the new iPhone. I mean, so there

40:30

are going to be ugliness. There are going to

40:32

be losers in these things, just like, you

40:34

know, it's again, Darwin is a good analogy. You

40:36

have some massive shift in the environment and

40:39

the climate or something else. And

40:41

it's not just that finches get replaced with

40:43

another finch. It could be all of a

40:45

sudden all the finches go extinct and there's

40:47

now some, you know, swimming iguana on there.

40:49

There's a million different ways that this can

40:51

play out. And that's the nature

40:53

of business. There's nothing new, but centrally

40:55

planned economies have been proven to just

40:57

be disastrous. And so I think that's

40:59

the biggest fear that I have in

41:01

all this. It's not like no business

41:03

should ever go out of business or

41:05

that it's all sacrosanct and you can't

41:07

touch an importer's business model or something.

41:09

It's much more that like centrally planned

41:11

economies, we just know that they throw

41:13

off poor results over the long arc

41:15

of history. And this has been such

41:17

an exogenous shock that has come, even

41:19

if it was telegraphed a little bit.

41:22

Thank you so much for spending this

41:24

time with us. I'm going to come

41:26

back to you with one final question.

41:28

That question is, you said, well, you

41:30

think there'll be an agreement and an

41:32

agreement will emerge between the two key

41:34

players, you know, China and Beijing and

41:36

the US through the White House. What

41:38

do you think that will look like? And when

41:40

do you think we could expect it? I

41:43

do think that, but my confidence level is probably

41:45

like 60 % or 170 % or something. So

41:47

you're betting your company on it, maybe

41:50

not a great deal. I think it has

41:52

to involve currency. I think there's going

41:54

to have to be something around the Chinese

41:56

allowing their currency to appreciate. If you

41:58

want to actually address the underlying structural issues

42:00

that the administration says they want to

42:02

address, you have to allow somehow the currency

42:04

to appreciate, which also sounds like dollar

42:06

devaluation. Looks like the market's taking care of

42:08

that on our own. The U .S. dollar

42:10

is down 9 % this year to date.

42:14

I know if that's by design or, you know,

42:16

some people are looking at that and Trump's policy

42:18

is disaster. But like kind of what he wants

42:20

is to make it cheaper to buy U .S. exports.

42:22

So our manufacturers are more competitive. So there may

42:24

be some element of that. You know, they're not

42:26

going to be able to get to the same

42:28

page on Taiwan. So I don't think that that

42:30

has to be on the table. I'm

42:32

not saying these countries are just going to

42:35

reconcile all the issues that they'll have between

42:37

them. I can't imagine

42:39

that the duty rates stay at this level

42:41

because you're effectively have got a trade embargo between

42:43

the US and China. And that's maybe a

42:45

less, you know, I mean, Trump's kind of a

42:47

hardcore dude in some ways, but if this

42:49

sticks, he's going to have a massive legacy of

42:51

creating huge amounts of unemployment in the United

42:53

States and it doesn't seem like what he's actually

42:55

trying to achieve. And he

42:58

likes doing deals. With that, Ryan,

43:00

thank you so much for being

43:02

generous with your time today and

43:04

joining me on my show. I

43:06

will say to our... There won't

43:08

be an episode next week because

43:10

it's a public holiday where I

43:12

am, but we'll be back in

43:14

a couple of weeks. Ryan, thank

43:16

you very much. My pleasure.

43:18

Thanks for having me on.