“It’s Been a Crazy Couple of Months:” Supply Chain CEO on Trump’s Tariffs

WALTER ISAACSON: Thank you Bianna. And Ryan Petersen, thank you for joining the show.

 

RYAN PETERSEN: Hey, it’s great to be here. Thanks for having me on.

 

ISAACSON: You have this company called Flexport, which helps people ship goods across borders. Tell me what the on again, off again, up and down nature of tariffs is doing.

 

PETERSEN: It’s been really difficult. So we help businesses ship their products from wherever they’re made to wherever they’re sold across, actually 147 countries. But our biggest market, biggest destination is the United States. And companies that are going through this kind of bull whip, whiplash effect have been on some level somewhere between paralyzed and, and just kind of stuck. Like they don’t, they don’t know how to plan anything. And a lot of ’em are kind of, they’re – there’s a mix of emotions, anger, feeling like they’re, everything they built got taken away from them overnight. And then, and then kind of the next day it’s relief and celebration. So it’s been, it’s been a crazy couple of months ever since, really since the election.

 

ISAACSON: Does that whip sawing make things harder for people to plan?

 

PETERSEN: Yeah, I mean, that’s exactly right. And, and these supply chains are like, they’re really long term things like you need to – you, you don’t set up a new factory overnight and you, you don’t do it on a short term basis. You do it, say, okay, this is gonna be our new source of supply for the next five to 10 years or more. And so if the tariffs are changing every single week, then it’s very hard to make a decision. You know, you’re like, okay, we should, tariffs are high on China, we should move them to Vietnam. Well, next, next thing you know, the, the tariffs on Vietnam go up and you try to move it to Europe or Mexico. I mean, it’s very difficult to make plans, but

 

ISAACSON: You probably got a higher visibility than almost anybody into exactly what’s coming into the United States. Tell me what you’re seeing in the numbers.

 

PETERSEN: Yeah, well, I mean, the most interesting that we saw was after April 9th, which is the day that the tariffs took effect on China. And that was when you had 145% duty immediately that week. Good, imports of goods from China, the bookings of new shipments coming from China went down by 60%. And that’s true within our own customer base at Flexport, but also true across the wider industry. So you had a 60% decline in ocean freight volumes for about five weeks. And then, that’s – 

 

ISAACSON: What, what does it look like now? Can you see what ocean freights are coming in, coming in?

 

PETERSEN: Yeah. And so that, that lasted about five weeks. And then when the tariffs were relaxed and dialed back to 30% on China, you then had this huge surge of bookings. And it was basically people making up for lost time that they had these goods, and now they’re worried that the tariffs may, may go up again 90 days later. So they want to get as much in as they can at the 30% rate. So you’ve actually had an increase of 80% above the pre tariff, pre-April 2nd norm that we had. So it’s a huge surge. 

And in the meantime, the ocean carriers, so these are the companies that operate the ships. They’ve pulled about 25% of all the container ships going from China to the US and moved them to other trade lanes, especially down to Latin America, to Africa, to some other trades. And so there’s not enough capacity now to move all those containers. So the price of freight in the last two weeks has gone up about three x over where it was before the tariffs hit. So it is kind of like importers can’t catch a break one day, you know, the tariffs get relaxed, everybody’s happy, and then the price of freight goes up three times.

 

ISAACSON: How does this actually work when the tariffs are going up and down and changing around or whatever, and you’re in the port of New Orleans or the Port of Los Angeles. Are there people there who just have a little sheet that tell you every day, here’s what it should cost?

 

PETERSEN: Well, it’s, it’s similar to doing your own taxes, it’s on you to, to get it right. They don’t help you that much. You have an industry called Customs Brokers, of which Flexport is one of, of many customs brokers in the United States, and they’re, they’re there to kind of hold your hand and help you through it, just like a tax accountant would help you. And so you’ve, but you do need good tools, and these customs brokers need good tools as well to figure out exactly what you need to file. So then you can actually file your customs entry about, up to five days before the goods arrive at the port. So you file that paperwork, you get the goods released, and, and, you know, make, and then you pay your duties and you’re on your way, so.

 

ISAACSON: You previously said there’d be mass shortages this summer, given all the turmoil and the new tariffs. We’re pretty much getting into summer now. Do you still see that?

 

PETERSEN: Well the, my view on shortages really, if they don’t do anything about the tariffs, and they kept ’em at the 145%, they’ve relaxed it. And so now, now you see this big surge of goods coming in. So I wouldn’t, I wouldn’t say mass shortages, however, all these goods are still not enough to make it up for that five weeks where you had only 40% of the normal cargo flows coming from China to the US. We had five weeks of really depressed volume. You’ve had two weeks of big bookings weeks, <inaudible>, but not enough ships to move all that cargo. So you are gonna see some degree of shortages. I wouldn’t call it mass shortages, but you’re gonna see a lot of, really, it probably gets reflected in high prices because whenever there’s scarcity of goods, whoever does have goods can charge kind of whatever price they want. So that, that’s actually the real driver of inflation in all this –

 

ISAACSON: Give me some of the early indicators you see of things that are gonna cost a lot more where there may be shortages.

 

PETERSEN: Well, one of the big ones is apparel. A lot of the apparel in brands in this country were using an exemption called di minimus. And that actually allowed you to ship items one item at a time, individual products duty free from overseas. And so, and that was taken away for goods made in China, which is 70% of those. So any apparel made in China is gonna go up quite a bit. You’ve already seen that take hold. Where some of these e-commerce brands have raised prices 30% or more if they were previously using the de minimis, which a lot of them were. And then just broad categories, furniture is a big one. Furniture’s also gonna get especially hard hit by these high ocean freight prices just because you can’t fit that many couches in a container. So if the price of a container goes up a lot, you know, it’s not shared by that many items. So kind larger bulkier stuff is what gets hit by the high ocean freight prices. And then duties, yeah, it’s kind of across the board with the 30% duty, anything made in China, the stuff, it’s really better stuff that’s not affected, which is kind of electronic semiconductors. You know, your smartphone got, got an exemption.

 

ISAACSON: You said time, a little while ago, thousands and then millions of American small businesses, including many iconic brands, will go bankrupt this year. If the tariff policies on China don’t change, how quickly does a trade deal need to be done to prevent that from happening?

 

PETERSEN: Yeah, and you know, that that was really about the 145%. At 30%, it seems like businesses can absorb it. They’re not happy at all, and it definitely hurts their P and L, but I don’t think it wipes them out. But where we are, you know, is in, in August, this is gonna go – they said August 30th now for a lot of products, it’s gonna go back up to 54%. That was the, when they first announced 54%, that was really a catastrophic day for, for importers from China. And so it, it’s somewhere in that range where if, if that, if that comes back to 54%, I do think you’re gonna see a huge wave of companies start to fail. And that, that’s imminent and middle of August will be here before you know it. So we’d like to see either this gets extended or a deal gets done before then, but I, I don’t have any inside view into what’s happening with the negotiation right now.

 

ISAACSON: Walmart CEO, Doug McMillon, and I think their chief financial officer, John Rainey and others have said it’s definitely just gonna have to be passed on to some extent to consumers. When you’re talking to your people, to what extent are they gonna pass this on to consumers, and to what extent do you think they can absorb the new tariffs?

 

PETERSEN: It, it’s pretty, it’s relatively straightforward to look at it mathematically, and it’s all about what’s the profit margin of that business. If it’s a very, very profitable business where they buy the goods cheap and sell them for a lot more – the tariff remember is on the wholesale cost. It’s on the cost of what they pay for. So those companies can absorb, but the reality is most companies and and Walmart’s in that category are trying to be cost leaders. They’re trying to have low cost, and that means they don’t put a huge amount of margin on their product. And it’s therefore, you know, when the cost goes up, they, they’re forced to pass it through. So I think that’s the, the reality for most companies, they’re gonna have to pass it through close to a hundred percent. 

And, and that’s what we see in the e-commerce world.  You’ve seen these brands have effectively come through, and a lot of ’em actually added a line item in the checkout that says import charges or customs charges. And customers are kind of pretty understanding about that. Tariffs have been so much in the news that there haven’t been a lot of pushback so far, but the reality is we don’t know until this really stays for a while and you see, how much is demand repressed are people just buying a lot less stuff? That’s what you would predict. And people start spending their money on other things that are made in America, whether, and, and it doesn’t have to be things, it can be services, it can be going out to eat, travel, et cetera.

 

ISAACSON: You talked about how people have to change their supply chain if something happens, happens on China, and then maybe they’re gonna try to do Vietnam or maybe even other places. How hard is it? Explain to me how that works. How easy is it to say, let me shift my supply chain based on the changing tariff regimes?

 

PETERSEN: It’s, it’s really hard because, I mean, you have to build a new, trusted relationship with a new factory that can make your goods at scale with quality and, and it’s your product, right? It’s the lifeblood of a company. So it is not a simple proposition at all. One of the things that’s made it a little bit easier, ironically, is that Chinese companies are actually setting up factories in other countries to make – so you could still work with the same company, at least –

 

ISAACSON: <Crosstalk>. Do you think that the administration might try to stop that workaround, I’d call it?

 

PETERSEN: I, I assume that this is on their radar and not something that they love, but I don’t know exactly how to do it legally because they are setting up an entity. It’s in Vietnam, the way Vietnam or Thailand, you see a lot of this in Cambodia. There’s factories in, being built in Mexico that are owned by Chinese, but it’s a local entity. They’re doing the right thing, they’re doing it legally in terms of making it a product of Vietnam. But there are a lot of Chinese components that go into that. So they’ll bring goods down to Vietnam, do a process that’s called substantial transformation, it’s a kind of a fancy term, but it just means that you’ve done enough transformation of the goods to legally qualify it under US Customs law as made in Vietnam, or made in Thailand, that makes you subject to the duty rates in in those countries.

I think what, what the Trump administration would like to see happen is that those countries sort of take the American side and say, Hey, you have to put duties up on Chinese imports, including the components that are going into your products. That’s probably the best mechanism they have have, is sort of saying, Hey, Vietnam, if you want to have low tariffs, you’re only at 10% right now. If you wanna keep it there, you’ve gotta agree to some kind of a deal on these Chinese components coming in to make it more difficult. So there’s some, definitely some room for negotiation there, but I, I don’t know how exactly you can structure it legally.

 

ISAACSON: You’ve kind of explained a pretty complicated rigamarole. To what extent does that add to the inefficiency and the cost in general of a supply chain?

 

PETERSEN: Just a huge amount. I mean, first off, the labor cost is higher in, in some of these places that, and, and not just like raw, okay, you wanna hire someone off the street, but the skilled labor, a lot of these are real craftsman jobs. You talk to people doing apparel and, and they’ll tell you the highest quality apparel now is in China, the best seamstresses, is the best technique and skilled workers there. So you, you move to another country by definition, taking a step down on quality. It’s really funny for people, you know, my age, where that was not the idea 20 years ago at all. So the China’s come a long way on quality, but the inefficiency of trade, you know, shipping items more than once from China to Vietnam and from Vietnam to the US and ironically, you might actually increase trade from a technical term because that’s two trade shipments instead of one. And so you’re seeing, yeah, add complexity here, adds cost, inefficiency, time time is money. So you, it takes longer to, you know, keep moving things around to different parts of the world. So yeah, there’s, there’s nothing efficient about it.

 

ISAACSON: You know, it seems to me that the response of a lot of the CEOs in the, you know, in the business of importing, making things has been kind of muted. I mean, you talk to all these people and you’re saying they’re all have some anxiety, but I haven’t heard a lot of outcry. Why is that?

 

PETERSEN: Yeah. Well, if, if you talk to these smaller companies where it’s kind of still founder-led, the CEO, the owner of the company’s still there, you’ll hear a lot, they’re quite vocal. They have a hard time getting their voice out. They’re not, they’re not famous and they’re not part of a big famous company, but these kind of e-commerce brands, they’re definitely out there. They’re, they’re really appreciative of what we’ve been doing. Flexport is trying to tell their story for them, and they do have a, a little bit more of a platform than your average company, but I don’t know what it is. Big companies, they’ve, they’ve, maybe it’s ’cause they have inside access, they’re able to go and talk directly to the White House and you know, and, and get, have their voice heard there, rather than needing to do it via the public airwaves. Maybe there’s something about being founder led, some of these small companies, you know, we founders, we can’t, we can’t be fired. So take a little bit more risk. And it does feel a little risky perhaps, to come out and criticize the government and think maybe they’re gonna, they’re gonna be backlash or something like that. So I think if you’re a professional CEO, you’re hired by your board, maybe, maybe it’s harder to take that kind of a risk to put your name out there.

 

ISAACSON: These tariff uncertainties, as you’ve talked about, have led to some supply chain shocks. And we had that a few years ago when COVID led to that. Do you think that there’s some lessons there that we may have to just reevaluate the whole notion of these supply chains?

 

PETERSEN: Well, it, there are, we, we, we learned a lot in COVID. One thing we learned was that companies, you know, the price of freight is very inelastic, which means you, you don’t ship more stuff just ’cause the price of freight is cheap. And it turns out you also really don’t ship less stuff because the price of freight is expensive. You, you, you ship the amount of stuff that you can sell out of profit, and the price of freight tends to be relatively marginal around the edges on that. And so the world can absorb a lot higher prices of freight than we ever expected. 

Tariffs are different though, because, you know a hun– a a 50% tariff, the average price of a container is about a hundred thousand dollars worth of goods in there. So that’s $50,000 extra price of freight. You know, we saw in COVID it went to $20,000 and people begrudgingly paid it, but 50,000’s another story. So we’re gonna find out what that elasticity is. How much do people just keep shipping the same amount? So that, that was one set of lessons there, was just the, the freight markets themselves being really dynamic and subject to big price swings. 

Should we think more regionally or, you know, stop depending having such complex global supply chains, the reality is that companies are always gonna try to make their products as cheaply as they can. That’s, that is the job at the end of the day of companies. Make great products cheaply. Whoever does that, the best will win the consumer, will grow. It’s a Darwinian kind of ecosystem. And, and so there, that’s the game that’s being played on. That’s the game on the field. You’ll, the government job is to set the rules and then companies have to go and find a way to make money, and they will always look for opportunity. And this is a long run trend. You know, COVID was a, a, a moment in time. We have a moment in time now, there’s changing landscape.

But global trade has gone on for thousands of years. And in fact, we’ve had about 4% annual growth in global trade since the Mongol invasions. For 800 years you’ve had this steady exponential growth. And so my view is sort of like, yeah, there’s, there’s repositioning here, but human nature is you wanna find the best manufacturer at the lowest price. You can make a profit, you wanna find your best customer. You don’t really much care what country they are, what they look in. You’re looking at the attributes of what their price is that they charge and what they pay. And therefore you’re gonna wanna do global trade. Governments will try to reign that in, but the, the market forces are such that it’ll be very hard for, for it to – the cat’s out of the bag in a sense.

 

ISAACSON: Ryan Petersen, thank you so much for joining us.

 

PETERSEN: Been my, my pleasure.