Flexport CEO Ryan Petersen argues that tariffs targeting a single country are ineffective because trade simply reroutes. For example, the U.S. might buy from Peru instead of China, but Peru then uses that income to buy from China. A blanket tariff, applied globally, is more effective at making domestic goods competitive.
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The Biden administration's approach to China tariffs was more effective because it was highly targeted at strategic industries and coupled with domestic incentives. Simply imposing broad tariffs is insufficient; smart policy requires pairing trade restrictions with domestic investment to build competitive capacity in areas like semiconductors and batteries.
Flexport CEO Ryan Peterson reveals that high tariffs incentivize foreign companies to under-declare goods' value. The U.S. uniquely allows imports without a local entity, meaning there's little recourse when fraud is discovered. This creates a significant competitive disadvantage for American companies that follow the rules.
Given that trade policy can shift unpredictably, rushing to execute multi-year supply chain changes is a high-risk move. According to Flexport's CEO, staying calm and doing nothing can be a radical but wise action until the policy environment stabilizes and provides more clarity.
The success of tariffs hinges on the insight that China's economic model prioritizes volume and employment over per-unit profitability. This creates a vulnerability where Chinese producers are forced to absorb tariff costs to maintain output, effectively subsidizing the tariff revenue and preventing significant price increases for US consumers.
A flat tariff on imports makes complex manufacturing with numerous cross-border steps prohibitively expensive. It becomes cheaper to move domestic production steps out of the tariff zone and import the finished good only once, leading to the deindustrialization of high-skilled jobs.
Despite significant US tariffs hitting labor-intensive goods, China's overall export volume remains strong. This resilience stems from a structural shift towards high-tech sectors like semiconductors and autos, combined with strategically rerouting trade through intermediary ASEAN countries to circumvent direct tariffs.
Far from being a precise tool against China, recent US tariffs act as a blunt instrument that harms America's own interests. They tax raw materials and machine tools needed for domestic production and hit allies harder than adversaries. This alienates partners, disrupts supply chains, and pushes the world towards a 'World Minus One' economic coalition excluding the US.
Contrary to popular belief, tariffs can be disinflationary by forcing foreign producers to absorb costs to maintain volume. They also function as a powerful national security tool, compelling countries to negotiate on non-trade issues like fentanyl trafficking by threatening their core economic models.
Flexport CEO Ryan Petersen predicts the administration will exploit a loophole in Section 122 tariffs. This section allows the president to impose tariffs for a maximum of 150 days. Petersen expects the government will let the period expire, pause for a few minutes, and then immediately reinstate the tariffs for another 150 days, effectively making them permanent.
A major unintended consequence of high tariffs is a surge in customs fraud, where companies misdeclare goods' value to slash duty payments. The U.S. is uniquely vulnerable as it allows foreign firms to import without a legal or physical presence, creating a significant enforcement challenge.