Why Trump Will Back Down on China Tariffs — ft. Ryan Petersen
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Today's number 70. That's the percentage of people who say they're polite to AI models when interacting with them. Ed, which vegetable has the worst manners? What? The rutabaga. That's terrible. Get it? The rutabaga? Yeah, got it. Rutabaga. Rutabaga. Welcome to Prop 2 Markets, Ed.

Welcome to Property Markets. Today, we're speaking with Ryan Peterson, the founder and CEO of Flexport. Now, there's a real name for a real man. First, Ed, it's time for Ruta Banter. Ruta Banter.

You always sound depressed when you have to intro this podcast just a little bit. It's like, oh, now I got to talk to this guy again. Well, it's only like my 11th fucking Joey Baggett on its podcast today. I don't know where, are you raging? Wait, who am I? Listen, you openly lesbian. Oh, wait, that's Kara. Nevermind.

I don't know where I am. What are you up to? I'm not up to much, Scott. I'm in New York. I'm just grinding away trying to make this podcast the best it can be. But I'm very happy, though, because we won the Webby's People's Voice Award. That's right. That's right. Say more. What does that mean?

Yeah, we won the Webby. It's interesting. There are two awards. One is decided on by the judges or the executive committee of the Webby Awards. And we did not win that prestigious prize. But we did win on the popular vote where the people decide what is the best business podcast. So I think that's honestly a greater honor. The elites don't love us, but the people love us. We're the populists. Fucking communists. Politburo bitches. Exactly. Yeah.

So for that, we have only our audience to thank. So thank you, everyone who voted. We're very, very excited. I'll be getting my first trophy for anything.

and we'll be at the Webby Awards in a couple weeks. And I hope, Scott, maybe you'll join us. Maybe you'll fly in. No. What's the last award you won? Seriously, what's the last recognition or award you won? I won a prize for my thesis in college. What was your thesis? If I talk about it, you're going to start making fun of me, and it's going to bore the hell out of you. But it was on ancient Greek festivals. Ancient Greek festivals. All right. As you may know, I was a classics major. Yeah.

I won the Keeney Prize for Best Senior Thesis. So that was actually a pretty good prize, and I won some money for it. That's a pretty big deal, right? What about you? What was the last, maybe award that people wouldn't know about or that I wouldn't know? I know you won like a Webby, and you're the New York Times bestseller, and you're the Poets and Quants Best Business Professor of the Year, et cetera, et cetera. Go on.

Maybe some, like, interesting... Did you have a high school poll? You know, like, most popular, most handsome? Oh, yeah, yeah. I won most comical. Oh, really? That was funny when I was young. So what happened then? How did things change? The joy got starched for my life. I don't know, sort of the bitter sadness of everyday drudgery just drove all joy from my soul. But no, I'm still... I still got it. I think you do. Enough of this shit. Get to the headlines. Now it's time to buy...

I hope you have plenty of the wherewithal. German bonds and the euro are climbing as investors look to the eurozone as a safe haven. The shift follows Trump's latest attack on the Fed Chair Jerome Powell on Truth Social, where he called him, quote, a major loser.

The post triggered a sharp market reaction. The major indices fell more than 2% and the dollar sank to a three-year low. Chinese state-backed funds are halting investments in US private equity as trade tensions between the two countries intensify. The freeze on allocations is reportedly a direct response to pressure from the Chinese government. And finally, Bill Ackman's Pershing Square has built up a nearly 20% stake in Hertz,

citing the company's strong position amid tariffs. In a post on X, Ackman said higher tariffs could drive up used car prices, boosting the value of Hertz's fleet. Scott, let's start with these German bonds. I just want to frame what's happening here because, you know, last week,

We talked about what was happening to the US Treasury market and also what was happening to the US dollar, where we saw a sell-off in both categories, which is very rare for that to happen simultaneously.

And the question we were asking last week was, okay, well, if there's this giant sell-off here, then where is the money going? You know, if you're selling your U.S. stocks and you're selling your U.S. treasuries and you're selling your U.S. dollars, then what are you buying? What are you converting that capital into? And so what we're seeing here is

is basically an answer to that in the short term. In the short term, what are investors buying? Where is the capital going? Well, one, it's going to euros, and two, it's going to European debt, such as the German Bund here, which is Germany's equivalent of a treasury. So the euro is up 5% in the past month against the dollar. The yield on the two-year German Bund is now 2% lower than the yield on the two-year treasury in America.

And so what we're witnessing right now is this very interesting dynamic where it's perfectly symmetrical to what is happening in the US. So in the US, you have this rare combination of a sell-off in the bond market and in dollars. And then in Europe, you have this very rare combination of a rally in both bonds and in the euro. So I think the answer couldn't be clearer right now

The world is selling America, we knew that. But as of this week, the world also appears now to be buying Europe.

So, Scott, your reactions to what's happening here? The idea of the German bonds becoming an alternative to the global dominant system of U.S. treasuries is sort of interesting. It's a tiny market compared to the U.S. treasury market at $3 trillion compared to $30 trillion for U.S., limiting its replacement potential. And they've also historically suffered from scarcity and sub-zero yields, which is really interesting. You have to pay them to hold on to boons as a store of value.

But increased issuance post-German stimulus is easing those constraints. The question is how permanent or structural these shifts, that even if the markets recover, even if there's a different approach to governments or, you know, they come out and say, no, the Fed is independent, slowly but surely over time,

big institutions have increased their allocation. They each have sort of a certain percentage that they put into asset classes and they have models such that they can justify higher prices. Whereas my favorite is the person running all the Nevada pension funds is one guy who makes a reasonable living in a bad office who just invests in ETFs from Vanguard and he's outperformed the 700 people working on Harvard's endowment. But they try to figure out risk models and they have asset allocation. Are we going to put X percent in venture, X percent in growth equity?

And consistently, I think over the last 20 or 30 years, they've increased their allocation to private equity because that's been an asset class that has overperformed. And I wonder how many of institutions are just going to restructure their allocation in terms of percentage away from the amount of capital they allocate to the U.S. market. So I think this is structural. Exactly right. And by the way, I mean, our next headline here is about private equity and this

turn away from U.S. private equity. But you mentioned, before we just move on to that, you mentioned this idea that institutions are turning away from these assets. I mean, I just saw another headline explaining how Yale is completely unwinding its private equity positions right now. And I think what we're seeing is large funds, large institutions are trying to figure out a way to slowly get out of America

and figure out ways to invest in Europe. And I don't think that means that you suddenly convert overnight. You suddenly buy into the biggest PE funds in Europe. But I do think it means that what they're doing is they're shifting to Europe. They're converting into euros in preparation to make these investments. They're converting into the European debt markets. And I think what will happen is that's the preliminary step

That's the first part of the rotation, of the transition out of America. And I would imagine that what will happen downstream of this, once we sort of emerge from the uncertainty, is while they are

pouring into these European safe haven assets, i.e. bonds, I think the next step is they're going to start getting into more risky assets. They're going to start getting into the European stock market. Maybe they'll start getting into European alternative assets like European VC, European private equity. Let's just talk about what we're seeing here with China. So China is halting all of its investments in American private equity. And that is

significant when you understand the role that China has played historically in the US private equity markets, which is to say a big role. Some of the biggest funds and the biggest names in private equity have taken in big investments from China, funds like Blackstone,

the Chinese sovereign wealth fund was one of their biggest investors in the IPO. Funds like TPG, Carlyle, which continues to co-invest with China to this day. And China has said there's no more investing in private equity in America, which is actually quite a big deal for the private equity industry. And we just saw Blackstone's earnings last week and

who, of course, was a Trump supporter, he appeared to be quite rattled by these tariffs. He said, quote, tariffs have dramatically impacted investor sentiment. He said, we believe that false resolution is critical to mitigate risks and keep the economy on the growth path. So this could be a real shakeup.

to the private equity industry in America. China's probably said, why on earth are we strengthening relationships with the U.S. who treats us poorly? Let's take some of our capital and use that to strengthen relationships with other nations. Chinese investments in FTSE 100 companies have surged, reaching nearly $90 billion, a 40% jump from 2022. So when we talk about a re-rating of American stocks down from a P of 28 to

Germany again, 22%, Japan 18%, China 14%. Well, what actually happens there, the mechanics of that are that people sell U.S. stocks and buy stocks in Japan, Germany, or China.

And I think you're saying that. And that is if China – and they're actually not the largest U.S. investor, but they're a significant enough investor – where if they pull money out and start putting it into other markets, that, again, that re-rating begins to happen. This has more impact actually on private market valuations.

And some people would argue, well, that ultimately impacts public company valuations. But a lot of when there's less money for these private equity companies, what that means is that entrepreneurs looking to sell their business have fewer bidders and the valuations start to come down. And what's also interesting is I bet they're clearly targeting the eight or 12 people in the economy that have a great deal of influence over Trump.

So, again, this is just another point of light around why we're going to see this re-rating. And it's small, but does it carry a trend? Because you've got to think that CIC is one of those sovereigns everyone talks about, Mubalaba, PIF, and I think they're— This is the Chinese sovereign wealth fund.

I think people take their actions very seriously. They're very smart. They're very strategic. They're very long-term. So it's more of a branding and a headline, I think, risk than it is the actual capital because relative to other nations, it's less capital than you'd think. But this might be, again, this just sends another signal that the U.S. is no longer the safe haven for capital, that there's a capital flight, which again creates that re-rating down. Yeah.

And you mentioned that China is a significant investor, but not as significant as other nations, which is true. But I think the question is, well, what if other countries start to follow suit? I mean, we have $5.5 trillion of direct foreign investment in the US. More than half a trillion of that comes from Canada. A trillion of that comes from Asia. But probably most concerningly, almost $3.5 trillion comes from Europe.

And for as long as this country has existed, those numbers have gone up every single year. And so I think the big question is, what happens? I mean, clearly the China number is going to go down. But what happens if the Canada number goes down and the Europe numbers goes down? What if Europe goes from a $3.5 trillion position to a $2 trillion position, a $1 trillion position, even lower? I think those are the big questions here that we need to pay attention to. So again, yes, China...

cutting off the funding to private equity funds is not that big of a deal on a pure dollar value basis. But it's a big deal when you consider what it might do and how the other dominoes in the line may fall. The best strategy for career success is, I think, is relationships because you want to be put in a room of opportunities even when you're not physically present.

I think what Trump has done is that Trump has put America and our markets and our assets in a room full of hostilities.

And that is, we just don't know who's going to stab us and where or what they're going to do. But there are some very bright people all over the world with a lot of capital are trying to figure out, quite frankly, how to punch back. Okay, let's talk about Bill Ackman and his new 20% stake in Hertz, which he's been tweeting about. He's talked a lot about how this company is uniquely positioned, especially amid these tariff policies. And he's talking about how

These tariffs are going to drive up the price of used cars. And of course, Hertz has this massive fleet of used cars. So Scott, your reactions to Bill Ackman and this kind of creative investment that he says is a response in large part to the tariffs. I appreciate the art in it. It's like when you see interpretive dance, you think, wow, or modern art, you think, wow, that's really creative. And then kind of 10 minutes in, you're like, this makes no fucking sense. Yeah.

That's a really good analogy. This is interpretive dance. To decide that, okay, so he has an asset base that's gone up in value, or Hertz has an asset base that's gone up in value. But in order to maintain that asset base, his costs will go up. Because for every car they sell, they're going to have to replace it with a higher-priced car. I guess the notion is that because cars are more expensive, more people will rent than own. And I think the countervailing force is,

a massive decline in tourism, which I would imagine makes up a large portion of their rental market, I think that negative force will be greater than the increase in the value of their current fleet. So I don't, to me, I think this is really creative. And

Bill has such a strong brand in the industry that when he puts out a tweet, the stock literally doubled in value. But this company— It did double, literally. The shares rose 100%, yeah. But the company has $6 billion in debt with a market cap of around $3 billion, including a half a billion in junk bonds. They lost $3 billion last year.

In some, I think Hertz is just a shitty, in a shitty business. I think what this is, is just sort of a simple distressed asset activist play. I mean, you have this company that has fallen around 90% in the past four years. And I think this is sort of no different from any other activist investment. He sees opportunities. He's looked at the

debt and he sees upside given how Hertz has been beaten down over the last few years. What's interesting to me is the way he is positioning this as a tariff play. And I feel that this is probably going to become a theme now where everyone's going to figure out a way to sort of retroactively justify their investment theses as a response to tariffs.

And that's sort of what he said. I mean, his argument, I can just quote him directly. He said, Hertz is uniquely well-positioned in the current tariff environment where auto tariffs are likely to cause used car prices to rise. Hertz owns a fleet of over 500,000 vehicles valued at approximately $12 billion. A 10% increase in used car prices would equate to a $1.2 billion gain on its auto assets. So he's basically saying, you know,

We saw what was happening in tariff world, and we decided to go in and buy Hertz. But what he's not really acknowledging is the fact that they actually started building this position last year, you know, before any of these tariff changes came about. Yes, it was after Trump won, but I don't think he could have known...

that the tariff environment would be this crazy and that it would be this targeted against cars. And in fact, you see his reaction to Liberation Day, where he was all up in arms on Twitter and he was massively disapproving of it. I think to me, that is an indication that Bill Ackman did not expect the tariff policy to play out the way it did. So I think this is sort of him trying to

retrofit this 40-chest tariff move as a way to explain what is essentially just kind of a regular activist investment. It reminds me, there's been an activist play about 10 times at a company called Macy's, and the play was always the same, and that is the underlying real estate is worth more than the company. And they did the analysis, and they were right, in that the stock was trading at a market cap or an enterprise value of $2 billion, and they own $3 billion in real estate, so they

Okay, the company's undervalued. The problem is it's like telling someone, all right, your heart and your lungs are worth millions of dollars. And it's like, well, okay, I'm kind of fond of my heart and lungs. And that was, no CEO was willing to harvest the organs of Macy's. They weren't willing to shut down Macy's and sell their real estate.

So, okay, great. Your cars just went up in value 10%. What does that mean for – how do you monetize? How do you harvest that organ? Great point. Because Hertz isn't going to just sell its fleet tomorrow. They like to believe they're in the business of running cars. It's just – and what you're going to find here – and the thing that's going to drive the stock price over the medium and the long term –

But over the medium term and even the kind of extended short term, the thing that's going to dictate this company's stock price, unless it becomes a meme stock, which is possible, but I don't think it will, is the growth or decline of the business. And the revenues fell 3% last year, and they're probably going to fall more than that this year. It's a highly levered business.

Yeah.

It almost doesn't matter, though, because the markets like Bill Ackman. And he made a clearly convinced the markets that, you know, maybe it's a meme stock. I mean, when a hundred percent in a day, that's probably what it is.

But for now, he's winning interpretive dance or not. Agreed. He's got a standing ovation because everyone's looking at each other going, wait, that was great, right? I'm cool if I clap for whatever I just saw on stage, right? This is unique and different. It's art. Yes. Perfect analogy. I love it. We'll be right back after the break for our conversation with Ryan Peterson. If you're enjoying the show so far, be sure to give the Profiteer Markets feed a follow wherever you get your podcasts.

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Welcome back. Here is our conversation with Ryan Peterson, the founder and CEO of Flexport, a leader in global supply chain management and one of the largest customs brokers in the United States. Ryan, good to see you again. Nice to see you. Thanks for having me on. You operate one of the largest supply chain management and logistics companies in the world. I feel that you are kind of in the eye of the storm when it comes to tariffs. So just tell

very basic question. I mean, just give us the rundown. What are tariffs doing to businesses on the ground that you're experiencing? And how is this all affecting supply chains around the world? Well, the eye of the storm is supposed to be really calm. I don't feel like we're there right now. We're right in the middle of it. It's creating, in a word, I would say paralysis, especially hurting small business businesses

Um, bigger companies tend to have factories in multiple locations. They kind of load balance. They shift production to Vietnam, even for the same item. They'll have multiple factories. Small business doesn't have that luxury. And a lot of small businesses are buying from China. It's very hard. Like they're kind of the back of the line. If you want to go to a new country and say, Hey,

I need you to produce this good. And they go, sure, how many do you need? You go, I need 500 of them. They tell you to pound sand. They've got a long backlog from kind of the Fortune 500 that's setting up mega factories, and they don't really care about taking these small batch production orders out of small business. So those are the ones who are kind of still stuck producing in China right now and struggling to find options. And then the reason I use the word paralysis is it also be sort of crazy to shift your manufacturing strategy.

When we know there's this looming new information that's going to come out in two and a half months or so, when they tell us what the new duty rates are, we have a 90-day pause. But in the meantime, you're either too late or too early to move your manufacturing. Too late, you should have done it by now. And too early, might as well wait two more months and see what the duty rates land at. But people are freaking out. I mean, 145% duty, you're going to see a lot of businesses fail.

A lot of shortages, frankly, ocean freight bookings out of China, China to U.S. trade lane are down 50%.

just in the weeks since the tariffs hit. So that's going to lead to shortages, mass inflation, business failures, unemployment, all sorts of second-order effects that we can't even predict. It sounds like small businesses are being hurt more so than larger businesses. And the reason they're being hurt is because small businesses are more reliant on China than anyone else. Would that be the right characterization? There's that. They also didn't have the great lobbyists that Apple and Nvidia and all those other guys had to keep their products alive.

They got exemptions for smartphones for a lot of other categories. So those aren't small businesses don't produce smartphones, right? They're producing furniture and apparel and home goods and these types of things that are hit with these crazy duties. Could you take us through what these tariffs actually are at this point? Because it's just so difficult to track. I mean, they go up, they go down, right?

They're canceled, they're uncanceled. What are the actual tariff rates in America today? Not what they're supposed to be in a week or whatever, but what are you actually paying if you're shipping something into the U.S. today? As of April 22nd, so the first container ships arrived yesterday that are subject to the new duties out of China. They left, if it left after midnight on April 9th, it's getting hit with...

with 125% duty on top of whatever pre-existing duty existed before. So that's from China. It's 10% for rest of world on top of whatever existed before. So, and those, it takes a while to cross the ocean, right? So the first ships arrived last night. And then, so going forward, presumably all the ships are now subject to this 125% duty rate. And then, yeah, a lot of products already had a 25% duty. The maximum, I think it was syringes,

for whatever reason, are at 245%, but that's pretty rare. It's usually most goods are around 150%. Furniture, like a couch, is 179%. Now, what consumers need to think about, that's applied to the cost of the goods. That doesn't mean prices are going up that much. That's the cost to the company you buy from goes up by, call it 125%.

Typically, these companies, if they have a good business, they probably are marking stuff up three times because they got to pay for a lot of overhead. They got to pay for their whole team, their marketing, everything else. So, you know, like if they're marking up 3X and they're 100% duty, just a simple math, your price is going up 30%, somewhere around there. So, yeah, it's definitely going to lead to price hikes. Now, the real inflation, like all the inflation modeling that I've seen people talk about is doing that simple math, right?

which I'm not that good at math in my head, so somewhere around what I just said. But the real inflation spikes are going to come when there's shortages. Like, ocean freight is down 50%. There's going to be a lot less stuff

Whoever has stuff has cornered the market and can charge whatever they want. And that's where you see kind of like real and kind of crazy hyperinflation. I don't know, hyperinflation is a technical term. I don't know if we get there. But where you see really high inflation is, hey, you're the only guy that got your furniture in before the tariffs. You charge a lot. The other people didn't bother importing. You know, you can charge whatever price you want if you're that guy. That tariff, the 125%, who actually pays that?

Who in the transaction is paying? Is it just, you know, you buy a sofa from Ikea or whatever, they ship it in. Is Ikea paying the tariff or is it split among people? Yeah, so this depends on the terms of trade. Most trade is done where the importer pays the tariff.

Importers pays the duties. U.S. is actually a really interesting thing to cover that I think hasn't gotten enough attention. The United States is one of the few countries, U.S., Canada and a lot of Western Europe. So it seems to be like a product of Western civilization in some way. But these countries allow foreign companies to import goods without registering an entity.

It's kind of a weird thing. Like, if you want to import something into China, you got to go set up a Chinese entity and then you can, you know, that entity can import goods into China. In the U.S., Chinese companies and any company in the world can just import stuff into our country without creating a local entity. Now, this creates real problems for enforcement because

There's now a huge incentive to lie about the value of your goods, right? You save a hundred. If you, if you say you import a hundred thousand dollars worth of furniture, tell the government it was 10,000. You just got your duty bill by 90%. And so there's a lot of this fraud now happening. It's escalating like crazy where people just lie. And then if they get caught, like customs and border protection does not have agents in China to go chase you down. Like you're not, uh, those people kind of disappear, create a new shell company, keep going. Um,

And I know Scott will love this. Those merchants get to keep their Amazon account

with all of its product listings and reviews. And they just, you know, now a new shell company keeps importing the goods, keeps selling. So Amazon merchants, 60% of them are these Chinese companies where they import. There's no American company at all. Chinese company imports, sells online on Amazon, gets busted for tariffs, spins up a new shell company, you know, just keeps going. So that's something I'm surprised that they haven't addressed in all of this. They've kind of taken this 40,000 foot macro view of the tariffs with crazy,

kind of general assumptions that, you know, we've heard about Penguin Island and everything, but they miss like the micro, like here's the real fraud that's happening. Like fix that. What do you hear from trying to describe the vibe you're getting from these big, medium and small retailers? I mean, Walmart and Target, this affects all the way down to the little guys.

Do you think a few of them go out of business or is this really kind of a meteor that could take thousands of these guys off the table, if you will? If they don't change anything in this 145% duty sticks on China, it'll take out like mass bankruptcies. You're talking like 80% of small business that buys from China will just die. And millions of employees will go, you know, we'll be unemployed. I mean, it's sort of why I'm like,

They obviously have to back off the trade. Like that can't be that they just do that. Uh, I don't believe that they're that crazy. But aren't you also saying China will, will likely not back down because they probably have done the math. I just think the U S backs down and China does it. You think 80% of companies that, that get shipments from China will just disappear and millions of employees later. I think so. Yeah. Um,

There's 145% duty. And people, you know, don't have to buy those things. A lot of what we buy from China is kind of discretionary spend. You don't have to buy it. When the price goes way up, you shift your spend to something else. You know, we have customers that ship, that buy pizza ovens in China for your, like for your backyard. They're really cool products. When the price goes up 50% or more,

You might just go out and buy pizza from Domino's or something, right? Like it's literally, there's a substitute there that is made in America that's not taxed. And, you know, you can see shift, spend shift out of these categories really quickly. So, yeah, I think, I think you're looking at something pretty catastrophic to the, to the point where I don't actually believe that they can hold the line. You know, the classic game of chicken, you got two guys driving right at each other in their cars and first one to swerve loses and,

The other guy gets the girl, right? And like, in this scenario...

So you can kind of game theory this out, like, okay, we're two cars headed straight at each other, China and the U.S. Now, there is a scenario where neither party swerves and they both die. Like, that's a possibility. But now evaluate it from both sides' point of view. China, the Chinese people, the Chinese leadership looks at it and go, hey, this is being done to us by this foreign imperialist power. They'll use whatever language they use, but it's being done to them by the other party.

On the U.S. side, all of us look at it and go, this is being done to us by our own leadership. Like, you know, we don't have the same resolve, you know, because of like just that dynamic. Second, we have way more feedbacks back to our government to put pressure on those, both through elections, through markets, the bond market. There's all kinds of things. American people are way softer. The Chinese have suffered much worse. They can bear this grin and bear it. They'll be fine. They've gone through worse in their history, in their recent history even.

And so I just like, if you just look at those two dynamics, one of these sides is going to budge. And if neither side budges, I think it's catastrophic for both economies and ultimately for the people of both countries. But if one side is going to be a buzz, it seems like it has to be the United States. Iron willed as Donald Trump may be and may want everyone to think he is, I just think the forces are really strong here. And just on that point, I just saw a headline coming into this recording, which is Besant sees de-escalation with China situation unsustainable.

So it certainly is pointing in that direction based on what you say. It could be that by the time this episode airs, they have budged. Yeah. Now the question is, does Trump listen to Besson or somebody else? Who knows? I mean, Besson seems like a rational guy who's got a lot of experience in the markets and understands what it means when equities go down and bonds go down at the same time. Like, this isn't normal. You're sort of the helm of the bobsled in terms of visibility into the supply chain. Yeah.

It seems like a lot of just the perception of us as a reliable partner is being eroded. How do you see the supply chain reconfiguring? Once, wherever the tariffs level out, and I realize that that's a big open-ended question, but how do you see, generally speaking, the way the world gets sources, manufacturers, and distributes products?

When you obviously have to allocate capital as a CEO, what is Flexport? Where do you see opportunities and how are you reallocating capital around which countries, which supply routes you're going to overinvest in and divest from? The U.S. consumer is still king, but that also revolves around the U.S. dollar being strong. It's come down a lot. I think it's down about 6% or so in the last few weeks since all this started.

That degrades our consumer purchasing power and therefore, you know, companies will look for customers in other markets. But, you know, when it comes to supply chain, yeah, there will be a reconfiguration out of China. That's an ongoing trend, by the way, for over a decade as the labor costs in China has just gotten higher and higher. Yeah, I remember 10 years ago at a shipping conference, a guy saying that they were shipping thousands of containers a year of used manufacturing equipment from China to Vietnam.

to basically lift and shift factories down there because labor cost is so much cheaper. We're doing a few things. I created this program. We call it the Marco Polo program, but it's basically to take flexporters from around the company and move them into these new emerging markets. We have about 400 employees in China. We got 50 in Vietnam and then a lot of the other Southeast Asian countries. We only have a handful of folks there.

trying to serve that giant market. So we're shifting, trying to move talent, create incentives for people, the leadership program to go down there and help us grow in those regions. We're getting a lot more focus on intra-Asia moves. One of the interesting things that's not intuitive at all here is that trade might actually increase from this. The market finds a way. And so if you put heavy duties on Chinese products, you now created this incentive to move components from China down to Southeast Asia,

assemble them, do what's called a substantial transformation. You have to do enough value-added work and add other components that this can now be, say, made in Vietnam, and then you ship it to the U.S. Well, now you've got two logistics moves. Your trade has gone up, even though the system is far less efficient. So we're doing a lot of stuff like that, like help people with tariff engineering,

Help people understand the advisory role of things like what qualifies as substantial transformation, that stuff. And then the biggest thing you see behind me, I have this model airplane. Flexport has three 747s dedicated that we fly a lot of Chinese e-commerce goods. And that we're modeling that business to go down between...

40 go down 60% to 95%. We're, we don't know, but it's going to drop dramatically. Uh, so we're, we're reconfiguring our network on that. They've been flying South China to us. We're, um, we've got one of them going to redeploy from, uh, South China to Europe, uh,

Uh, we got one that's going to go Vietnam, stop in Korea. We got one that's just going, I mean, we're making deals right now trying to figure out, Hey, how do we keep these planes full? We try to, we try to be asset light. Uh, but we made those deals during COVID when there were no capacity of passenger airplanes available.

50% of the world's air freight flies in the belly of passenger planes. So when there was no capacity, we went out and signed these long-term deals. So we're sort of, I wouldn't say stuck with it because I would do that deal again 10 times out of 10. It's made a lot of money over its lifetime. But at the moment, we have some assets that are, it's the asset-owning logistics companies that are going to feel the pain here. If you don't have any assets, you kind of flow with the tide. But if you have assets, you know, you could be underwater. Is there any indication from what you've seen, Ryan, that

these trade partnerships are building among the world and trade is increasing for everyone except for America. This idea that if we're going to build this wall around us in the form of tariffs, the world's going to keep on chugging along. People are going to continue to trade goods. It's just that they won't trade with the US. Is that a trend that you think is actually

viable? Is that something that you think we would see? Maybe, but like, you know, a lot of these analysis forget that trade is not zero sum, it's positive sum. By definition, both parties are better off when they do trade. That's why they do it. And so, I mean, if the U.S. backs off here, it's going to lead to recession all over the place. There'll be less consumer demand in other markets. It's like these very complex systems with second or even the second order effects are hard to model, much less third, fourth order effects.

So it will not be like a graceful transition and, oh, now I'll just sell it to someone else. I mean, you would have sold to them already if you could have, right? So it's going to be kind of ugly. And then the big thing that people are missing here is let's say they go do a deal right now. Well, 50% of bookings for the last two weeks, the ocean freight market has gone down by 50%.

Some of Scott's buddies, right? They've canceled their orders. Well, if a deal gets done, all of that stuff's going to flow at once and you won't have enough space on ships. And meantime, the ocean carriers have already started canceling services, moving ships to Southeast Asia, right?

moving containers down there, and you're going to wake up. Every week that goes on, this problem is going to compound. But you'll wake up and go, oh, my goodness, trade is back. Maybe not to where it was. Maybe it's down a little bit, but it comes back a lot more than 50% down where it is now. But the ships aren't here. The containers aren't here. And you're going to get back to these bottleneck situations that we had in COVID where the price of freight goes crazy. So we're sitting here modeling these scenarios. We're like, all right, either it all goes to hell,

and you're down 100, you know, the duties stay at 145%, volumes are way down, we got to make all these contingency plans for that world, or the opposite, where the price of freight goes crazy and I can't get anything loaded and we're scrambling. It's like super like long tail effects in both directions. It's very hard to make decisions as a logistics operator right now.

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We're back with ProfitGMarkets.

You mentioned that if he makes a deal, and Trump has said, you know, more than 70 countries have called him to make a deal.

Do you have any insight into what the deal is or is supposed to be? Just at like a very basic level, what is your sense of the goal of these tariffs? And if we're going to swerve out the way, what is the deal? First off, on the short term, I don't think they can make a deal with China in the short term. I think the deal is, hey—

We'll pause this and give ourselves all some time to sit down and have a nice negotiation. And that might take a year or two. I mean, it's very difficult for Trump particularly to deal with China because his style is man at the top, head honcho, sit down in the room, yell at each other, say some things, make a deal. He wants to negotiate that deal himself personally, probably. Chinese would never allow that.

In the Chinese system, they can't risk the leader looking bad and losing face. So the deal has to be worked out at the lower levels of

And then it's a formality when President Xi and President Trump come and shake hands. So I just think there's a mismatch there. They'll get over that, but like not on a three-week timeframe. And I think the nuance, there's so much complexity in the China deal that by the time they actually sat down and got on the same page, it would be too late for the types of businesses we're talking about failing. So I would say, but what would the deal look like over time? And what does the deal look like with these other countries?

I have a rule in life, like don't argue with someone unless you think you can make their argument better than they can. I got that from Charlie Bunger. It's like a good, healthy rule to make sure you're doing a good job in your debate. And so if you're taking their side and kind of steel manning it, what are they looking for here? What are their points? They have a few that I think are valid and they might be after in some form or another. One might just be, hey, this is negotiating tactic. And actually, these guys are actually free traders all along and

Really just want to lower tariffs and trade barriers, and that's what they're after. Doesn't really jive with the rhetoric about bringing jobs home. If free trade is bad, then it's bad, right? So not sure that's the case. But maybe. They will get better terms out of people than they were before, sounds like. Two is we have a major fiscal problem in this country. $2 trillion deficit, no end in sight. You got to do something to generate more revenue. So tariffs are one way to do that. Not 145%, probably net revenue.

lowers the amount of trade and the amount of duties collected, but some amount of duties maybe is a reasonable place to, you gotta get the revenue somehow for the government. So that's fine. That's reasonable. Third is it is a valid point around U.S. not having manufacturing capacity in a national security time of war. Like you're,

Your car factories become your tank factories. This is why auto is such an important strategic sector, for example. And then fourth, and I think where they really will see them hammer, I think they have a valid point is on the industrial policies of these countries, both currency. Look at Vietnam. Vietnamese dong has gone down in valuation the last three years, maybe not the last three weeks, but the last few years. At the moment that their manufacturing sector is absolutely booming,

And if this was a normal market, their currency would appreciate as so much, so many more dollars flowed in. So there's some, some, some probably terms for a deal around currency, uh, setting the reserve currency, setting the U S currency exchange rates at a level that we think is healthier, uh, subsidies. These countries provide a lot of subsidies for manufacturing, uh,

Free land, free buildings, cheap credit. There's all kinds of things that they do smartly from their own perspective, I think, but that don't make the level playing field. Environmental regulations that we have that are way higher than theirs. Organized labor repression. I mean, Korea for many, many years had like a mandatory six-day work week rule.

You know, I mean, that would never fly here. China has a six day work week. I don't think it's mandatory. It's just like culturally they just work harder than us. I don't know if there's something, but there's, there's a, these are all like fair grounds for going, Hey, like, you know, it's not a balanced playing field for us.

And so maybe there's some deal on one or more of those grounds to get them to change some policy or something. But the duty rates itself is one small piece of it, like how much they charge us in duty versus what we charge them. And they've been pretty clear about this. The administration cares much more about these non-tariff barriers, they would call them. Memo to self, mandatory six-day work week. Okay, good. It'd be good for us. Yeah.

So let's take tariffs off the table. Pre-tariff, if you look at countries as stocks or asset classes and you get to see who's doing a great job in terms of partnerships and manufacturing...

prowess. What countries would you go long and what countries would you go short? Definitely Vietnam long. That's incredible what they're doing. They have some real geographic benefits to their river network. 80% of the containers flowing out of Vietnam actually go on a barge floating down the river to the port instead of having to use trucks. That's let them kind of

go much faster in scaling because their roads can't really keep up with the demand, the amount of manufacturing boom that's happened there. They've had, I think it's 8% GDP growth last few years in a row. I mean, you only have to do that for so long before you get, before you double. So Vietnam, a lot of the Southeast Asian countries are just benefiting from like lower costs of labor and reasonably good policies around industrial stimulus. Who am I short of?

India still remains a mess. I guess they're probably doing well, but it's just very complicated to do business there. They don't benefit from logistics network. They don't have inland river network. So it's more expensive to move stuff. A lot of complexity from a logistics standpoint that falls out of that. Their infrastructure is lagging.

But then again, it's a billion people that are relatively low cost. So maybe, I don't know if I'd short it, but we have not seen as much dynamism there as you have in Southeast Asia. Europe seems hard to go long Europe right now. They're just over-regulating everything. But then again, Flexport, actually Europe is one of my favorite case studies internally because Europe has been our fastest growing market for the last three years in a row.

And we've way outgrown the scale. The market hasn't really grown, but we've been growing like 30% annually there. And it allows me any other, anytime any other team at Flexport points to market dynamics, I just point to Europe and go, markets don't matter. It's all about how you guys execute. So within our company, we kind of ignore the macro trends and it's all about just having good people that can go

The market's so big from our perspective that it barely matters if it goes up or down. So just on the topic of people, Toby Lutke from Shopify made headlines when he said, you can't have a job hire unless you can prove that AI can do it. Curious as the CEO of a logistics and supply chain company,

What role does AI play in your mind and what type of level of investment? How do you think it impacts your current hiring or kind of human capital strategy? So Shopify owns 20% of Flexport. So I follow everything Toby says very closely. He's kind of my boss on some level. They got a board seat. And I actually took his AI memo and

put it into ChatGPT and said, rewrite this and pretend the CEO of Flexport wrote it so I can send it to my employees. I haven't hit send on that yet. You do that too, huh? Might send that one out soon. So if you take like, let's take normal conditions, which we haven't seen in 10 years or something in logistics, but take normal long run average for the last 30 years is like, cost you about $2,000 to ship a container from Asia to the US. So let's just say we go back to that world. The cost of the freight forwarders keep 20%.

And 80% gets paid to the people that own the ships and the trucks and own the assets. They deserve that, at least that. So, okay, of the 20%, of the $400 the freight forwarder is keeping on this, half of that is going to labor costs of coordinating the shipment, what I call freight email forwarding, to pushing docks, making phone calls. Not the blue-collar guys driving forklifts like this is the service jobs, desk jobs, but

We believe we can take about 80% of that cost out in the next two, three years, largely because of AI. And if you asked me that three years ago, I'd be like, eh, stuff's pretty hard to automate. You know, it turns out there's a million edge cases that you can't put into rules engines and you need people that are smart that can do it. Um, now we're finding about 1% weekly, uh, the ability to automate about 1% of that work every week. It's kind of crazy. Um, and,

And so we think 80% in the next few years is totally possible. That means you reduce in a steady state world without craziness, you're reducing the cost of shipping anything by about 8%. So that would be huge for consumers. Now we might decide to keep all that for my margin and be the highest margin freight forwarder in the world. Our view is much more give it back to the customer, drive more scale forward.

But you have, it's probably some, the correct answer is probably some choice in there. So that's one. Number one, the thing that people care about is price. Lower the cost. Two, a lot of these supply chains are about data. Data to make good decisions. How many units should I order? When should I order them? Where should I position them? How should I engineer them from a tariff standpoint? These types of things.

All of that, we're finding huge opportunity to just use AI to like ask questions in natural language, generate reports on the fly, like stuff that you used to take. You'd have some analysts on your team. It would take them three days to generate the report. You get it in an instant. Last question for me. Timu and Xian, these incredible supply chain monsters, right?

Curious what you think about those two companies and how this shakes out and what you think the prospects for those two firms are. Obviously, May 2nd is the key for them that their business model as it stands right now gets turned upside down. So they have to start paying duties May 2nd or shift their manufacturing. I think you'll see a bit of both. They're going to pay duties. They're going to see what consumers are willing to do. They can still import the goods. By the way, they still have a cost of goods sold advantage policy.

over you and your buddies because they're just built in China, made to source things cheaper. They have some big advantages there. Doesn't their cost advantage broaden? Because if they're selling a garment in for $10 versus $60 from Ralph Lauren, okay, they go to $24, but Ralph Lauren goes to $150. Exactly. Their cost is lower already. So, exactly. So, the cost advantage is still there. They're paying for air freight, where Ralph Lauren's probably paying for ocean freight.

So there's a bit, you know, that's much cheaper, but they're not paying for us warehousing, which is much more expensive. They're, they're, they're, um, final mile costs is lower. They have less working capital of just like products sitting on the warehouse and sitting on the water for months at a time. It's much more just in time production. So, um,

I think net, like the tariffs will cost, having to pay duties will cost, you know, hurt them versus their current model. But I think they still have a big advantage over other kind of companies that they would compete with. So probably their sales go down, but they might, their market share might go up. It's hard to say. I think that, I don't think that's going to be the death of Timu and Sheen. I think you're going to see that they, unless there's some other like very possible Trump administration puts in some kind of company specific deal.

regulation to kill these guys. It's, you know, nothing's outside the range of possibility, but, um, I think you're still, I think they'll still be okay. Probably. Final question from me, Ryan, this has been massively informative. Thank you. Um,

We've been talking about the public response from business leaders to the tariffs and to what Trump is doing. What we have found or our view is that the response has been quite muted from CEOs. People are not complaining as much as you'd think.

And, you know, I just think about the stats that you mentioned, or your predictions, that this would wipe out 80% of businesses that rely on China. It's massively affecting small businesses. You could see millions of jobs lost as a result of this change. And then I also would reference a tweet you put out. You said, quote, 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. And you said,

I believe, are one of the few CEOs, granted you have a real horse in this race, but you're one of the few CEOs that is speaking out about this and saying just plain and simple, this is a bad idea. I'm wondering if you think based on the people you speak with and the businesses and the clients you service,

Do you feel that we are about to see a change in sentiment from our business leaders? Do you think that we're about to see business leaders come out and say, this is a horrible idea and this is stupid and we don't support this? I see a fair number. Certainly all of our customers are up in arms and tweeting about it, posting about it, and all these small brands. They may just not have enough of a voice.

I don't know, man. I think big companies, there's a lot of failure of leadership in general. Like a lot of big companies are, well, they're, they're found a long time ago. The founders have retired. You got middle managers who got promoted up to be the CEO. There's a lot of risk here. You know, you go criticize the president and he attacks you publicly. Like you're fired. It's like a lot of downside to criticizing, uh,

I'm hard to fire. So, and you know, I'm on some level, I'm not, I'm not the best voice for the administration to listen to because I am selling my own book. It is bad for my business, bad for my customers. Like, so, you know, are they going to listen to me on tariffs? Probably not. Like I, I, I'm, I'm, I'm, I'm a little too self-interested for you to take me that seriously. Um, but, uh,

I think you'll see more and more. Some JP Morgan put out a statement. I haven't seen Jamie Dimon say anything, but like their chief strategist, whatever that job is, said that this was really, really bad. I think you'll see more. The banks probably weigh in. I don't know that it matters. I feel like the Trump administration knows that this is bad for businesses importing from China. Maybe they want that. So...

It's like not clear that this isn't by design. Sounds like your view is founder CEOs will speak out and the middle managers won't, which I actually think is a pretty good thesis. Well, it's also my thesis for why Flexport could beat other logistics companies. These companies were the only one founded in the last 40 years. So in the big global companies, the founders are mostly retired companies.

pretty much all retired and these companies aren't managed by people with enough skin in the game or frankly, like, yeah, they could get fired really easily if they, they're also a little too rational. Logistics is a very rational market. You know, it's all math at the end of the day. And some of this stuff is you don't have that much math to go by. You got to go off your instinct and just be like, yo, this is, let me speak up here. I don't need to listen to my committee of managers. Like this is really bad for my customers. So just do it.

I love that. Well, we support you. I'm certainly feeling long Flexport after this interview. Ryan Peterson is the founder and CEO of Flexport, a leading technology platform for global logistics. Prior to starting Flexport, Ryan was the founder and CEO of Import Genius, a premier provider of transaction data for the global trade industry. He earned a BA in economics from UC Berkeley. Go Bears. I didn't know that. Oh, yeah. Go Bears. Nice. California. Enough of your bullshit, Ed. Were you raised in California? No, I'm from Baltimore.

Bethesda, Maryland, but I was lucky enough to get in as an out-of-state student undergrad. And did you stick in the Bay Area? Yeah, I'm here in San Francisco. Oh, that's great. Love to hear that. Sorry, can please continue it? I'm done. That's the outro. Thank you for joining us, Ryan. Ryan, you've got this great, I think you actually should command the space you occupy. You have this kind of firebrand, I don't know, reputation as this sort of maverick entrepreneur who's

kind of shoots first and ask questions later. I think you're just the voice that small business needs. I'm trying. I mean, my customers certainly appreciate it. That's why I'm doing more and more. I want them to see that we got their back. Yeah, well, I think you do. Keep on keeping on, my brother. I love seeing stuff from you. And I think you're, I don't know, I think you're bold. And I love what you said that founders aren't as worried about being fired. It's sort of the silver bullet to the questions we've been asking. Fly your freak flag. I love that.

Can't get rid of me, so... Thanks very much for your time. Thanks, Ryan. All right, take care, guys. Algebra of Wealth. Scott, Ryan painted kind of a dark picture for small and medium-sized business owners in America in that interview. And I believe him. I mean, he has probably the greatest and the most...

colorful understanding of what is actually happening in our supply chains. For any small business owners or even employees at these small businesses who rely on trade and maybe on trade with China, what would be your advice to them? And what would be perhaps a message of optimism or sanity to deal with what Ryan just told us? What I would say is that, well, one,

You can only control what you can control, and that is, all right, go to the bank, see if you can get an increase in credit, slow down the shipments, think about how you save money. Does it involve layoffs to try and extend your runway? There's some just very hard decisions you have to make. You know your business better than me, but you can control only what you can control. The other thing I would keep in mind that has always played out for me, not only in business, but in life, is that nothing's ever as good or as bad as it seems.

And then generally speaking, you look back on situations like this and go, okay, it wasn't as bad as I thought. Because it could, I do think what Ryan was saying that they're going to blink and the tariffs could be off. And also even imagining the worst case scenario. I remember when a variety of things, moons lined up in a very negative way when I was

had done a proxy fight, taken control of the board of Red Envelope, came back in like MacArthur returning to the Philippines. And then we had the Great Financial Recession, our credit line got pulled, and we had a software glitch and sent out 10,000 gifts to the wrong address. And we went from a stock of $7 to Chapter 11 in like two weeks. And I was just devastated. I lost everything. And just such an emotional investment. I'd been in the company 10 years.

And I ended up, strangely, a year later or six months later, some hedge funds called me and said, we've been watching the proxy fight at Red Envelope and you're crazy. Well, thanks for that.

But they said, but you are kind of crazy. Would you be interested in us? We have some stock in some companies that we think are underperforming. Would you be interested if we bought some more stock? Would you be interested in co-investing and getting involved in an activist play with us? I would have never thought that Red Envelope going out of business after I had waged this public war against the board would result in opportunities for me. I just would have – in a million years, I could have never thought that. So one, control what you can control.

to recognize that whatever you're feeling right now, if it's bad, it's probably not as bad as what you're feeling. And also sometimes when things are really good, it's probably the situation isn't as good as you think it is. And also you just don't know what kind of opportunities might open up, even if the worst thing possible happens. You just don't know. But again, nothing's ever as good or as bad as it seems.

This episode was produced by Claire Miller and engineered by Benjamin Spencer. Our associate producer is Alison Weiss. Miss Silverio is our research lead. Isabella Kinsel is our research associate. Dan Chalon is our intern. Drew Burrows is our technical director. And Catherine Dillon is our executive producer. Thank you for listening to Profity Markets from the Vox Media Podcast Network. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday.

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