00:00:00 · Ty Morse
[00:00:00] S0: Today, have the pleasure of sitting down with Ryan Petersen, the founder and CEO of Flexport. You are one of the experts on global trade, and I think one of the best entrepreneurs of all time and somewhat of a tradesman himself was, Pablo Escobar.
00:00:11 · Ryan Petersen
[00:00:11] S1: Oh, wow. Pablo Escobar is a... For... To be clear, evil, terrible human. Right. One of the first entrepreneurs to get into politics, though. I think he ran for mayor. Did he win? I can't remember the story. But, yeah, Pablo Escobar also was a logistics guy. The car... The... That kind of this term cartel is really about an alliance. The cartel is an alliance of different companies, different countries in the terms of, in the case of OPEC, for example, but a cartel in the drug context was, he, he ran the logistics side of the, of this alliance of companies. So you had producers, you had distributors downstream, but Pablo Escobar's job was logistics, shipping. Of course, much harder form of logistics than what we have to do because it all had to be underground and illegal and crossing borders is hard enough. Clearing customs is hard enough. Having to do this without without being detected by the government and while they're trying to kill you actively, total nightmare. I was I was listening to the trial of El Chapo, and there was this great audio recording that, I guess, the NSA or somebody tapped his phones. They had this audio recording that they play, this evidence of him, dealing drugs. And they had him negotiating what are called... We call it in the industry incoterms. So incoterms are like... I forget who created this standard, probably the World Trade Organization. It's the standard terms by which you negotiate where are the goods handed over in a trade transaction. You... If I I negotiate incoterms, the most... Probably most 90% of traders, it's done on FOB terms, free on board, meaning it's... I sell to you at the port. X... I have clear... Cleared customs is the factory's responsibility. Export customs, you take it from there on the inbound. Everything from the origin port onwards is your responsibility. The the most famous eco term today is called DDP, delivery and duty paid. That means it's the supplier's job to deliver all the way to your warehouse. So it's obviously a big deal because it's who pays the tariff, who pays the freight, who crosses the border in the... And so there's this great video recording... Audio recording of El Chapo haggling over a kilo of heroin. And, like, is it is it DDP, or is it FOB? I mean, it's a big deal because now who's responsible for getting this into The United States?
00:02:26 · Ryan Petersen
It's probably, like, 80% of the cost of this thing is crossing the border illegally. But actually, Incoterms are back in the news because there's a huge amount of fraud happening right now. With with tariffs... With Trump's tariffs, they've created this enormous incentive to cheat. And, you know, the markets find a way. They're gonna cheat. People will... Especially entrepreneurs whose backs are against the wall and might lose everything will often cheat. And that's what we see. It's an enormous amount of fraud happening. In fact, a lot of it is just Chinese merchants just selling on Amazon. And the fraud looks like this. In the old day, pre tariffs, it was a couple percent. You didn't bother. And so you just import it. You pay the duties. You didn't cheat. Mean, I there was probably some cheating, but it wasn't rampant. Now when tariffs have gone to 35, at peak, were like 150% for a few weeks. But right now, it's about 35% on most goods. That's a big incentive to to lie about the value of the goods because it's 35% of whatever you tell the government the value of the goods is. And so people are just lying, and they're saying, hey. This thing is a 100,000. No. It's 10,000. And now instead of paying 35% tariff, I pay three and a half percent and back where I was before. And that is absolutely rampant right now. In fact, Amazon has become the number one freight forwarder in the... People don't know this, actually. I haven't seen it reported with breaking news here. They're the now the number one freight forwarding company on the Trans Pacific Asia to The US. And it's because of the... My theory is allegedly, I allege, it's allegedly, just a huge amount of fraud that's happening with these merchants who sell on Amazon, all these companies with their brand name of like XYZ forty seven fifty, you know, like these crazy names. They're just lying and they're undercutting everybody on price, because of it. Yeah. There's always incentive to cheat, whether you're Escobar or some Chinese merchant.
00:04:21 · Ty Morse
[00:04:21] S0: On the matter of incentives, I think it's incredibly important to get the incentives right. And how did things get this bad?
00:04:30 · Ryan Petersen
[00:04:30] S1: Well, The United States is the only... Actually there's two countries in the world that really allow anybody to import goods into their country almost unrestricted. It's The United States and The UK. And I don't know if we... It doesn't come from British common law. These these things evolve separately. We we... We've... I don't know when it really started in The US. It's not codified into the statute, but it is... We allow it. So what does that mean? In every other country in the world, besides those two, you need to go create a local entity, whether it's an LLC, a C Corp, or a sole proprietor who's in The United States would import the goods in their name. And in The United States, that's not required. You can just import stuff into The United States as a foreign company with no domestic presence whatsoever. You can just register with CBP and just import the goods. And you are the importer even though you're a foreign company. Therefore, we have no ability to enforce what these people do. It's an honor system. Like most law depends on consequences if you're caught. Mean, I people will still cheat, but at least there's consequences. It reduces the cheating quite a bit. But if you know nothing can ever happen to me because the United States government does not have jurisdiction agents. We don't have trade compliance agents in other countries, so we cannot go after them. We can refer them to the Chinese government for prosecution. That's the best we can do if they cheat. So it's open season. And actually, pulled this data. The Chinese government publishes their export statistics to The United States, and they show a $112,000,000,000 higher export value than what those same goods show up as when they're declared to the US government upon import. A 120... That was for 2025, a $120,112,000,000,000. It's gonna go up, further until something's done about this. So, it's it's just an insane situation, which could be very, very easily fixed. Now it wouldn't ever go away, but you simply say, Hey, you have to be a US entity. It could be a wholly owned foreign entity, but you got to set up an LLC, have a US bank account, go through some kind of KYC process, know your customer who is this entity, and have consequences if you're caught cheating. But, haven't been able to get anybody in Washington DC to pay any attention to this issue thus far.
00:06:51 · Ryan Petersen, Ty Morse
They're all very busy with other things. I'm... I think I I spent a lot of time in DC lobbying on this issue. Lobbying is kind of a strong word, just talking to the administration. [00:07:02] S0: Trying to let people know that [00:07:03] S1: there's a problem. Yeah. And everybody kind of smiles and nod. Yeah. Like, you know, I hear you. Like, that definitely sounds bad. Then nothing happens in between. I think I need to reframe my efforts a little bit. It's actually a good object lesson in persuasion for me. So I'm used to like show people a problem and then you would think that would be enough for them to wanna fix the problem. [00:07:27] S0: Well, it's kinda funny. Like, there's that line of you can't reason people out of an idea or belief system that they weren't reasoned into. And so if you give them facts and evidence and they weren't reasoned into it in the first place, it doesn't necessarily change their opinion.