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So one of the ways that I have been trying to sort out the chaos of tariffs and trade wars is by talking to the people that make the software, which actually runs our global trade systems. We got a lot of notes from listeners who really appreciated our episode with Altana's Evan Smith.
whose systems track the global supply chain. He was able to come on the show and really illustrate where manufacturing is moving as globalization starts to break down. So today, I wanted to bring back one of my very favorite Decoder guests, Flexport CEO Ryan Peterson. whose software manages the logistics of moving things around the world, from factory to your doorstep.
We've done two episodes with Ryan in the past. We'll link them in the show notes. They're both fascinating. And one of the reasons for that is that Ryan is unique. He runs a software company in Silicon Valley, but his product is actually all about the very real and very complicated process. of actually shipping things on planes and ships and trucks. And I've always appreciated his perspective to connect the dots between what's happening on the screen and what's happening in the real world.
In the case of tariffs, that means he has a real-time view of how his customers are dealing with them as products arrive in our ports and go through customs. Flexport is itself a customs broker, so it manages the tariff process pretty directly. But nothing about Trump's tariffs are business as usual.
So I really wanted to dig into how they're working in reality. At the highest level, the Trump administration has launched into what feels like a game of chicken with the Chinese government. A game which is completely upending the stock market and putting industries of all kinds into outright panic. We can all see that. But down on the ground, the systems still have to work. Goods and services still have to move across the ocean. And these tariffs need to actually get paid.
You'll hear Ryan say the tariffs are already changing where things are coming from. and that shipments from Vietnam and Flexport's platform overtook shipments from China for the first time in the past week. You're also going to hear that Ryan and Flexport have basically been in war mode for the past several weeks trying to keep up with all the changes. FlexWord is running a literal tariffs live blog.
for its customers just to try to keep the latest information going out the door. In fact, Trump's tariffs are so unpredictable that when we sat down to record on Monday, we knew the numbers we were talking about would change, and we were right. The tariff on syringes from China somehow went from 154% to 245, and lithium-ion batteries shot up to 173%.
So instead of specific numbers, Ryan and I really focused on how this system works, how it's supposed to work, and how it's working now, if it's working at all. If you follow Ryan on X, you know that he thinks things are breaking in ways that create nothing but paralysis in the short term, and potentially widespread bankruptcy in the medium and long term.
So I just asked him, is there anything anyone can do right now to pressure the White House to make this make sense on a timetable that saves the U.S. economy from potential devastation? I'll let you listen to his answer. To his credit, Ryan took a pretty valiant demeanor throughout this conversation. He says he wants to give the people in charge the benefit of the doubt and keep his cool so he can keep advising his customers well.
but I think you're going to be able to hear how quickly he's running out of patience. And he didn't hold back in describing the kinds of frankly scary consequences that might await us if things keep escalating at their current rate. Okay, Flexport CEO Ryan Peterson on Trump's tariffs and the ongoing trade war. Here we go. Ryan Peterson, you are the founder and CEO of Flexport. Welcome back to Decoder.
Great to be here. I'm excited to talk to you. This is your third time on the show. I have to tell you you're one of my very favorite guests because I'm so obsessed with hidden systems. And how things move around the world is a very obvious system whose mechanics are usually pretty hidden. And you do such a great job of explaining it.
That said, I feel like it's not great for a shipping software logistics company to be running a live blog about tariffs, which is a thing Flexport is currently doing. I actually just want to start there. Why is Flexport running a live blog about tariffs? Oh, I mean, we're one of the biggest customs brokers in the United States. So our customers need to know what's going on because this is dollars out of their pocket. They're trying to figure it out.
We are the go-to sorts of information for them. It's hard to keep it up to date, honestly. We got people working the weekend shift to make sure because there's news that keeps dropping on the weekend. Yeah, I just looked at it and I thought, what is the single best?
symbol of our moment right now. How is all this chaos affecting the flow of goods in the United States right now? What are you seeing from your customers? Are they sending more stuff, less stuff? Are they trying to get ahead of the tariffs? Well, there was a big surge. So the deadline for the tariffs, as I said before, it was based on departure of the goods. So there was a huge rush right after they were announced. You had about seven days to get the goods out. So there was a big switch.
of air ocean freight over to air freight to try to get things out air freight. You can just ship at same day ocean freight. You need to get it to the port three or four days in advance of the ship departing. So a lot of cargo moved to the air air freight.
we've seen a big shift. Bookings from China are way down on our platform and bookings from Vietnam are way up. First, in fact, last week was the first week in Flexport's history where we did more ocean freight out of Vietnam than we did out of China. So big shift there is people ramp up manufacturing. A lot of companies have dual sourced already, so they just shifted, hey, we're going to start producing.
the goods in Vietnam. There was also this case where people saw this coming for a long time. Trump announced April 1st was originally the day, April 2nd was the final date for Liberation Day. That was known for two to three months in advance. that you would have these higher tariffs. Companies really pulled forward and got their orders in ahead of time and have now are well-stocked and are starting to say, hey, let's move to Vietnamese.
Southeast Asian or other manufacturing outside of China. And then there's also just a lot of like, let's just wait and see, because many people like me don't believe that the current hundred. 25 plus duty rate is the final duty rate that's going to be applied to china i think many of us believe there will be a deal cut and this is going to come back down from here Obviously, moving things from ocean freight to air freight, that has to be more expensive. Is that enough to arbitrage the...
The cost difference of the tariffs? Yeah, for sure. I mean, the duty rate on, let's say a typical container has got about $100,000 worth of goods. It's 125% duty. That's $125,000 extra on top of your 100K. Something like that, right? I'm afraid it's not that much more expensive. You definitely save money there. I don't think people know. What's the cost of shipping one container on a plane?
Six times more. We don't really talk in terms of containers on air freight, so it depends on the weight of the product and stuff. But usually air freight's between five and ten times more expensive than ocean freight. Ocean freight's about $2,000, so call it... 10 to 20 grand to ship it by air and you're saving 125 grand by i'm just doing this math top of my head i might be off by a little bit but Depends on how dense it is and other things, but
It would save you 80,000 bucks to ship that container by air. Last week, it would have. It's too late now. Well, I'm just wondering, I mean, even that math, as rough as it is, it seems really challenging, right? Get that money from somewhere and say, okay, I'm going to spend more money shipping my existing product. That's got to come out of.
R&D or manufacturing the next set of products or whatever it's – marketing, whatever it's going to be. Where are your customers getting that money from? You've got to raise your prices to your customers. The dollar amounts of these tariffs are so high that you are going to pass. I've seen a few brands say they're not going to pass it through, but I'm skeptical. The big question mark is, do people buy less stuff?
The iPhone seems to have been exempted for the moment, but that's an easy one for people to wrap their heads around. I haven't looked at these in many years, but it was like $400 to manufacture the phone that sells for $1,000 or something like that. The margins are pretty good. Might have even, I forget, but let's just say that was the math and you applied 125% duty. That's on the 400, not on the thousand.
So you take 125% of 400, I think it's 500 bucks. So now let's say you add 500. So the phone that was a thousand now is going to cost 1500. If you just pass it through one-to-one, you don't mark up the duty. I think a lot of people will, on a thousand dollar phone, maybe they buy one every two years.
If it's $1,500, they go every three years. You know, I mean, that's the equation that different people are going to make. And so that would be a 30% reduction in sales if you went from a two-year upgrade cycle to a three-year upgrade cycle. And that's a product that everybody kind of needs and wants and is a necessity. A lot of products, you're like, I'm just not going to buy it. I'll eat more in the restaurant or I'll save money because I'm worried about my job.
Obviously Flexport runs the software that helps people ship things from manufacturing site to people's doorsteps. You're at every level of the chain from the trucks to the ships. How are these tariffs actually collected? Where does this happen? Oh, you make a payment to the U.S. Treasury. So most companies will set up an ACH. What does that stand for? Automated Clearinghouse. You set up a, you know, like a wire transfer effectively that you make to the government, to the Treasury.
You can pay a check. Sometimes your customs broker, Flexport, is one of the largest customs brokers that will make the payment for you. And you pay us back. So that's pretty straightforward. It's gotten a little messy because the government, the executive order here made it so that the effective date of the tariff is based on when the goods depart at origin.
That's like the first I've ever seen that done. It's always based on when the goods arrive. And that's what CBP, that's what Customs and Border Protection Systems are set up for, is to be based on arrival day. And so they're having a lot of problems right now, I understand, at CBP because their tech systems are not made to actually function the way that this executive order was set up. So there's a scramble, I assume, going on right now. to get the tech systems updated to work the right way.
A few days ago, CNBC reported that actually these tariffs weren't being collected. Because the systems were actually broken. They weren't capable of collecting the tariffs. Has that been fixed? Is that something you saw ripple throughout your system? I'm still working on getting an assessment there, but that's what I'm describing here is it was because they're actually collecting the wrong amount. They're collecting it based on...
arrival date instead of departure date. And those will be different for ocean freight, obviously quite different. So I think it's going to take a little while, but that's fine. These things get, you know, there's a process by which you... It's called a post-entry summary correction. So you can go get a correction, get a refund if you pay too much.
which is what this would be. People have paid the wrong duty amount. They would have paid too much and then go get a refund. So that's a service that Flexport offers, by the way. It can go help you get refunds on your customs duties. The last time I talked was about two years ago, and you had reconfigured the company. And you were talking at the time about all the things you would do if you had more just liquid capital. And you said, well, we don't, so we've got to be smaller and more focused.
It strikes me that being a big customs broker in a time of tariff uncertainty requires you to just have a lot of capital sloshing around. Has that been a problem? Is that something you're seeing that there's pressure on just the amount of liquidity you need at your company? Not because of customs in particular. I mean, we are making sure that as many customers as possible, we try to put them on a direct pay to government directly without paying flags for it.
It's fine. We have a good business. I mean, first of all, we have a great, strong balance sheet. And then it's actually a good business for us. If we outlay duties for you, we charge for that. So it's actually a pretty high margin part of our business. It's kind of almost a lending business that we have going there.
It's less so that than it is assessing the health of our customers, making sure that everybody's in a good place. Just in a general, you know, this is kind of a black death moment for importers from China and see who survives. and helping them all maximize their chances of survival.
It's pretty grim out there for a lot of companies if they're single source from China. Especially if they have competitors who are buying from other countries, all of a sudden they're at a huge disadvantage from their competition. And so, yeah, we may get stuck with some bad debt if companies fail and owe us money. How quickly do you see the information from a true social post?
or an Air Force One interview ripple through the system. At some point, someone's got to actually update all the software to say this is the tariff rate, right? How quickly is that happening? Because there does seem to be a delay between – What gets posted to Truth Social and what the actual rates are or even what the other members of the administration believe?
Yeah, so this was really interesting when Trump first took office a few months ago, where he would, I think it was the very first day, second day in the office where he started to say, you know, he imposed, hey, the 10% duty on China. My first instinct was, okay, we got to send out, notify the customers, like tell everybody. But it turned out, you know, you go from that true social statement to a statement by the White House spokesman. to an actual executive order.
to what really matters is an update to the Code of Federal Regulations. That's where it becomes law. I mean, that's where it becomes the rule. And so now we've built a little discipline where we're rounding these things up in a weekly update, and we're really only...
super concerned i mean we're concerned always but we're really taking action when it hits the cfr the code of federal regulations um that's that's when we start translating it into our systems and updating the regulation updating the duty rates effective in our software. So that can be a week or more. Otherwise, we're rolling things up into a weekly update for our customers. And like we have a weekly newsletter that goes out of what's happening.
what's new. But that took us a little while to get used to because in the old world, you were just like, the president said something massive on tariffs. notify your customers. It turns out now he's doing it over a few hours. And so it would be too many emails and not enough signal in all the noise. How often do you have to update your system? How often are you watching the code of federal regulations to say, okay.
Flexport systems need to be aware of this change. Constantly. I mean, we're trying to update it within minutes when it does hit. And it's one of the big advantages that we have as a software-based platform is that with one database query, we're... And the amount that it would impact them and get within an hour, our teams are calling, you know, to have conversations with customers and we want them to hear from us first.
and see us as the real trusted experts. Whereas a company that doesn't have good databases for all this stuff, which is most of the industry, was founded way before Netscape. They're not built around the web and the cloud, and it's hard for them to query this data, they store it in. actual physical files in some cases and just don't have the systems in place. So it gives us some competitive advantage.
I think we're going to take a lot of market share in this environment. It's ugly for our competition as it is for us, but I think it's just a massive opportunity to lean into being the most customer-centric customs broker and freight forwarder in the industry. take market share but um yeah having to fight through a lot of friction to get there just put that into a little bit of context for me right now we're updating this
How often compared to how often you were updating it in the Biden administration or the first Trump administration? Well, oh, I mean, now several times a week and before Biden administration. They made a big update at one point, but they give you six months notice or something. It wasn't one day's notice. That's the biggest difference. They actually increased Trump's duties and tariffs from Trump 1.
It was one thing, actually, I would say the Democrats and the Republicans are relatively aligned on is they both seem to hate trade, especially trade with China. But yeah, the Biden administration was a little bit more. process oriented, you'd have a years, you know, for example, they did, they notified that we would be, they'd be shutting down the de minimis exemption, which allows you to import goods duty free if they're less than $800 per package.
and they're going all the way to a final consumer's house or business. That was announced, but they were like, basically, they announced it with an indefinite time frame when it would happen. And everyone was like, yeah, it'd probably be a year. And then Trump announced and gave you 30 days. And so it was much. faster pace of like needing to change we again think this gives us an advantage being a
less bureaucratic company than some of the big old school companies we compete against. We feel like if we can't be faster than them at responding to this kind of change, shame on us, right? Walk me through just the... There's one this weekend that I think is really relevant to the Verge audience, the Coder audience. They announced... Huge tariffs on everything from China. Then they announced an exception for smartphones and chips and computers. And then...
I don't even know if that was announced. It was like buried in a customs document. And then Howard Lutnick says it's not actually an exception. And Trump says it's not an exception. It's in a different tariff bucket. I've been paying a lot of attention to all of this. I couldn't really tell you what any of that means. Do you know?
Well, there was an exemption for those things. I mean, that was just published. Now, what they're signaling is, stay tuned, that they've exempted from the... the duties the reciprocal duties but we have another set of program coming for those categories and they will get duties of their own and we don't know what those are so it'd be nice if they just went ahead and published it all at once
They said there might be an update as soon as today. Today's Monday, the 14th. So by the time we go live, we may know more. Almost certainly. That's the pain for all of this is just they got to get it over with. Nobody can make any plans or investments in their supply chain right now while it's changing every single day. I mean, even if you were going to make your stuff in America, it'd be crazy to do that right now.
Tomorrow, it might be cheaper to make it in Vietnam. Who knows what deal he's going to strike? So until they get through all these backlog of deals and just set that these are the tariffs for the next, call it a few years, everybody's paralyzed.
And one interesting thing here is under the U.S. Constitution, it's very, very clear that the Congress controls the tariffs, not the president, and that he's only able to do these things because of an act in 1977, a few other acts, but 1977 was the big one that he's using. for the reciprocal tariffs was that under a national emergency then the president can take control of the duty rates of the tariffs and so we had to declare a national emergency here
That's going to get challenged. Right now, the Republicans control the Congress. But if it looks like they're going to get wiped out in the midterm, you'll probably see enough defections that they might take back that control. It's likely they would win if it went to the Supreme Court right now. The Supreme Court seems relatively stacked on the president's side, but I'm not a political analyst there. But it does seem likely if this thing gets bad enough that—
that Congress could take back control of the tariffs and end it that way. So there's a lot of different scenarios for how all this plays out. But all of that leads to even less certainty for a... company that needs to make decisions about where to manufacture. It was like, if it's all going to change again, supply chains need many years of investment to pay back. So really difficult moment.
Your tweets right now are pretty spicy. You have one recently that said the entire system is designed to create paralysis. What do you think that process serves? I don't really know if that's true, but I mean, I also tweeted, you know, the purpose of a system is... is the result that it generates. And so at some point, even if that's not their intention, if that's what it generates, it's kind of like...
I don't really think that's what they're setting out to do. I also don't believe in getting in any argument unless you can understand the other side's point of view, at least and explain it better than they can. I have a sense of what they're trying to do, and I think some of it's admirable and noble. Reducing debt, increasing manufacturing, creating leverage over the other countries.
It's these countries are going to offer better trade deals than we've had in the past because they're horrified about the idea of getting these duties put on them. So there's some there's some strategic rationale to some of that, too. man, there's going to be some second order consequences that they have not modeled it out properly from my point of view. We need to take a quick break. We'll be right back. Support for Decoder comes from Liquid Ivy.
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We're back with Flexport CEO Ryan Peterson. Before the break, we're discussing some of the actual mechanisms of tariff enforcement here in the United States, how they get applied, how they change ripples through the shipping logistics systems of customs brokers like Flexport, and what effects that might have on the broader economy.
Those are the first order effects. Ryan just mentioned the second order consequences, and that's what I really wanted to talk about now. Because sure, the immediate tariff situation is chaotic and changing almost nonstop. But the actual end result beyond the day-to-day is that the Trump administration is squeezing global trade and trying to exploit what it thinks are vulnerabilities and how the system has functioned for decades.
Whatever motivations the Trump administration might have, or whether the people involved are misinformed or simply reckless, is besides the point. The result is what matters. So I wanted to ask Ryan, what's going to happen now? Let me talk about a second of our consequences. I actually want to start with Flexport, and then I want to get into what you're seeing across your network and across your customers. Last time you were on the show, 2023, you described a pretty broad vision for the company.
At the time, it didn't strike me as being under threat by the collapse of global trade. But in your vision, there's the implication that global trade will get easier. And you described growth for Flexport in the following way. You said, I want to be able to go to a brand in the United States and say 90% of your sales in the U.S.
But if you look at your Instagram followers, it's 50-50 global in the U.S. Why aren't you selling on Flipkart, Rakuten, all these other platforms? I can light you up. We've got the international piece. We've got the customs. We can deploy the inventory and fulfillment, and we just hope you grow your revenue.
That is a growth story for your customers that implies that international trade will get easier or more predictable, that you can be a driver of growth. And what you were saying is, I don't want to be a cost center. I want to be a driver of growth with all of these international capabilities. That was Vision 2023. It's 2025. A lot has changed. A lot continues to change day by day. Is that Vision under threat?
I think the vision becomes more important as it is under threat. Global trade is under threat. It's less popular, you know, than it's been for a long time. But it also makes it more important that we work on it. And it's kind of in some ways easier to create value if global trade gets harder than someone who's working to make it easier is like more valuable. You know, I also take the really long-term view where global trade has just increased 4% annually.
The last 800 years, if you look at it on a long, long-term basis. And there have been major disruptions to global trade in that period. World War II, the Black Death. I mean, there's a lot of things happened. And yet global trade continued to outgrow it all. And those things barely show up when you look at the exponential growth curve of trade. You barely notice them. So I think on one hand...
Trade is, if you fast forward 10 or 20 years, there's going to be more trade than there is now. I have pretty strong conviction of that. I don't need that to be true for Flexport to win, but I believe it to be true. And then on the other hand, things I am certain of is that... There will be trade and that people will value a cheaper platform that has higher quality, more on-time delivery, faster shipping. There are certain things that are going to be true no matter what.
And we just have to be super persistent in pursuing that vision. And then to the specific point that you mentioned of like helping a company go global, that might be more important than ever. If trade in the United States is more difficult. brands are going to want to find okay where are my growing markets like people are looking right now okay i've got
It's going to be really hard to ship from China to the U.S. Can I sell that inventory made in China somewhere else? What are the markets that don't have these same protective barriers? And can I use my brand to go into other countries and sell stuff? US brands and global brands are going to be important. That's one of our beliefs is that. Not everything should just be commodity, Amazon Basics, cheap crap. There is value in creating a brand story.
and taking that globally and selling your stuff so i don't think our vision is under threat like that it won't happen but it's definitely under threat in the sense that like it's harder than ever to to make it happen You just said something really profound there that some brands might say doing business in the U.S. is too hard. I need to take my Chinese manufacturing base or my Vietnamese manufacturing base and figure out what my other markets around the world are.
for the past, I don't know, 15 years What you want is you want to get into the Amazon shop and create a brand given the extremely fluid supply chain between China and the United States. There are a bunch of brands we've covered just in tech that are this story. Anchor is one of my favorites of these, right?
A bunch of ex-Amazon engineers that moved to China and started selling batteries. Now they have a growing tech brand that just sort of relied on the ability to move things back and forth and use Amazon as a store.
If the United States is no longer the preferred market for that kind of gross story, where does it go? Well, in aggregate, it'll be very hard to replace the U.S. consumer. We're just like... the biggest consumer market by far just as it'll be hard to replace the chinese as a manufacturing site
But you'll see on any given brand, they're going to try really hard. You're seeing them shift pay-per-click ads to other countries, testing things out. I don't know if Europe becomes a growth market because of all of this, but for a given brand, they're going to try hard. They're going to push more ad spend into those markets. We see a lot of companies looking at those markets. But, you know, it's going to be really hard. You're not going to be able to replace the U.S. consumer. And so…
My broader point is just brands are going to want to be more global generally, and this might accelerate some of that. But when you look at it in a macro picture, there's not going to be enough demand globally to replace it. A little earlier, you mentioned the iPhone is an easy example for people to wrap their heads around when it comes to tariffs.
In whatever scenario we land on, if the United States tariffs smartphones shipped from China, the components to make the smartphones or whatever it ends up being, the iPhone will be more expensive. But the iPhone is already expensive, right? It's just interesting to me because at the high end of the smartphone market, particularly where the pro phones sit, It feels like the customers of those kinds of devices will just eat the marginal cost of whatever tariff increases get baked into the price.
We're actually already seeing this in the TV market. Sony just raised the prices of its most expensive TVs. It appears in the United States by $500. They're going to sell every one of those TVs. Those are the most expensive TVs you can buy. They were already selling every single one of those, and those customers are just going to... It feels like the low end of the market is where the customers are going to be most
sensitive to these price fluctuations and these price increases. Is that something you can see already, that it's the smaller goods, the cheaper goods that are the most affected? I haven't seen the data myself, no. I'm not saying it's not out there to be seen, but from where we sit, we're not necessarily seeing the final sales data yet. It is about the margin, though. So the higher the margin is, the less percent.
that it matters on the tariff so yeah in that sense it's really about margin that it is total dollar spent it's like if you're marking the thing up 5x or 50x like some nike sneakers or whatever then who cares If your cost goes, you know, you sell a $5 product for a hundred, it doesn't really matter if it goes from five to 10, like you could, okay, now it goes from 100 to 105. Whereas if you're a 5% margin business on the good.
Now you've got to mark the price up 2x, basically. So that's the ultimate question here is the high margin businesses will be less impacted than the low margin. Ask that question because I've been dying to ask you about the de minimis exception. You have entire companies here like Shein and Timu that.
basically have built their business on this one tariff exception that has existed, which you mentioned already. If the package is worth $800 or less, it's going directly to the customer. You don't have to worry about it. That's going away. That's a lot of volume from those two companies. They're sending a lot of things to the United States all the time. TikTok shop exists. It's sending a lot of things to the United States all the time.
It just seems like enforcement of that volume might cost us more than it's worth. Like that whole thing might get wiped away by the de minimis exception disappearing. Do you see that already? I mean, you must see that volume coming through. Do you see that as being basically an existential risk now if we start actually enforcing it? Existential to who? To she and to Timo, to American consumers who love cheap stuff.
Well, there's something I have to start paying duties, and then it's DVD, whether the products are still... affordable for people. They still like to buy it. The duty is not the only thing that makes those business models work. They have a just-in-time inventory model, so less inventory holding costs.
cargo sitting on the water and sitting in warehouses, that gives them an advantage. They're doing fulfillment, pick and pack labor in China or in Asia, which is much cheaper than the U.S. The real estate cost is cheaper because they're not renting warehouses in the U.S.
Their last mile costs are lower because they're flying in to an airport that's close to the final customer instead of having to truck it all over the country coming from an ocean port. So they have a few advantages there. And then I also think these guys are good at sourcing goods. you know your brand name american company that has to go source so they're they buy a little bit cheaper the scale lets them buy cheaper so
I don't know that the tariff alone is enough to derail the business model, but certainly they're going to have to start paying their duties. And then there's a lot of challenges, like not just the duty rates are higher, customs inspection rates are going to go up. So some percentage of your packages won't arrive in three days. They'll arrive in three days plus two weeks as it goes through a customs inspection process.
Customs requires more data on these products than in de minimis world. So they've got to go do a whole bunch of work to gather that data on every factory, where it's coming from. compliance data for all the different government agencies that might take an interest. So jury's still out. We're going to find out over the next month what happens and do consumers, how to consume, no one knows how consumers are going to respond to the higher prices. We don't.
I've always wondered about the actual enforcement of that exception. How do you know if it's $801 versus $800? Just the honor system? Yeah. I mean, that always seems nuts to me, right? We're just letting this happen on the honor system. Was there any enforcement in the past of people lying, of companies?
taking advantage of it um um less so on the valuation front how many orders on team were over 800 bucks you're going to kind of everything on team which one of everything you and i live very different lives How many $5 pair of jeans do you need? You know, actually the bigger thing that I'm surprised the Trump administration hasn't touched and that I'm pushing.
The thing I'm pushing the hardest for, if they're listening out there, because they're not going to listen to me. I don't like duties. They're bad for my business. Probably people just ignore me on that front. But the piece where I think... The government, this administration should be focused on that I haven't seen anything is on what we call foreign importers of record. So in the United States, you don't.
need to be a U.S. company to import goods. And I don't even mean like you don't even need an entity in the United States. You can just import stuff as a foreign company and... sell it on amazon and you have no u.s entity at all no employees for sure but not even a legal entity so that if you're caught committing fraud by u.s customs these companies just disappear
And there's no enforcement, no going after them. And so, yeah, as the duty rates go up, there's just a huge incentive to lie about the valuation. or the classification of goods to get a lower duty rate code and there's no consequences when they get caught and amazon actually allows them i understand to keep their there's not a sync between amazon and custom so that they can keep their account on amazon
and keep selling the goods under it. They get a new shell company and import the goods under a different name and keep the thing going and keep their reviews and everything. So that's the one that I think the government really should focus on is it puts American companies that are...
And any company that's honoring the law and saying, all right, this is the duty rate, I'm going to pay my taxes successfully, it puts them at a huge disadvantage for being law-abiding while other companies can be fly-by-night and just disappear. I'm very curious to see how much actual enforcement.
gets increased here. In the previous regime, maybe everyone complained that there wasn't enough enforcement, too much stuff was getting through, legal and illegal. Now it seems like we have a system that requires a lot of enforcement to work. Right. You can't just read the label. That's directly related to what you all do. Right. I mean, that's being a customer's broker. That's making sure the packages are getting through on time. What does that system look like now at the port?
Is it just a guy with a scanner? Is it an automated system? How does that work? They inspect some percentage of shipments. They're not exactly open about what percent get applied for customs inspection, and it'll be very different. So if it's your first time ever importing something, your inspection rate goes way, way up.
And if you've imported the same thing over and over again, your inspection rates come down. And if you enroll in this program that Flexport's enrolled in called the Customs and Trade Partnership Against Terrorism. It's kind of like TSA pre or whatever for a customer. You can still get flagged, but your rate goes down. That's like a post 9-11 program they built. And that's how it is. You get flagged. And if you are flagged, you must be able to present those goods.
the customs officials and often it'll be flagged before it leaves the port so they they take it over to us x-ray you know a process where they x-ray things or open it up and go inside and look at it and those inspection rates are high they're higher than ever before right now I understand that CBP is one of the only departments of the government that's going to get an increase in headcount as they start cutting headcount everywhere else.
And so, yeah, they're going to need it. If they try to ramp up enforcement on all these things, they're going to need more headcount. Do you think they have enough right now, just from a capacity standpoint, a bandwidth standpoint? I doubt it given that they basically weren't inspecting. very low inspection rates on program. And just to give you a sense of how that thing scaled, 10 years ago, there were about 100,000 packages a day imported under the de minimis regs.
Last year it was $4.1 million a day. And so they just haven't had the capacity to keep up with that from an enforcement standpoint of inspecting. You know, all of a sudden, you know, you're inspecting 1%. It's just like they can't keep up. So we'll see how that switches over to formal entry. process and if the formal entry inspection rate, which I think is kind of like around 1% of packages get inspected.
of shipments, then it's a lot of new inspections that are going to ramp up. And I kind of doubt they have the headcount that they need to do that. Do you think they could ramp that as quickly as they need to? You know, even if they said you've got a new budget, you're going to hire twice as many people as that.
I don't know. I'm not close enough to the problem. I haven't seen anything from CBP on that. I'm just curious because the reason I ask that is because, again, famously, you were like, just stack the containers higher. Like, create more capacity in this part of the system to ease this bottleneck.
And it does feel like we're staring at another bottleneck. There's probably some thing, I agree with that. There's probably some low-hanging fruit in terms of technology that you could put in. You know, we only automate, we x-ray 1%. It seems like, I don't know, what do we need, more x-ray machines?
What else is there? I met a company a few years ago. I haven't kept in touch with them, but they were doing some crazy stuff where they would put a chip in a rat in the brain. And rats have even a better sense of smell than dogs. and then put that alongside the conveyor belt and it could detect fentanyl.
and then send a signal. And yeah, I mean, there's going to be some crazy future tech that might be needed. And I doubt they're doing much of that kind of stuff either. So yeah, there's got to be a role for technology to help. And not to mention data science of machine learning.
to go look for patterns you know like the thing that i described of these fly-by-night entities that are serving as foreign importer of record and importing stuff A smart data scientist could probably detect these patterns of like, hey, this company disappeared and then this other one showed up a week later.
you know, with similar addresses or factor the manufacturer name or the product code, like a lot of that could probably be detected through machine learning algorithms and other quantitative techniques. I don't know that Customs has that capability right now and probably doesn't have it in enough scale given the changes that are happening. If I'm listening to this, I'm an entrepreneur, I'm thinking...
Okay, I'm going to go do some data science to detect fraud at customs. I'm going to talk to my friend in biosciences and we're going to make the fentanyl rat. It's going to happen. That all works if you think that there will be a need for these tools. down the line, right? That the market will be sufficiently big, and the United States or elsewhere, that those businesses will be necessary.
But the whole theme of this episode is, well, this might all go away. And I'm just wondering how you're making those bets and those kind of investment for Flexport and how people listening to this describing these opportunities should think about those kinds of investments. Well.
If you're making a 50-year bet on fentanyl rats, it feels like you need to make sure that that's going to be a sufficient budget in the CVP line items to make it worth it, right? The rats should be able to detect other things besides fentanyl. I think some of these things, you know, are here to stay. Government's going to care more about borders than they have.
In the past. And that's that's pretty consistent. I mean, you know, the Biden administration was pretty they were kind of like open on people coming across the border. But for trade, they were they increased Trump's duty rates from term one. They didn't decrease them. So I think in the U.S., it's both parties seem kind of aligned on that front. Reasonable bet to make. I think, you know, actually the bigger problem that I see as an entrepreneur is just like these.
the they're kind of like a lot of the edge case a lot of the cases that we have of We look at this end-to-end shipment. We're responsible from a company placing an order to their factory, submitting POs to their factory. The factories become users. So every time we get a company in the U.S., we're getting about 10 of their factories to become users. And then executing that full transaction from picking up the goods.
Export customs, loading it on a ship, warehouse where we might consolidate it, but load it on a ship all the way through end-to-end. We look at that full end-to-end and then anywhere in that chain, we can go, oh, look at this. Here's an application for AI. We can take away this little... small detail that might only save two minutes of labor, but multiply times a million shipments, it's like worth doing.
but maybe not worth creating a whole startup around. You wouldn't even know about that problem. It's kind of nuanced. And maybe it's too small to create a whole company around. So that's where we like our position in that sense of like... There's a million little things that we can go and automate and problems that we can solve that maybe no one would ever know about that problem and wouldn't be worth, they're not market size, not big enough for a whole company.
Yeah, it's hard to figure out. It's also why I don't think you're going to see 18-year-old kids straight out of high school build successful supply chain tech companies. you need some real world experience to actually see the problems up front. They're smart enough. They just won't have seen it. We need to take another quick break. We'll be right back.
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We're back with Flexport CEO Ryan Peterson. Before the break, we were talking through some of the actual on-the-ground consequences of Trump's tariff policies. For instance, what the future might hold for companies like Shein and marketplaces like TikTok Shop and Teemu.
that have historically relied on the de minimis exemption to ship tons of cheap goods to American consumers, or how you might even enforce some of these rules, given the sheer scale of exporters that want to reach the typical U.S. budget. We also talked about fentanyl rats, which was a first for us here at Decoder. But there's a much bigger picture here, and one that really gets to the heart of what we think might be going on. China.
This trade war looks increasingly like Trump's tool for punishing the Chinese government and the Chinese economy and trying to tilt the balance of global trade in a way that decouples the U.S. and its presumed allies from the world's biggest economy. As you might imagine, that has some profound consequences. So I wanted to ask Ryan about that and get his take on what he thinks will happen to manufacturing, trade, and the global supply chain if we stay on this current path.
You mentioned borders. It seems like borders are going back up. This brings me to China pretty inevitably. It seems like changing the terms of our trade with China has been the goal of both administrations, Biden administration and the Trump administration. The terms are changing even more dramatically. I think if Trump could say nothing was manufactured in China and all of it was being made in Kentucky, he would just write that EO tomorrow.
Right now. But as you're saying, you're seeing increased shipments from Vietnam for the first time ever. Where else are you seeing that manufacturing move to? Is any of it moving to the United States or is it moving elsewhere in the world? No, I mean, U.S. has been... U.S. is a major manufacturing center. Before, you know, I might have said earlier, we don't make anything. It's not true. America is one of the biggest export markets in the world. We export.
a lot. We do make a lot. We're one of the biggest industrial producers in the world too. As a trend, what you see is manufacturing shifting always to low. Water flows downhill, and if you're looking for cheap labor costs, that's not the U.S. And it's not China either, by the way. So if it's just cheap labor, that's largely moved. To places like Vietnam, Cambodia, Bangladesh, Sri Lanka for apparel. India is growing quite fast. And then...
parts of Latin America as well. So these policies are making it more difficult for U.S. manufacturing because of two things. I mean, they import machines, and a lot of those machines are not made in America. And if no one makes your machine, you just got to import it and pay the duties and therefore your costs are going up. A lot of the machinery is made in Germany.
And second is labor components. You know, these supply chains are quite global. And so you want to buy your component from somewhere else. Now, you can set up a foreign trade zone in the U.S. so that you could import and make your factory a foreign trade zone so that you don't pay duties on these things and you can process it inside the foreign trade zone. And then if you're exporting the goods, never pay U.S. duties on the way in.
So that's going to be more and more popular, more and more common. That's the service that Flexport offers is to help you. get your factory turned into a foreign trade zone. But in general, that's a pain in the butt. And so people are just going to, if they're given a choice and they have, like I have a friend who has two factories, one's in Europe and one's in the U.S.
He's going to shift manufacturing to Europe for the global market because he doesn't want to pay duties on the way in for components. And Europe's not making him do that on Chinese components. The policies are not really designed as far as I can. Well, they're designed to generate reindustrialization. I don't think that's the result they're going to achieve. Yeah. That piece where it's factories outside the United States that actually boom.
feels like a small trend. There hasn't been enough time. There's not enough data to actually call it a trend. But we've talked to several hardware manufacturers who say, look, I'm investing in Mexican production. I'm going to invest in production elsewhere because my components can at least come to these countries without all these extra duties. And then on final imports, then I'd say I can just pay the final tax. I'm not managing all these different supply chain risks.
I'm going to a place that allows me to just deal with that and then I can deal with it once entering the United States market. Are you seeing any glimmers of that in terms of where things are going to like what factories from different places where the components are being built? Yeah, I mean, it's a long run trend of companies diversifying away from China also because of Chinese labor costs.
done great their workers make more money and now it's more expensive so if you're in china it's not for cheap labor um you see that moving The interesting question right now, as Trump's given these countries 90 days reprieve from the reciprocal tariffs. Do you think they're reciprocal? Everyone has to call them reciprocal because that's what they say. But do they feel reciprocal to you?
Yeah, I mean, it's a reasonable case. I mean, a lot of these countries do have, they're saying it's not reciprocal on their tariff levels. It's reciprocal on their whole package of industrial policies. And on that, I think there's some reasonable grounds to stand on. I mean, look at Vietnam. Their currency has depreciated the last five years, even as they're... the amount of trade and it's boomed i mean any in a normally functioning economy that the dong would have appreciated not depreciated so
There's clearly some industrial policy going on. I mean, Korea was a famous one in the 60s and 70s. Korea adopted a national required six-day work week. mandated by a dictatorship. Well, that's not really fair. We're giving our people the weekend off. So there's some cases to be made here.
I don't really care about the language of it all, but he's given them 90 days. Now we're like 80 days left, right, to make a deal. And I suspect a big part of what the deal he wants is, hey, you have to put barriers up against Chinese goods coming into your country. if you want access to the U.S. market at a low duty rate. So we're going to see, I think it's too early to assess the landscape.
And people who are making this, creating this paralysis because you're sitting here going, I can't make any decisions. But you also should avoid declarative statements about what, you know, what the result of all this is and what it means until we have more. Until some of these deals get negotiated. And I don't know, I'm trying to withhold some judgment and remain calm, even if I think I see them making some stuff that if it ended in today's.
It would be pretty bad, borderline catastrophic. But that's why I sort of believe that it can't end in this state. It's just like, can't be that this is the plan. Maybe there's no plan. It's a bunch of idiots, but I'll try to give them more credit. There does seem to be the whiplash every day or two days between...
These are the tariffs we need to make America great again. We're going to be so rich because of tariffs. The consumer won't pay them. The countries will pay them. We've got to do tariffs. And then we're walking the tariffs back. Art of the deal. This was just a negotiation tactic. Trump is a brilliant negotiator. Love him or hate him, going back and forth between those two extremes seems not very stable for anyone to do business in as an environment.
Where do you think this should land? If you had to end it and say, okay, here are the deals. I'm doing art of the deal. Here are the actual deals that need to get done. How would you draw them? Yeah, I mean, remember, this is his negotiating style. I take a very extreme position. Therefore, there's room for compromise because there's an extreme position, but then act incredibly unpredictably, erratically.
to make it the other side doesn't know what to expect and make a deal. I mean, that's like kind of Trump 101. It's really interesting because they're like, on the one hand, they really would like to see industrialization and re-industrialization. So jobs coming to America manufacturing. On the other hand, talking about negotiating free trade agreements with other countries. Well, it's like those.
Wait, I thought trade was bad. Why do we want a free trade agreement? So I don't get it. So my perspective, I'd like to see more free trade. Everybody trades equally with, you know, just like really open markets and government less involved in the economy. But that's.
Classic libertarianism, which is pretty naive. We don't really get to work in an environment where the government's not involved in the economy. So, yeah, it depends whose perspective you're looking at. From the perspective of a business, you want low barriers to entry. uh cheapest brought low barriers to trade and let me buy my stuff from whoever makes it the cheapest From the U.S. strategic interest standpoint, probably that's quite different. You want products made in America.
If there's war, we have factories that we can convert to industrial wartime production. I haven't put enough time thinking about it from that lens. I'm always thinking about it from the lens of our customer. Let me ask you about the United States customers, and I have one wild card question to ask you at the end.
You have customers in the United States. They're obviously shipping internationally, right? That's part of the growth story for Flexport. It occurs to me that a lot of these tariffs are premised on the United States being the most desirable. Right. We're going to raise the barriers of entry, and you're going to want to be here anyway, so deal with it. Figure it out.
the flip side of that is other countries are retaliating against us by raising their tariffs or protecting their markets in different ways and that The manufacturing facility in the United States that want to export, brands in the United States that want to export are going to feel that pain just as much. You've alluded to it several times now. Are you already seeing that in outbound shipment?
Yeah, we're seeing it more anecdotally right now, but definitely, you know, I talked to a company that makes products in Los Angeles. I was kind of surprised they still manufacture these type of things down in their well-known brands. I don't want to share too much about what they do, but make their products in LA. And they've said that it's actually really, I was like, oh, you know, maybe it's helping them, but they felt.
that American-made brands has a real tarnish on them and that people in Canada and in Europe are not buying their product as much right now because... Don't like American made right now. It's not a good reputation to have. And that's to say nothing. That's just branding. That's to say nothing about tariff barriers.
as they kind of get into these escalating trade wars with other countries. So, yeah, it's going to hurt American exporters for sure, just the ability to export. And then that's on top of adding duties to component costs and other things. I mean, these guys, I think all their components come from the U.S. too. But in a world where you're paying duties on the import, their machinery is made in Germany, but they're not having to import that. They already have their machines.
But if they have to build up a new line, it'll be expensive. You mentioned that the strategic national interests of the United States are at play here. The last time you were on the show, you talked about the United States needing to treat its ports as strategic assets and manage them better. It's been something you've been talking about for a long time.
So this brings me to the absolutely bizarre side quest here of the Panama Canal, which the Trump administration has just said it wants in the same way that it wants Greenland or a snack or whatever it wants day to day. Do you have a sense of what is happening with the canal, why it became such an issue, whether that can be resolved? Yeah.
Canal, the government of Panama, well, Jimmy Carter gave them back to Canal for a dollar, I think. And it used to be autonomous territory of the United States, similar to Puerto Rico or something like that. part of the United States until Jimmy Carter gave it back to them. And they, under the terms of the treaty,
They're not to turn over sovereignty of the canal or canal zone to other countries besides Panama. And Trump administration, they did, they leased the terminals, the ports at either end of the canal. There's these two ports. one on the Atlantic, one in the Pacific. They leased him to a Hong Kong company owned by Li Ka-Shin, the richest man in Hong Kong.
So Trump administration feels that that's controlled by China and therefore is a violation of the treaty under which we turned over the canal back to Panama and wants that. to be in the hands of american companies at least um so he negotiated there was a deal that was set up for Li Ka-shing to sell it to BlackRock, a consortium by BlackRock and MSC, which is actually a Swiss company, an Italian company, but they moved to Switzerland for their headquarters. Then the Chinese government...
My understanding, just from reading about it, Chinese government didn't like that deal and is currently blocking the sale, which I think Trump is going to lean on and say, well, see, it's definitely controlled by China, the fact that they can block the sale. And so the U.S. government is basically saying, hey, you've got to put these in the hands of an American company or we're going to do it by force in some way.
So, yeah, that's my understanding of the current state of the Panama Canal. It's not the canal itself. It's the ports on either end of the canal that are in question. Is that affecting the volumes you're seeing your customers put through the canal? Has that affected its operations? No, it's functioning normally at present.
Yeah. It feels like the deal with China has a lot of weird external factors in it, right? You're blocking the sale of this port on one end and then the ends of the Panama Canal. we want you to sell TikTok and you won't sell it. You're mad at JD Vance because he keeps running his mouth. And the tariffs are at 5 billion percent. Do you think that we can get a reasonable deal with China that wraps it all up or do you think we have to parcel it out?
I don't know. I think there's got to be a deal just because both sides need it so badly. I don't know. But I don't know if the both sides know they need it. There's a lot of ego involved. It's actually one of the biggest problems of negotiating a deal is their styles are so different that Trump wants to make the deal himself.
mano a mano, you know, top to top. She and Trump sit down and... make a deal um i don't think that that's uh the chinese style the chinese just culturally the chinese style is hey this gets sorted out at the lower levels and then we come and it's a formality the leadership shaking hands on the deal and too much risk to have the leader lose face if a deal falls apart and it looks bad this isn't a statement on xi jinping just broadly Chinese culture, the way deals get done.
I just don't see Trump allowing this important to get solved at some lower level than himself. Probably has to. I don't think that you're going to get to a place where she and Trump sit in a room and... negotiate this one-to-one. Maybe that would be great for the world, but I just don't know that that fits with the Chinese style of negotiation. That's to say nothing of all the terms.
And where's the middle ground for a negotiated settlement? What are we actually trying to get at? Probably that it's around currencies at the end of the day. requiring that the Chinese allow their currency to appreciate is probably that. a place that the US government will want to push on the most. That'll make their exports less attractive. It'll make our imports into China more attractive if their currency is more valuable relative to the dollar.
There's not going to be a settlement on Taiwan. We're not going to see eye to eye there. What else does the U.S. want from them? I don't know. Some things around guarantees on IP protection or something that they might agree to it. Haven't really admitted to a company stealing all the allegations the U.S. has against them. They don't admit to them in the first place. So what's the value of making a deal on that? But yeah, probably currency, maybe some commitments to buy more American products.
I don't know, though. I think it's more of the hands being tied for the U.S. government rather than there's a deal that they really want to do. It's more just like there's going to be at some point a realization that the mass unemployment that comes from cutting off the U.S. companies from buying Chinese goods. is so painful that they can't politically survive it. I do want to ask you this last question. You are a very unique person. Talked about all this. You're a software CEO.
SoftBank is one of your investors. You're very much part of that class of entrepreneurs in America. But you're also on the ground, right? One of the reasons I always enjoy talking to you is you can see the problems in the real world moving things around and actually making the things and getting them to customers. And there's a real tension.
between those viewpoints, right? You can see the tension expressed between, I don't know, Peter Navarro and Elon Musk who are just rage tweeting at each other all day long. I mean, talk about solve it at the lower levels and then it's a formality. Like we're not going to solve it at the lower levels on this side of the ocean. But those are two worlds that don't agree right now. And you're right at the intersection of them.
Do you think our business community can put the pressure on the Trump administration to get this done on a timeline that makes sense? Because that seems like the level. Yeah, you know, every day that goes by, I mean, we'll see. I think we'll know in the next 90 days. And my view is they have to make a deal much faster than that for this not to kind of derail here and lead to a huge wave of bankruptcies and unemployment.
But you know what? Two weeks ago, I thought it was skies falling. And then they made a reprieve and said, OK, we're carving out these, you know, we're only doing it on China. Nothing will surprise me at this point from this administration. I will not be surprised by it. I'm ready for whatever is coming. It could be much worse or much better than the current situation. But unlikely that the current situation is the end game.
I don't know if that was a reassuring answer or not. It was a very pregnant pause. That's what I will say. Ryan, it's always great to talk to you. It feels like we're going to be talking a lot more over the next four years of the Trump administration. Thanks for being on Decoder. Great. Yeah. Great to be back. See you guys. I'd like to thank Ryan Peterson for joining me on the show, and thank you for listening. I hope you enjoyed it.
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