Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Let's talk about tariffs because President elect Donald Trump proposing
Speaker 2: tariffs on Canada, Mexico, China, and the EU, resulting in
Speaker 2: more questions than answers about how his administration will implement
Speaker 2: them and how fast. Ryan Peterson of Flexport writing, We're
Speaker 2: seeing strong demand for ocean freight. It could be driven
Speaker 2: by a multitude of factors. Fear of a potential il
Speaker 2: strike and tariff increases earlier than usual, lunar new year,
Speaker 2: plus a strong economy, Ryan joins us. Now, Ryan, really
Speaker 2: interesting there. When you think about this increased demand for
Speaker 2: ocean freight, you name a number of factors as we
Speaker 2: just walked through. Is that taking share from other methods
Speaker 2: or is this just the pie growing bigger?
Speaker 3: Well, I think what you're saying is a pull forward,
Speaker 3: So it's taking share from the future that people are
Speaker 3: trying to get goods in before a potential strike or tariffs.
Speaker 3: That if you're concerned about the things which you should
Speaker 3: be that you know and you have the option, you
Speaker 3: have the flexibility your supply chain, you want to get
Speaker 3: the goods in as soon as possible to avoid the.
Speaker 2: Disruption, and how much can we draw on the experience
Speaker 2: of the twenty sixteen election and the first Trump administration
Speaker 2: when it comes to mapping out the potential impacts of
Speaker 2: some of the tariffs that we're talking about.
Speaker 4: Yeah, I mean we've seen we've seen this movie before.
Speaker 3: In many ways, the tariffs weren't as disruptive as people
Speaker 3: maybe expected them to be. Their tariffs have existed, you know,
Speaker 3: throughout all of human history. It's basically how government's always
Speaker 3: funded themselves. So people are able to adapt to this.
Speaker 3: It's it's not huge shock, but it is you know,
Speaker 3: the big thing right now is the uncertainty. It's like
Speaker 3: what exactly is going to hit, When is it going
Speaker 3: to hit, how is it going to hit. So, for example,
Speaker 3: this just this week, the president of Mexico actually imposed
Speaker 3: large tariffs against imports from China, and to everyone's surprise,
Speaker 3: those actually affected Mexican fulfillment centers. So these are e
Speaker 3: commerce warehouses who are not shipping into mex but import
Speaker 3: to Mexico in order to ship, reship the re export
Speaker 3: those goods to consumers in the US. That's a huge
Speaker 3: way that US e commerce has done is actually out
Speaker 3: of fulfillment centers in Mexico and this morning, you know,
Speaker 3: the largest or last night, late last night, the largest
Speaker 3: fulfillment centers in Mexico had to like email all of
Speaker 3: their customers and cancel all their contracts.
Speaker 4: So a lot of American businesses.
Speaker 3: Are scrambling today to find new fulfillment opportunities, new ways
Speaker 3: to serve their customers in the US, even though it
Speaker 3: had nothing to do with the US government.
Speaker 1: Yeah, that feels like a complete wild card. So when
Speaker 1: something like that happens, basically someone throws a deck of
Speaker 1: cards up in the air, how long does it take
Speaker 1: for a new normal to be set in place?
Speaker 3: The fun part about working in logistics, we all figured
Speaker 3: out many years ago there's no such thing as normal,
Speaker 3: and we got to be ready for whatever happens.
Speaker 4: So it's every day a new thing.
Speaker 3: It feels like between the you know, the strikes and
Speaker 3: the Red Sea disrupting ocean freight, you've got tariffs, got
Speaker 3: a drought that's affecting the Panama Canal sort of, you
Speaker 3: just have to be at very nimble and agile if
Speaker 3: you want to run a supply chain in the modern world.
Speaker 1: Yeah, makes sense. Going back to the tariffs question that
Speaker 1: Katie was posing. The details, of course, are TBD. We
Speaker 1: don't know when, we don't know how much, but we
Speaker 1: do know that some form of these tariffs are coming
Speaker 1: on imported goods into the US, and the mechanics are
Speaker 1: pretty clear in terms of tariffs tend to reduce demand
Speaker 1: for these imports, at least if you're American. But you
Speaker 1: also point out that we've seen a decrease in ocean
Speaker 1: freight rates from China and that could be an offset.
Speaker 1: So walk us through how that, what that might mean
Speaker 1: for goods that are being imported from China, and how
Speaker 1: manufacturers think about that.
Speaker 3: Yeah, well, see, ocean freight rates have been quite high
Speaker 3: throughout the year, sort of two to three times long
Speaker 3: run historical averages. And this is in a market where
Speaker 3: the supply side of the market, the number of ships
Speaker 3: at operation in their capacity, has has ballooned. There's been
Speaker 3: a huge number, a huge deployment of new container ships
Speaker 3: that as these carriers made a lot of money during
Speaker 3: the last cycle during COVID, they reinvested that in new ships.
Speaker 3: So one would predict with this huge surge of supply
Speaker 3: that the price will come down. The only reason that
Speaker 3: hasn't happened is because of the Red Sea. It's absorbing
Speaker 3: capacity as ships have to go around the southern coast
Speaker 3: of Africa. If anything is to be done and allowing
Speaker 3: ship container ships to return through the Red Sea, that
Speaker 3: will instantly bring the price of ocean freight down by
Speaker 3: two thirds or so is our guest, maybe more probably
Speaker 3: saving companies four to five thousand dollars per container that
Speaker 3: they import.
Speaker 4: That's a pretty big deal.
Speaker 3: The average value of an ocean container at wholesale the
Speaker 3: goods inside of it is probably one hundred thousand dollars,
Speaker 3: So if you're talking about twenty five percent tariffs, that's
Speaker 3: twenty five thousand helps a little bit. It's not going
Speaker 3: to get you all the way back there, though. The
Speaker 3: twenty five thousand dollars per containers are pretty big blow.
Speaker 4: Yeah.
Speaker 2: Absolutely, And I mean, as we've been talking about, there's
Speaker 2: a lot of unknown here and spools about the levels
Speaker 2: that talking about the final levels, whether or not we
Speaker 2: get deals negotiated with our trade partners. But when it
Speaker 2: comes to actual tariffs, in your notes, you write that
Speaker 2: there's basically only two ways that businesses can deal with
Speaker 2: new tariffs. They can absorb the costs themselves, or they
Speaker 2: can increase their prices. And the businesses that you work
Speaker 2: with that you speak to, what are you hearing so
Speaker 2: far about what path they're actually going to follow?
Speaker 3: Yeah, well those are that's a very simplistic way that,
Speaker 3: you know, trying to simplify things for everybody.
Speaker 4: I think that's true in a very short run.
Speaker 3: You know, if you've got goods on the water coming
Speaker 3: here and not much else to do but pay the tariffs,
Speaker 3: and then you have to choose whether it makes less
Speaker 3: money or pass it on.
Speaker 4: But in the medium term, there's a lot of strategies available.
Speaker 3: You can, by the way, make goods in the United
Speaker 3: States and you don't have to pay the tariffs. You know,
Speaker 3: you may own the raw materials, but you won't on
Speaker 3: the on the finished codes, which is most of the value.
Speaker 4: You can make goods.
Speaker 3: In other countries that have free trade agreements with the
Speaker 3: United States.
Speaker 4: There's there's tariff engineering.
Speaker 3: So by understanding at a very detailed level of partnering
Speaker 3: with your customs broker sir a flexport, you can understand
Speaker 3: the raw materials and how those create the duty rate,
Speaker 3: and if you change things you may get a different
Speaker 3: duty rate. So there's a lot of opportunity to reduce
Speaker 3: tariffs over the medium term, and I think companies are
Speaker 3: getting really smart about this thanks to the last.
Speaker 4: Cycle, all of these strategies you've been deployed. People, if
Speaker 4: you didn't see this coming at all.
Speaker 3: Sure, people weren't sure that Trump was going to get elected,
Speaker 3: but by the way, Biden's been increasing tariffs too, So
Speaker 3: I think people who have been preparing for this for
Speaker 3: a while and should be in a reasonably okay place
Speaker 3: to adapt to it.
Speaker 2: Well, Ryan, where are we on the near shoring slash
Speaker 2: on shoring narrative, because that's been a big push over
Speaker 2: the last couple of years, especially gaining steam in the pandemic.
Speaker 2: But you know better than most people that supply chains
Speaker 2: are pretty slow moving animals. They take a long time
Speaker 2: to actually shift and move them. So where are we
Speaker 2: on that push it?
Speaker 4: It really depends on the sector.
Speaker 3: I mean, there's a there's a massive amount of industry
Speaker 3: real industrialization taking place in the United States right now,
Speaker 3: but it tends to be much higher value goods, higher
Speaker 3: complexity things that where and the deployment of things like indvants, manufacturing, robotics.
Speaker 3: But for low value goods, what you're seeing is that
Speaker 3: the shift down to countries like Vietnam, to Mexico as well,
Speaker 3: but even cheaper countries like Vietnam and Cambodia. India is
Speaker 3: having quite a boom right now and exports, So it's
Speaker 3: and then and then certain things.
Speaker 4: You know, China is still.
Speaker 3: Just a great country at manufacturing, and there are certain
Speaker 3: sectors where even with higher tariffs, it still makes economic
Speaker 3: sense to produce there because of the quality and the
Speaker 3: scale of their manufacturing capabilities.
Speaker 4: And you see it.
Speaker 3: You know, I was in China not too long ago,
Speaker 3: and the quality of their cars is remarkable that even
Speaker 3: with high tariffs, I think for much of the world,
Speaker 3: people are gonna still want to import those cars. There's
Speaker 3: there's so much cheaper and better than than it's produced
Speaker 3: domestically in most countries.
Speaker 1: Yeah, and at affordable prices.
Speaker 3: No less too.
Speaker 1: Ryan, as you speak with your customers, what is the
Speaker 1: number one worry that they have for twenty twenty five
Speaker 1: beyond tariffs, because that is a big unknown and it
Speaker 1: kind of hangs over everything.
Speaker 3: Yeah, I mean, short term, it's definitely this ISLA, the
Speaker 3: strike on the East coast that's looming over our heads.
Speaker 3: We had that back in October for four or five days,
Speaker 3: and then the Biden administration stepped in and kind of
Speaker 3: told them, hey, knock it off before the election, So
Speaker 3: they got to stay until January fifteenth and extension of
Speaker 3: the contract. Well that's five days before inauguration obviously, so
Speaker 3: we are very much in crunch time for what happens
Speaker 3: with those negotiations. My latest understanding was that the two
Speaker 3: parties weren't even speaking to each other to get you know,
Speaker 3: so the odds of a deal seemed kind of low.
Speaker 3: The demands of the union right now is not just
Speaker 3: no more automation and higher wages. They've already achieved those
Speaker 3: the carriers and the employe I have agreed to that,
Speaker 3: but they're asking reverse automation, actually eliminate automation that already exists.
Speaker 2: All right, Ryan, great to speak with you and get
Speaker 2: your insight. That is Ryan Peterson of Flex support of