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Let's talk about tariffs because President elect Donald Trump proposing tariffs on Canada, Mexico, China, and the EU, resulting in more questions than answers about how his administration will implement them and how fast. Ryan Peterson of Flexport writing, We're seeing strong demand for ocean freight. It could be driven by a multitude of factors. Fear of a potential il strike and tariff increases earlier than usual, lunar new year, plus a strong economy, Ryan joins us. Now, Ryan, really
interesting there. When you think about this increased demand for ocean freight, you name a number of factors as we just walked through. Is that taking share from other methods or is this just the pie growing bigger?
Well, I think what you're saying is a pull forward, So it's taking share from the future that people are trying to get goods in before a potential strike or tariffs. That if you're concerned about the things which you should be that you know and you have the option, you have the flexibility your supply chain, you want to get the goods in as soon as possible to avoid the.
Disruption, and how much can we draw on the experience of the twenty sixteen election and the first Trump administration when it comes to mapping out the potential impacts of some of the tariffs that we're talking about.
Yeah, I mean we've seen we've seen this movie before.
In many ways, the tariffs weren't as disruptive as people maybe expected them to be. Their tariffs have existed, you know, throughout all of human history. It's basically how government's always funded themselves. So people are able to adapt to this. It's it's not huge shock, but it is you know, the big thing right now is the uncertainty. It's like what exactly is going to hit, When is it going
to hit, how is it going to hit. So, for example, this just this week, the president of Mexico actually imposed large tariffs against imports from China, and to everyone's surprise, those actually affected Mexican fulfillment centers. So these are e commerce warehouses who are not shipping into mex but import to Mexico in order to ship, reship the re export
those goods to consumers in the US. That's a huge way that US e commerce has done is actually out of fulfillment centers in Mexico and this morning, you know, the largest or last night, late last night, the largest fulfillment centers in Mexico had to like email all of their customers and cancel all their contracts.
So a lot of American businesses.
Are scrambling today to find new fulfillment opportunities, new ways to serve their customers in the US, even though it had nothing to do with the US government.
Yeah, that feels like a complete wild card. So when something like that happens, basically someone throws a deck of cards up in the air, how long does it take for a new normal to be set in place?
The fun part about working in logistics, we all figured out many years ago there's no such thing as normal, and we got to be ready for whatever happens.
So it's every day a new thing.
It feels like between the you know, the strikes and the Red Sea disrupting ocean freight, you've got tariffs, got a drought that's affecting the Panama Canal sort of, you just have to be at very nimble and agile if you want to run a supply chain in the modern world.
Yeah, makes sense. Going back to the tariffs question that Katie was posing. The details, of course, are TBD. We don't know when, we don't know how much, but we do know that some form of these tariffs are coming on imported goods into the US, and the mechanics are pretty clear in terms of tariffs tend to reduce demand for these imports, at least if you're American. But you also point out that we've seen a decrease in ocean freight rates from China and that could be an offset.
So walk us through how that, what that might mean for goods that are being imported from China, and how manufacturers think about that.
Yeah, well, see, ocean freight rates have been quite high throughout the year, sort of two to three times long run historical averages. And this is in a market where the supply side of the market, the number of ships at operation in their capacity, has has ballooned. There's been a huge number, a huge deployment of new container ships that as these carriers made a lot of money during the last cycle during COVID, they reinvested that in new ships.
So one would predict with this huge surge of supply that the price will come down. The only reason that hasn't happened is because of the Red Sea. It's absorbing capacity as ships have to go around the southern coast
of Africa. If anything is to be done and allowing ship container ships to return through the Red Sea, that will instantly bring the price of ocean freight down by two thirds or so is our guest, maybe more probably saving companies four to five thousand dollars per container that they import.
That's a pretty big deal.
The average value of an ocean container at wholesale the goods inside of it is probably one hundred thousand dollars, So if you're talking about twenty five percent tariffs, that's twenty five thousand helps a little bit. It's not going to get you all the way back there, though. The twenty five thousand dollars per containers are pretty big blow.
Yeah.
Absolutely, And I mean, as we've been talking about, there's a lot of unknown here and spools about the levels that talking about the final levels, whether or not we get deals negotiated with our trade partners. But when it comes to actual tariffs, in your notes, you write that there's basically only two ways that businesses can deal with new tariffs. They can absorb the costs themselves, or they
can increase their prices. And the businesses that you work with that you speak to, what are you hearing so far about what path they're actually going to follow?
Yeah, well those are that's a very simplistic way that, you know, trying to simplify things for everybody.
I think that's true in a very short run.
You know, if you've got goods on the water coming here and not much else to do but pay the tariffs, and then you have to choose whether it makes less money or pass it on.
But in the medium term, there's a lot of strategies available.
You can, by the way, make goods in the United States and you don't have to pay the tariffs. You know, you may own the raw materials, but you won't on the on the finished codes, which is most of the value.
You can make goods.
In other countries that have free trade agreements with the United States.
There's there's tariff engineering.
So by understanding at a very detailed level of partnering with your customs broker sir a flexport, you can understand the raw materials and how those create the duty rate, and if you change things you may get a different duty rate. So there's a lot of opportunity to reduce tariffs over the medium term, and I think companies are getting really smart about this thanks to the last.
Cycle, all of these strategies you've been deployed. People, if you didn't see this coming at all.
Sure, people weren't sure that Trump was going to get elected, but by the way, Biden's been increasing tariffs too, So I think people who have been preparing for this for a while and should be in a reasonably okay place to adapt to it.
Well, Ryan, where are we on the near shoring slash on shoring narrative, because that's been a big push over the last couple of years, especially gaining steam in the pandemic. But you know better than most people that supply chains are pretty slow moving animals. They take a long time to actually shift and move them. So where are we on that push it?
It really depends on the sector.
I mean, there's a there's a massive amount of industry real industrialization taking place in the United States right now, but it tends to be much higher value goods, higher complexity things that where and the deployment of things like indvants, manufacturing, robotics. But for low value goods, what you're seeing is that the shift down to countries like Vietnam, to Mexico as well,
but even cheaper countries like Vietnam and Cambodia. India is having quite a boom right now and exports, So it's and then and then certain things.
You know, China is still.
Just a great country at manufacturing, and there are certain sectors where even with higher tariffs, it still makes economic sense to produce there because of the quality and the scale of their manufacturing capabilities.
And you see it.
You know, I was in China not too long ago, and the quality of their cars is remarkable that even with high tariffs, I think for much of the world, people are gonna still want to import those cars. There's there's so much cheaper and better than than it's produced domestically in most countries.
Yeah, and at affordable prices.
No less too.
Ryan, as you speak with your customers, what is the number one worry that they have for twenty twenty five beyond tariffs, because that is a big unknown and it kind of hangs over everything.
Yeah, I mean, short term, it's definitely this ISLA, the strike on the East coast that's looming over our heads. We had that back in October for four or five days, and then the Biden administration stepped in and kind of told them, hey, knock it off before the election, So they got to stay until January fifteenth and extension of the contract. Well that's five days before inauguration obviously, so we are very much in crunch time for what happens
with those negotiations. My latest understanding was that the two parties weren't even speaking to each other to get you know, so the odds of a deal seemed kind of low. The demands of the union right now is not just no more automation and higher wages. They've already achieved those the carriers and the employe I have agreed to that, but they're asking reverse automation, actually eliminate automation that already exists.
All right, Ryan, great to speak with you and get your insight. That is Ryan Peterson of Flex support of