What Tariffs Are Doing to North American Freight
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Hello and welcome to another episode of the Odd Lots podcast. I'm Jill Wiesenthal. And I'm Tracy Alloway. Tracy, we can't get enough of trying to understand the immediate impact that the new tariff announcements are having basically to like every business in the world, but certainly any business that touches goods and certainly any business that touches goods that at some point cross a border, which at some point is all of them.

I like the implication that we're just going to do episodes on every single business in the world. That's what you're saying, right? Aren't we? Yeah, I think we are. We're deep in the process of doing that already. So here's an episode with another business. Well, so yesterday in our episode, our first of the multiple emergency tariff episodes, we're like, we just got to go down the list and talk to all the supply chain specialists.

guests that we talked to a few years ago over the last several years. And so we're just going to do that. And we have another guest today who I think we talked to about a year ago, maybe a little less. We're going to be speaking with Matt Silver. He is the co-founder and CEO of Cargado, which is a freight brokerage that really specializes in U.S., Mexico, lanes, North America, knows a lot about North America, trucking, cross-border trucking, et cetera. And given the world of tariffs...

you know, suddenly things like knowing about the world of cross-border trucking. You know, the last time we spoke to him, I think the episode was titled like how shippers are responding to a U.S.-Mexico trade boom. Oh, yeah. So I guess I guess we're going to check in on whether that let's check in on the U.S.-Mexico trade boom. Matt, is there a U.S.-Mexico trade boom happening right now on April 7th, 2020, 25? Well, first of all, trade

For Q1 is up year over year with Mexico. So it is definitely still going in the right direction. One thing to clarify, we're not a brokerage. We're a software business. But yeah, so we work with freight brokers and trucking companies that are moving cross-border freight. So we hear it.

from everybody involved in the process. And there's definitely anxiety and concern over how these tariffs are going to impact trade with Mexico and Canada. The thing is, like, the news that we heard this week revolved around basically every country besides Mexico and Canada. And the USMCA got some sort of a reprieve, if you will. But they were still hit by tariffs over the last couple of months. And so...

The companies like the automakers that are producing cars throughout North America, they're not getting hit the same way the companies that are bringing their cars in from overseas, from Europe or Asia. And so...

The trucking companies that are moving this freight, they're going to continue to move the freight that they can still move that's consistently shipping. But they understand that things might get a little bit rocky as all these discussions get worked through. And so they're going to stand strong, I guess, ultimately and wait and see what happens with

with the market. Right. I mean, I think even if Mexico was exempted from the reciprocal tariffs that were announced last week and I should just mention, we're recording this on April 7th, lots of things could still change. But even if they were exempt, I mean, the direction of travel seems fairly clear at this point.

Give us a reminder of why U.S.-Mexico trade had been on a sort of upwards trend line, because a lot of people were saying, well, this is actual genuine trade between the U.S. and Mexico. And then other people would say, well, this is China rerouting some stuff through Mexico in order to get

further away from the Trump administration's first round of tariffs back in circa 2018. Yeah. So going back to 2018, that's when Trump updated NAFTA to the USMCA, and that encouraged more manufacturing to happen in North America and less overseas. And so you've got the pandemic that scared everybody and thinking that it's not such a great idea to rely on China for manufacturing.

Couple that with the general relations that the U.S. and China have had for the last decade or so, which has been contentious and it's not super friendly. Then you've got the latest round and everything even up to the last few hours when Trump said that if China goes through with the increased tariffs that they announced, I think he said 90 percent would be placed on all goods coming from China. And so...

Things are only escalating. And between the fact that Mexico is primarily on the same or similar time zones as the United States, it's only a few hours to get there, whereas it's, I think, 14 or 15 hours to get to China.

And then the culture and language barriers are a lot simpler and easier to get through with Mexico than it is with overseas. And so there are a lot of reasons why companies already do manufacture in Mexico and why they're going to continue to do that. Yes, there's Chinese investment in Mexico, but it's not as heavy as people make it out to be. It's just

you start to hear it more because everyone's going, well, here's how China's reacting to this trade war. They're investing in countries nearby like Mexico. But I still think we'll see more American companies investing in Mexico than we will Chinese.

Time zones and language, two of the great non-tariff trade barriers that affect our world. All right. Why don't we pause here? Give us the status of the tariffs, because it seemed like Trump was like really, you know, for a while, like talking about blowing up the USMCA. Right now on April 7th, what is the status of what's newly being tariffed? What isn't in the cross-border US-Mexico trade?

So you hear about the big separator being what qualifies under the USMCA. I think most agricultural products still qualify under that. And so we're not seeing an impact on most of those goods. Although the US for a long time has had tariffs on sugar. Right.

Mexico has had it on some dairy products. And like the irony right now is like the RFK movement talks about trying to reduce the reliance on high fructose corn syrup and like the biggest counter to that would be sugar, which we could buy from Mexico. And so on one side, like you've got

goods that fall under the USMCA that have those requirements. So like take a car, for example. If 75% of the value of the car came from Mexico or the US or Canada, it falls under the USMCA and it's qualified. The difference now though, is that the parts that are not

falling under the USMCA will get taxed right now at that 25% rate. And so if, let's say, on a $40,000 car, 10% of that car, so about $4,000 worth of value,

is coming from overseas, that could still have tariffs applied to it. And if it's 25% tariff, then it'd be 25% on that $4,000. So about $1,000 would get added to the $40,000 cost. And so they're only taxing that piece. Who actually does those calculations, though? Because that seems like a lot of paperwork to break cars down by components and where those components are made.

It's the customs broker. Oh, wow. And there's... Yeah, I mean, there's a startup called Gaia Dynamics that's also doing that using AI. And so companies are able to use them for that stuff now too. But it's very specific. If you're using...

Something made of steel versus aluminum versus another raw material, even if it's a screw, it still depends on what it's made out of, and it depends on the size of it and all that other stuff. So, like, there are very specific, it's called harmonized tariff codes that are assigned to each good, and then there's a potential tax related to that, along with requirements. Very specific. ♪

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Okay, so let's say I'm some company and I don't know what the future is of U.S.-Mexico trade. Some things are getting tariffed now that weren't so much. What am I passing along and what am I eating? So it

It depends on if, so the, who is it? Land Rover, Jaguar, whatever the name of their brand is now. Like they announced that all their cars coming in from overseas are pausing for a moment until they figure out exactly how to manage this. And historically, even cars like that, that were coming from Europe,

We're still, or Asia, we're still getting grandfathered in under kind of almost like a side letter to the USMCA. And so some of those companies were able to get by and now all of a sudden they're getting hit with these tariffs. And so they don't want to go turn around to their customers and raise prices.

They know it's not a good look. And so rather than raising prices, they're saying, hey, hang on a second. We're not going to put more cards on the lot. We're going to stop shipping for a moment until we figure this out. And over the next, call it five to 10 days, as the US and the EU navigate and negotiate. And I think I just saw recently that that conversation is starting. And you'll see similar with a lot of other countries or trade organizations that

ideally, that'll get back to some level of a more balanced trade agreement where there's ideally no tariffs in either direction. And so those companies that are getting affected by it, they just have to wait. And I think a lot of them are just waiting. And they're okay with less inventory for the time being and keeping the prices the same because those cars already landed rather than trying to charge more to the consumer or eat that cost.

So if we were to assume that maybe things don't change from what's been declared, like let's just assume that we don't see a bunch of deals like Trump is advocating for and these tariffs were stuck with them for a while.

How would you expect some of your clients to actually react and maybe reorient their businesses for this new reality? What would they do? Our customers are logistics companies. And I think what you're thinking about is more on the manufacturer side, which is their customers. And so I'll put myself in the shoes of a logistics company that's working with manufacturers.

manufacturer, my first thought is like, let's build some consistency around the freight that you're moving. Because if you have to move that freight, one of the levers that you have is how much you're spending on moving it. So if you're getting an increase in the taxes and duties that you're paying on your goods, then I would be looking at ways to reduce my costs, which would be relying more on a logistics company or a third party logistics provider that can help kind of spread that price risk and the operational risk.

And they can take that on with more volume. So you think about how more density builds over time with more freight moving in an individual lane. Well, all of that, that's going to drive ideally better price control. And so for a shipper, thinking about their freight moving across the border, I might rely more on a logistics company to try to navigate that and reduce my cost of actually procuring different trucking companies and potentially be able to scale that business up by outsourcing more of that.

And so if I'm a shipper, that's how I'm thinking about it. If I'm a trucking company, from what I understand is right now, trucking companies are not running out and buying more trucks. They want to see what's going to happen right now.

They're waiting. They're not panicking. They're not picking up and switching how their business operates. So like I was in Canada recently and I met with a handful of trucking companies that move freight from Mexico to Canada and vice versa. And they told me, you know, look, like there's definitely anxiety here. Like there's as much anxiety

outrage that I heard from every trucking company and broker that I met with in Canada a few weeks ago that I've seen on social media about everything going on right now in politics. And so most of those trucking companies are saying like, hey, we're going to stay calm. We're going to focus on supporting what we can support. We know some customers might not be shipping right now if their freight is getting taxed heavily.

And so we have to find freight elsewhere. But for the time being, we're going to stand strong. We're going to wait and see because we don't think this is how it's going to stay long term. And so they're of a more long term mindset of waiting and seeing what happens rather than panicking and trying to switch what they're doing or shutting something down or slowing down their fleet. They might just not grow as much right now, but they're not going to stop their trucks. But it sounds like no matter who you're talking about, and it's funny because, look, in the financial markets,

One gets the sense that there is a widespread belief that the current rules can't stay in place. Like this can't be the ultimate status quo. And no one really wants to accept that the new tariff schedules are really the whole thing. And I think there's a widespread belief that if somehow you had a crystal ball and these were the permanent tariffs for years to come, the markets would go a lot lower. It sounds like actually from you that that's kind of the same in industry, that whether we're talking about manufacturers or whether we're talking about truckers, that

yeah, okay, so I'm pausing. We're not going to move new inventory in right now. We're not going to change our business model. But at the moment, still, the sort of widespread belief that this can't be the final set of rules. Correct. And keep in mind that the big market that everybody talks about is the U.S. market when it comes to freight. Yeah.

Obviously, ocean freight is going to slow down. We're already hearing about that on both social and from customers directly that they're seeing volume coming in through the port slow down. And then two, that freight comes into the port. It goes to a warehouse at some point. It gets repackaged or labeled and then packaged and palletized. It goes on a truck after that.

And so what people in the US market would say is considered domestic freight moving from Los Angeles to Dallas, that freight very well is going on a truck and it is considered a domestic shipment at that point, but it's really part of an international move.

And so if international freight slows down coming in over the ocean, that is ultimately going to impact over the road throughout the US. And so I don't think we're going to see a spike in rates by any means. I think we might see some weird fluctuation over the next couple of months as these things settle. But I think overall, the market's going to be a little bit slower for freight in general, not just for cross-border or international. Yeah.

I mean, on this note, one of the things we learned from the 2020 pandemic and the supply chain disruptions after that, one of the things we really internalized is just how cyclical the trucking business actually is and how you do tend to get these boom bust cycles. And it feels like the more sort of one-off shocks we have to the system, the worse that cyclicality kind of gets. How bad should we assume things are going to get?

if this tariff uncertainty sticks around for a while? I think it really depends on what happens with China. All the other countries, like, it all has an effect, right? Like, if you think about what happened during the pandemic when all of a sudden there was a shortage with semiconductor chips and what that did to everything, like, all of a sudden cars were not rolling off of lines because of how many chips are going to a car. And so the whole ecosystem is really tied in more than you'd think. But...

China is really the big one that it's all going to depend on, right? Like, if we come out of this with significant tariffs from both sides on China and from China to the U.S., then, like, yeah, it's going to slow things down. If things...

go to a new normal, but to me, normal still means that supply chains don't have to be completely redone in a really quick fashion, then I think the market should pick back up and there should be excitement from the new agreements in place where people might start buying again.

people are not obviously happy about their bank accounts right now yeah obviously not no i mean like this is sort of the big one because if some of these levels that are being discussed and again we're talking about this april 7th 2 35 p.m eastern time if some of these levels for china tariffs remain in place i mean people are talking about the end of

of U.S.-China trading, which is the sort of the defining economic relationship of the entire world. Matt Silver, thank you so much for coming back on OddLots. Absolutely. Thanks for having me.

It really feels, Tracy, even with all of the market volatility, I love catching up with Matt, by the way. It really feels, though, with all the market volatility that we've seen, with all the selling, like no one just believes that this could be the new normal, right? No, it's true.

It's like, oh, we're going to see what happens with negotiations. I'm like, what negotiations? But, you know, there's got to be something, right? Everyone assumes there must be some deal to be cut. Yeah. Well, I mean, ostensibly, that's the whole point of this process, right? It's to use leverage to strike deals. But in the meantime, we're all sort of grappling with all this uncertainty of what's going to happen. But I thought that was really interesting. Good to catch up with that. I did think his emphasis on the importance of

of China is a really big deal. And you said it very well at the end as well, like the world's two largest economies, there's a real chance that they're basically decoupling from each other, which seems like it could reverberate around supply chains and industries around the world. So again, no matter what happens, you know, if the U.S. strikes a deal with, I don't know, like some small Pacific island or something like that,

Maybe it doesn't really matter because the U.S.-China relationship is much, much bigger and weighs much, much, much more heavily on the global economy. Yeah, it seems like the big one. And so it's like even if you're talking about U.S. versus Mexico trade, right?

The future of U.S. and Mexico trade is contingent to some degree on the future of U.S.-China trade because, A, there's a question of, well, can Chinese goods get through Mexico and then to the U.S., which happens to some extent. And then, B, if you're really shut off from China, how much actual capital I investment do you then make in North America, China?

and how much do you make in Mexico versus the United States? Many big questions. But like investors, it sounds like the world of shippers and carriers are also in a certain kind of wait and see mode. Yeah. And I mean, the other big thing happening here is the difference between now versus 2018 is you don't have those outlet countries necessarily. Right. So you can't just reroute stuff into Vietnam or into Mexico away from China like that is no longer an option.

So that seems to make it much, much more complicated as well. Shall we leave it there? Let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Traci Allaway. You can follow me at Traci Allaway. And I'm Jill Wiesenthal. You can follow me at The Stalwart. Follow Matt Silver. He's at Matt Silver. Follow our producers, Carmen Rodriguez at Carmen Arman, Dashiell Bennett at Dashbot, and Kel Brooks at Kel Brooks. For more OddLots content, go to bloomberg.com slash oddlots, where we have OddLots,

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